CA ZAMBIA PROGRAMME EXAMINATIONS

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CA CERTIFICATE IN ACCOUNTANCY LEVEL

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CA 1.1: FINANCIAL ACCOUNTING

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MONDAY 13 JUNE 2022

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TOTAL MARKS – 100: TIME ALLOWED: THREE (3) HOURS

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INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.
2. This paper is divided into TWO (2) sections:
Section A: Ten (10) compulsory multiple choice questions.
Section B: One (1) compulsory scenario question.
Plus Four (4) scenario questions. Attempt any Three (3) questions.
3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.
4. Do NOT write in pencil (except for graphs and diagrams).
5. Cell Phones are NOT allowed in the Examination Room.
6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.
7. All workings must be done in the answer booklet.
8. Present legible and tidy work.
9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.
SECTION A

Attempt all ten (10) multiple choice questions

QUESTION ONE

Each of the following questions has only one (1) correct answer. Write the letter of the
correct answer you have chosen in your answer booklet. Marks allocated are indicated
against each question.

1.1 Which of the following lists the four (4) enhancing qualitative characteristics of
Financial Statements as defined in the IASB's Conceptual Framework for Financial
Reporting?

A. Relevance, faithful representation, materiality and going concern

B. Comparability, verifiability, timeliness and understandability
C. Relevance, comparability, verifiability and going concern
D. Timeliness, understandability, materiality and faithful representation
(2 marks)

1.2 A sole trader had opening capital of K10,000 and closing capital of K4,500. During the
period, the owner introduced capital of K4,000 and withdrew K8,000 for her own use.

Her profit or loss during the period was:

A. K9,500 loss
B. K17,500 profit
C. K7,500 profit
D. K1,500 loss
(2 marks)

1.3 Ntumbachushi’s cash book at 31 December 2021 shows an overdrawn bank balance of
K565. On comparing this with your bank statement at the same date, you discover the
following.

(i) A cheque for K57 drawn by you on 29 December 2021 has not yet been
presented for payment.

(ii) A cheque for K92 from a customer, which was paid into the bank on 24
December 2021, has been dishonored on 31 December 2021.

The correct bank balance to be shown in Ntumbachushi’s statement of financial

position at 31 December 2021 is:

A. K714 overdrawn
B. K657 overdrawn
C. K473 overdrawn
D. K53 overdrawn
(2 marks)

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1.4 You are given the following information:

Receivables at 1 January 2021 K10,000

Receivables at 31 December 2021 K9,000
Total receipts during 2021 (including cash sales of K5,000) K85,000

Sales on credit during 2021 amount to:

A. K81,000
B. K86,000
C. K79,000
D. K84,000

(2 marks)

1.5 Where a transaction is credited to the correct ledger account, but debited incorrectly
to the repairs and renewals account instead of to the plant and machinery account,
the error is known as an error of:
A. Omission
B. Commission
C. Principle
D. Original entry
(2 marks)
1.6 Calculate the subscription income for the year ended 31 December, 2021 in respect of
Monze Social Club using the following data: Arrears at 1 January, 2021 were K700;
amounts prepaid in advance at 1 January, 2021 were K1,500; arrears at 31 December,
2021 were K1,200; amounts paid in advance 31 December, 2021 were K3,200 and
cash received from members during 2021 was K14,200.

A. K13,000
B. K14,200
C. K11,400
D. K17,000
(2 marks)

1.7 The difference between a receipts and payments account and an income and
expenditure account is:

A. A receipts and payments account is prepared on an accruals basis and an

income and expenditure account on a cash basis.
B. A receipts and payments account is prepared on a cash basis and an income and
expenditure account on an accruals basis.
C. A receipts and payments account is prepared for a not for profit organizations
and an income and expenditure account for a business.
D. A receipts and payments account is prepared for a manufacturing business and
an
income and expenditure account for a non-manufacturing business.
(2 marks)
1.8 Kariba Breams Limited distributes fish to major retailers around the country. They are
concerned about their cash flow situation and have asked the accountant to calculate
the quick ratio to determine the company’s ability to pay their fish suppliers.

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 The following figures were extracted from the Statement of Financial Position as at 30
November 2021:

Inventory K25,000
Trade Receivables K22,000
Cash in hand K23,000
Cash at bank K5,000 Credit
Trade creditors K60,000

The quick ratio for Kariba Breams Limited is:

A. 1.08
B. 0.69
C. 1.25
D. 0.75
(2 marks)
1.9 Which of the following correctly defines a Liability, according to the IASB conceptual
framework for financial reporting?
A. A liability is the residual interest in the assets of the entity after deducting all
liabilities.
B. A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
C. A liability is a resource controlled by an entity as a result of past events and from
which future economic benefit are expected to flow to the entity.
D. A liability is a decrease in economic benefits during the accounting period in
form of outflow or depletions of assets or in incurrences of liabilities that result
in decrease in equity other than those relating to distributions to equity
participants.
(2 marks)
1.10 After checking a business’ cash book against the bank statement, which of the
following items could require an entry in the cash book?
1. Standing order entered in bank statement only.
2. Credit transfer entered in bank statement only.
3. Deposits not credited.
4. Cheques not presented.
5. Error by bank.
6. Bank charges.
7. A cheque from a customer dishonored.

A. 1, 2, 6 and 7
B. 3, 4 and 7
C. 2, 3, 4 and 5
D. 3 and 4
(2 marks)
[Total: 20 Marks]

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SECTION B

Question TWO (2) in this section is compulsory and must be attempted. Then
attempt any other THREE (3) questions from the remaining four (4) questions.

QUESTION TWO – (COMPULSORY)

The following is the trial balance of Poland Ltd as at 31 December 2021.

K K
500,000 equity shares of K1 each 500,000
60,000; 7% redeemable preference shares of 50 Ngwee each 30,000
Equipment: cost 350,000
Equipment: accumulated depreciation 75,000
Motor vehicle: cost 160,000
Motor vehicle: accumulated depreciation 25,650
Premises 220,000
Inventory as at 1 January 2021 51,980
Bank 10,050
Sales 508,420
Purchases 225,000
Trade receivables 130,010
Trade payables 10,200
Distribution costs 80,400
Administrative expenses 45,240
Irrecoverable debts 1,250
Income Tax liability 14,360
Rent received 8,500
Income from investments 17,040
Interim dividend on equity shares 7,420
Retained earnings 51,760
General reserve 40,420
1,281,350 1,281,350

Additional information:

(i) Inventories as at 31 December 2021 are valued at K85,420.

(ii) Insurance include K840 for one and half-year. Insurance is included in administrative
expenses.
(iii) Rent received includes an amount of K2,400 paid in advance as at 31 December 2021.
(iv) Distribution costs of K750 were prepaid and administrative expenses of K800 were
owing as at 31 December 2021.
(v) The total trade receivables balance of K130,010 includes a balance of K1,010 which
has been outstanding for ten months. Poland Ltd has decided to write off this balance.
(vi) The charge for income tax liability is included in the figure for administration expenses.

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(vii) On 15 January 2021 Poland Ltd purchased premises at a cost of K105,000. This cost
included K3,500 relating to legal costs. The legal costs of K3,500 had been included in
administrative expenses and not in the cost of premises. Premises are not depreciated.
(viii) On 1 April 2021 Poland Ltd purchased equipment which cost K50,000. This transaction
was entered in the accounts on 1 April 2021.
(ix) Provide depreciation on Equipment at 20% per annum on cost and Motor vehicles
20% per annum reducing balance basis
(x) Depreciation on equipment is apportioned 20% to administrative expenses and 80%
to distribution costs. Depreciation is charged for each month of use. Depreciation of
motor vehicles is treated as a distribution cost.

Required:

Prepare, for Poland Ltd, the following statements in accordance with International Financial
Reporting Standards (IFRSs).

(a) Statement of Profit and Loss for the year ended 31 December 2021 (10marks)

(b) Statement of Financial Position as at 31 December 2021. (10marks)

[Total: 20 Marks]

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QUESTION THREE

Mubita is a sole trader whose business is to supply gumboots on credit to mining companies
in Zambia. Mubita has an accounting year that ends on 31 March each year. At each year
end, Mubita has large receivable balances and so he has a policy of making an adjustment
to its percentage of allowance on each year’s closing trade receivables in accordance with
the current ‘economic climate’.

The following details are available for Mubita for three years ending 31 March 2020, 2021
and 2022.

2020 2021 2022

‘K’ ‘K’ ‘K’

Receivables balance at 31 March after

Writing off irrecoverable debts 252,000 462,000 516,000

Irrecoverable debts written off 7,440 15,648 31,860

% allowance for receivables 5% 4% 3%

Required:

(a) Briefly explain why irrecoverable debts arise in a business. (4marks)

(b) Prepare irrecoverable debts accounts for Mubita for each of the three years ended 31
March 2020, 2021 and 2022. (6marks)

(c) Prepare allowance for receivables accounts for each of the three years ended 31
March 2020, 2021 and 2022 and show the statement of financial position extracts as
at 31 March 2020, 2021 and 2022. (6 marks)

(d)State reasons why an allowance for receivables account is created, in addition to writing
off irrecoverable debts. (4marks)

[Total: 20Marks]

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QUESTION FOUR

(a) You are the Accountant of Mukaka Co (Mukaka) limited. Mukaka Financial year end is
31 December each year. Mukaka purchased an equipment on 1 January 2021 and
the costs schedule below has been given to you for you review. All costs were paid
on 1 January 2021.

Costs schedule

(1) Equipment purchase price K95,000

(2) Trade discount K15,000
(3) Site preparation costs K10,000
(4) Delivery costs K7,000
(5) Insurance costs for the year ended 31 December 2021 K40,000
(6) Compulsory dismantling costs at end of 10 years asset's life K3,000

The equipment is depreciated on a straight-line basis and revaluation model is used

by Mukaka. Management revalued the equipment to K102,000 on 31 December 2021
so that its carrying amount is not materially different from market value.

Required:

(i) Calculate revenue expenditure and capital expenditure at 1 January 2021.

(2marks)

(ii) Prepare journal entries for the acquisition of equipment as at 1 January

2021. (2 marks)

(iii) Calculate revaluation surplus/ (loss) at 31 December 2021. (4 marks)

(iv) Prepare journal entries for the revaluation of equipment as at 31

December 2021. (3 marks)

(b) Mayo and Tata have been trading as a partnership for many years, sharing profits
and loss equally. You prepared their income statement for the year ended 31
December 2021 which reported a profit of K255,784 before taking into account the
items below:

(1) Partners are charged interest on drawings at a rate of 8% per year. Drawings
made at the beginning of the year were; Mayo K56,000 and Tata K48,000.
(2) Partners were paid annual salaries: Mayo K44, 000 and Tata K16,000.
(3) Each partner contributed K250,000 as capital at the beginning of the partnership.
(4) At 1 January 2021 partners current accounts balances were Mayo K34,840
(Debit) and Tata K19,094 (Credit)

Required:

(i) Prepare partnership appropriation account. (3marks)

(ii) Prepare partners (Mayo and Tata) current accounts. (6marks)
[Total20Marks]

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QUESTION FIVE

(a) The Conceptual Framework's purpose is to assist the IASB in developing and
revising IFRSs that are based on consistent concepts, to help preparers to develop
consistent accounting policies for areas that are not covered by a standard or where
there is choice of accounting policy, and to assist all parties to understand and
interpret IFRS.

Qualitative characteristics are attributes that make financial information useful to

users. Chapter 2 of the framework, distinguishes between fundamental qualitative
characteristics (FQCs) and enhancing qualitative characteristics (EQCs). FQCs
distinguish useful financial reporting information from information that is not useful
or misleading and EQCs distinguish more useful financial reporting information from
less useful information. Financial information is useful when it is relevant and
represents faithfully what it purports to represent.

Required:
State and explain enhancing qualitative characteristics. (8marks)

(b) The trial balance of Bubu Ltd has an excess of debit balances over credit balances of
K24,995. A suspense account has been opened to balance the trial balance. The
following transactions were later discovered:

(i) Interest paid of K5,000 and Interest received of K8,000 have both been
entered on the wrong side of the trial balance.
(ii) The receivable control account balance of K224,387 had been included in the
trial balance as K242,387
(iii) Sales of K2,000 had been omitted from the sales records (i.e from the sales
day book).
(iv) Purchase of raw material of K4,005 was entered in the purchase account as
K4,500.
(iv) The balance on the current account of K12,500 for the Proprietor’s wife had
been omitted from the trial balance. This item when corrected will clear the
suspense account.

Required:

State and explain three (3) errors that will not affect the balancing of a trial balance
and open a suspense account and correct the above transactions in it.
(6marks)

(c) EFG Ltd has prepared its October 2021 bank reconciliation for auditors to review. As
at 31 October 2021 the ledger balance was K2,450 (Credit) but the bank statement
showed that the company has funds amounting to K3,743.

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The following are useful information:

(1) The company arranged for the bank to transfer the dollar equivalent of K500,000 to
a supplier in the United States. Charges on the transfer of 0.5% have not been
recorded in the books of EFG Ltd.
(2) The CEO of EFG Ltd arranged for an amount of K3,000 to be transferred from his
personal bank account into the company’s account. The bank made the transfer on
31 October 2021, but EFG Ltd has not made any entry in its books.
(3) A Cheque for Electricity Company amounting to K5,600 issued and recorded
correctly in the bank statements appeared in EFG ledger as K6,500.
(4) The following cheques issued by EFG Ltd in October 2021 did not appear on the
bank statement:
Cheque # 20450 - K2,000
Cheque # 20456 - K4,800
Cheque # 20500 - K5,250
(5) Income earned on investment with an advice by the bank of K2,457 was not
recorded by the bank until 3 November 2021.
(6) Three cheques received and booked by EFG Ltd amounting to K4,800 were not
credited by the bank.

Required:

(i) Prepare the bank account in EFG Ltd nominal ledger including any adjusting entries
based on the information above.
(3marks)

(ii) Prepare a reconciliation of the bank statement balance to the corrected balance on
the bank account in EFG Ltd nominal ledger.
(3marks)
[Total:20 Marks]

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QUESTION SIX

The following summary information relates to two (2) businesses Bwana and Mkubwa. Both
businesses traded in the same market sector for the year ended 31 December 2020.

Statement of Profit or Loss Accounts for the year ended 31 December 2020
Bwana Mkubwa
K K
Sales 800,000 800,000
Cost of sales (400,000) (360,000)
Gross Profit 400,000 440,000
Expenses (250,000) (220,000)
Net Profit 150,000 220,000

Statement of Financial Position as at 31 December 2020

Bwana Mkubwa
K K K K

Fixed Assets 490,000 700,000

Current Assets
Inventory 50,000 100,000
Receivable 80,000 160,000
Cash at bank 170,000 Nil
300,000 260,000
Current Liabilities
Payables 90,000 140,000
Bank overdraft Nil 120,000
210,000 Nil

700,000 700,000
Financed by:
Opening capital 575,000 555,000
Net profit 150,000 220,000
725,000 775,000
Drawings (25,000) (75,000)

Closing capital 700,000 700,000

Additional information:
Inventory as at 1 January 2020: Bwana K30,000
Mkubwa K80,000

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Required:

(a) Calculate the following ratios for Bwana and Mkubwa:

(i) Gross profit margin
(1 mark)
(ii) Net profit margin
(1 mark)
(iii) Return on capital employed (based on closing capital)
(1 mark)
(iv) Current ratio
(1 mark)
(v) Liquid (acid test) ratio
(1 mark)
(vi) Inventory turnover
(1 mark)
(b) Use the ratios calculated in (a) to assess:

(i) The liquidity of both businesses; (4 marks)

(ii) The profitability of both businesses. (4marks)

(c) Advise management of both Bwana and Mkubwa on the actions they should now take
to improve liquidity and profitability.
(6marks)
[Total: 20 Marks]

END OF PAPER

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CA1.1 SUGGESTED SOLUTIONS

SOLUTION ONE

1.1 B

1.2 D

1.3 B

1.4 C

1.5 C

1.6 A

1.7 B

1.8 B

1.9 B

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SOLUTION TWO

a) Poland Ltd.
Statement of Profit and Loss for the year ended 31 December 2021
K K
Sales 508,420
Opening inventories 51,980
Purchases 225,000
276,980
Closing inventories (85,420)
Cost of sales (191,560)
Gross profit 316,860
Other income (17,040 + 8,500 – 2,400) 23,140
Distribution costs (80,400 – 750 + 48,000 + 6,000 + 26,870) 160,520
Administrative expenses (45,240 – (1/3x840) + 800 +
1,250 + 1,010+ 12,000 + 1,500 – 3,500-14,360) 43,660
Preference dividends (7% x 30,000) 2,100 (206,280)
Profit before tax 133,720
Taxation (14.360)
Profit after tax 119,360
b) Poland Ltd.
Statement of Financial Position at 31 December 2021
K K
Assets
Non-current assets
Premises (220,000 + 3,500) 223,500
Equipment (350,000 – 75,000 – 60,000 – 7,500) 207,500
Motor vehicles (160,000 – 25,650 – 26,870) 107,480
538,480
Current assets
Inventories 85,420
Trade receivables (130,010 – 1,010) 129,000
Prepayments ((1/3x840) + 750) 10,30
Bank 10,050
225,500
Total assets 763,980
Equity and liabilities
Equity
Equity share capital 500,000
General reserve 40,420
Retained earnings (51,760 + 119,360 – 7,420) 163,700
704,120

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Non-current liabilities
Preference shares 30,000
Current liabilities
Trade payables 10,200
Accruals (800 + 2,100+14,360) 17,260
Prepaid rent income 2,400
29,860
Total equity and liabilities 763,980

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SOLUTION THREE

(a) Irrecoverable debts arise to a business that sells goods or services on credit for the
following reasons:

 Bankruptcy or financial difficulties

 Trade disputes
 Fraud
 When the customer has a poor financial management

(b) 2020 irrecoverable debts account

Irrecoverable debt account(2020)

Receivables 7440 profit and loss 7,440
7440 7,440

IRRECOVERABLE DEBT ACCOUNT(2021)

Receivables 15648 profit and loss 15,648
15648 15,648

IRRECOVERABLE DEBT ACCOUNT(2022)

Receivables 31860 profit and loss 31,860
31860 31,860

(c) Allowance for receivables

Statement of financial position extract

CURRENT ASSETS 2020 2021 2022
K K K
Trade receivables 252,000 462,000 516,000
Less allowance for receivables (12,600) (18,480) (15,480)
Net receivables 239,400 443,520 500,520

(d) Why allowance for receivables account is maintained in addition to writing off
irrecoverable debts.

Irrecoverable debts are debts that are the entity is sure will not be recovered. The
corresponding expense must be recognized in the profit and loss in which such a fact
arises. This is application of the matching concept that seeks to match revenue of a
period with the corresponding expenses of the same period.

On the other hand the entity applies the prudence concept (conservatism) which
requires that when losses are foreseen, they must be recognized now as expenses

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even before they occur. Revenues predicted are foreseen or predicted, they are
ignored until they actually occur. This concept makes management to do an age
analysis of receivables and identify customer debts that may not be received. Then a
provision for doubtful debts or allowance for receivables is created and maintained.

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SOLUTION FOUR

(a)
(i) Revenue and Capital expenditures
Revenue expenditure = K40, 000 Insurance costs

Capital expenditure
Equipment purchase price 95, 000
Trade discount (15, 000)
Site preparation costs 10, 000
Delivery costs 7, 000
Compulsory dismantling costs 3, 000
Total K100, 000
(ii)
DR CR

Equipment 100,000
Insurance 40,000
Bank 140,000

(iii)
Dep: 100,000/10yrs = 10,000 N.B.V: 100,000 – 10,000 =
90,000
Revaluation surplus: 102,000 – 90,000 = 12, 000

(iV)

DR CR

Equipment 12,000
Revaluation 12,000

(b) (i) Partner appropriation account as at 31 December 2021

Net profit 255, 784
Interest on drawings: Mayo 56,000 x 8% 4, 480
Interest on drawings: Taka 48,000 x 8% 3,840
Salary: Mayo (44, 000)
Salary: Tata (16, 000)
Profit to share 204, 104
Share of profit:
Mayo 102, 052
Tata 102, 052
Profit to share 204, 104

(ii) Dr. Mayo Current Account Cr

Opening Balance 34, 840 Profit 102, 052
Drawings 56, 000 Salary 44, 000
Interest on drawings 4, 480
Balance c/d 50, 735
146, 052 146, 052

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(ii) Dr. Tata Current Account Cr
Drawings 48, 000 Opening balance 19, 094
Interest on drawings 3, 840 Profit 102, 052
Balance c/d 85, 306 Salary 16, 000
137, 146 137, 146

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SOLUTION FIVE

(a)
Comparability, verifiability, timeliness and understandability are qualitative
characteristics that enhance/improve the usefulness of information that is relevant and
faithfully represented.

Comparability; Information about a reporting entity is more useful if it can be compared

with a similar information about other entities and with similar information about the same
entity for another period or another date. Comparability enables users to identify and
understand similarities in, and differences among, items. The consistency of treatment is
therefore important across like items over time, within the entity and across all entities.
Consistency is a means by which the objective of comparability may be met.

Comparability is not the same as uniformity. For information to be comparable, like things
must look alike and different things must look different. The disclosure of accounting
policies is particularly important here. Users must distinguish between different accounting
policies to be able to make a valid comparison of similar items in the accounts of different
entities.

Corresponding information for preceding periods should be shown to enable comparison

over time. Where an accounting policy is changed in the current period, the comparative
figures will normally need to be amended to show the figures as they would have been
presented using the new accounting policy (requirement of IAS 8).

Verifiability; Verifiability helps to assure users that information represents faithfully the
economic phenomena it purports to represent. Verifiability means that different
knowledgeable and independent observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a faithful representation. Verification can
be direct or indirect. Direct verification means verifying an amount or other representation
through direct observation, for example, by observing a physical inventory count or by
counting cash. Indirect verification means checking the inputs to a model, formula or other
technique and recalculating the outputs using the same methodology. An example is
verifying the carrying amount of inventory by checking the inputs (quantities and costs) and
recalculating the closing inventory using the same cost flow assumption (for example, using
the first-in, first-out method).

Timeliness; Timeliness means that information is available to decision-makers in time to be

capable of influencing their decisions. Generally, the older the information is the less useful
it is. However, some information may continue to be timely long after the end of a reporting
period because, for example, some users may need to identify and assess trends.

Understandability; Classifying, characterizing and presenting information clearly and

concisely makes it understandable. While some phenomena are inherently complex and
cannot be made easy to understand, to exclude such information would make financial
reports incomplete and potentially misleading. Financial reports are prepared for users who
have a reasonable knowledge of business and economic activities and who review and
analyze the information with diligence. Users must be able to understand financial

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statements. They are assumed to have some business, economic and accounting knowledge
and to be able to apply themselves to study the information properly.

Enhancing qualitative characteristics should be maximized to the extent necessary.

However, enhancing qualitative characteristics (either individually or collectively) cannot
render information useful if that information is irrelevant or not represented faithfully. A
trade-off between qualitative characteristics is often necessary, the aim being to achieve
an appropriate balance to meet the objective of financial statements.

(b)
• Error of Omission- Failing to record a transaction- Once a transaction is omitted it will
not affect balancing of the trial balance
• Compensating errors: Errors which are equal and opposite to one another which in
effect will not affect balancing of the trial balance
• Error of Commission: Entry recorded in the wrong accounts. E.g. Electricity expenses
recorded as Telephone expenses. This will not affect the trial balance.
• Error of Principle: Entry in the wrong class of accounts. E.g. Revenue expenditure
treated as capital expenditure.

Suspense Account
DR CR
K K
Unidentified balance Per TB 12,500

Interest paid 10,000

Interest received 16,000

Receivables overstated 18,000

Purchase over casted 495

Current Account (Balancing figure) 24,995

40, 99540,995

(c)
I) Bank Account in EFG Ltd nominal ledger K

Balance b/f (2,450)

Transfer charges (0.5%*500000) (2,500)
Transfer from CEO 3,000
Electricity Overstated 900

Balance c/f (1,050)

ii)Bank Reconciliation Statements K

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 Balance per ledger (1,050)
Add unpresented cheques
#450 2,000
#456 4,800
#500 5,250 12,050
11,000
Less:
Uncredited cheques 4,800
Interest not booked 2,457 (7,257)
Balance per bank statement 3,743

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SOLUTION SIX

(a) (i) Gross profit margin: Bwana Mkubwa

Gross profit ÷ sales x 100 400,000 ÷ 800,000 x 100 440,000 ÷ 800,000 x 100
= 50% = 55%

(ii) Net profit margin:

Net profit ÷ sales x 100 150,000 ÷ 800,000 x 100 220,000 ÷ 800,000 x 100
= 18.75% = 27.50%
(iii) ROCE:

Profit ÷ Capital employed x 100 150,000 ÷ 700,000 x 100 220,000 ÷ 700,000 x 100
= 21.43% = 31.43%
(iv)Current ratio:

Current assets ÷ current liabilities 300,000 ÷ 90,000 260,000 ÷ 260,000

(v) Liquidity:

Current assets – Inventory ÷ CL 250,000 ÷ 90,000 160,000 ÷ 260,000

= 2.8:1 = 0.62:1
(vi)Inventory turnover:

Cost of sales ÷ Avge inventory 400,000 ÷ 40,000 360,000 ÷ 90,000

= 10 times = 4 times

(b) i) Liquidity:
 The stock turnover of Bwana is low, and stock levels are twice those of
Mkubwa.
 The current ratio of Mkubwa is high with probable idle funds; Bwana’s ratio
is low with poor credit control.
 The liquid ratio of Mkubwa is high with substantial cash available; Bwana’s
ratio is again low with an overdraft and substantial debts uncollected.

ii) Profitability:
 The gross profit margin of Bwana is greater than Mkubwa, possibly due to
a higher markup.
 The net profit margin of Bwana is greater than Mkubwa as expenses have
been maintained at a lower level for the same turnover for both
businesses.
 Return on capital employed is acceptable for both businesses but
particularly high for Bwana.

23
(c) Advice to management of Mkubwa:
 Mkubwa should seek to reduce its expenses.
 Mkubwa should consider investing some of its cash which is at present
‘idle’.
 Mkubwa’s stock level has increased from K30, 000 to K50, 000 in one year
and should therefore be reviewed.

Advice to management of Bwana:

 Bwana should seek to reduce its inventory level and improve its stock
turnover.
 Bwana should institute better credit control to reduce its debtors to fund
the
 Limination of bank overdraft.
 Bwana should seek to improve its current ratio and liquid ratio.

24
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________
CA CERTIFICATE IN ACCOUNTANCY
___________________
CA 1.2 BUSINESS STATISTICS
___________________

WEDNESDAY 15 JUNE 2022

___________________
TOTAL MARKS – 100: TIME ALLOWED: THREE (3) HOURS
__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This paper is divided into TWO (2) sections:

Section A: Ten (10) compulsory multiple choice questions.
Section B: One (1) compulsory scenario question.
Plus Four (4) scenario questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

25
SECTION A – (COMPULSORY)

Attempt all ten (10) multiple choice questions

QUESTION ONE

Each of the following questions has only one (1) correct answer. Write the letter of the
correct answer you have chosen in your answer booklet. Marks allocated are indicated
against each question.

1.1 The mean of height of students in a class is 160 cm with a standard deviation of
12.5. If a student of height 160 cm joins the class, what would be the immediate
effects on the mean and the standard deviation of the height of the class of
students?

Standard deviation Mean

A. Decreased Decreased
B. Unchanged Increased
C. Increased Unchanged
D. Decreased unchanged

(2 marks)

1.2 Observational studies are especially useful for:

A. population inference
B. neither type of inference
C. both types of inference
D. causal inference

(2 marks)

1.3 Statistics descriptive data summaries, the number that represents the difference
between the largest and smallest measurement is called;

A. range
B. variance
C. median
D. Inter-quartile deviation
(2 marks)

26
1.4 Let X be the number of contacts the shop owner visits on a particular day. The
following table gives the probability distribution ofX:

X 1 2 3 4

P(X=x) 0.20 0.35 0.30 0.15

The average number of times the shop owner visits on a particular day is?

A. 10
B. 2.50
C. 10.6
D. 2.40

(2 marks)

1.5 If the mean of five numbers 3, 6, 7,𝑥 14 is 8. Calculate the standard deviation.

A. 4.18
B. 4.74
C. 10.0
D. 5.24
(2 marks)

1.6 A survey was conducted to find out the relationship between changes in price of fuel
(𝑥) And cost of the staple food mealie-meal (Y) in the country. The results for 8
observations were summarized as shown below:

∑ 𝑥 = 900 ∑ 𝑥𝑦 = 35200 ∑ 𝑦 2 = 1487800 ∑ 𝑥 2 = 99500 ∑ 𝑦 = 3900

What is the Pearson correlation between𝑥 𝑎𝑛𝑑 𝑦?

A. -0.7515
B. -0.2485
C. 0.2485
D. 0.7515

(2 marks)

1.7 The method of moving average is used to find the:

A. Season variations
B. Secular trend
C. Cyclic variation
D. Irregular variation
(2 marks)

27
1.8 The following are the times (in hours) of ten students studying for an exam in a
particular week:

49 53 37 56 35 32 59 27 31 44.

Find the interquartile range for the data.

A. 21
B. 22
C. 23
D. 2
(2 marks)

1.9 The addition theorem states that if two (2) events A and B are mutually exclusive the
probability of A and B this is written as:

A. 𝑃(𝐴 ∪ 𝐵) = 𝑃(𝐴)/𝑃(𝐵)
B. 𝑃(𝐴 ∪ 𝐵) = 𝑃(𝐴) − 𝑃(𝐵)
C. 𝑃(𝐴 ∪ 𝐵) = 𝑃(𝐴) + 𝑃(𝐵) − 𝑃(𝐴 ∩ 𝐵)
D. 𝑃(𝐴 ∪ 𝐵) = 𝑃(𝐴) + 𝑃(𝐵)

(2 marks)

1.10 Given that the Pearson’s coefficient of skewness is 0.42, with a mean and standard
deviation of 30.89 and 2.219 respectively, find the median.

A. 29.58
B. 30.54
C. 30.58
D. 30.45

(2 marks)

[Total: 20 Marks]

28
SECTION B

Question TWO (2) in this section is compulsory and must be attempted. Then
attempt any THREE (3) questions from the remaining four (4) questions.

QUESTION TWO – (COMPULSORY)

(a) Define the following stating two examples of each;

(i) Quantitative data (3 marks)

(ii) Qualitative Data (3 marks)

(b) Each of the investment sale of farm produce maize, egg plants, fresh vegetables and
beans have a probability of 0.6 of yielding a profit. If the business person decides to
sale all the four products,

(i) What is the probability that all four yield a profit? (3 marks)

(ii) What is the probability that the business person’s four (4) investments are
not profitable? (2 marks)

(c) The results are from an experiment conducted from a certain industry on the
relationship mass in kilograms of product (x) and its subsequent product profitability
(y) in kwacha. A linear regression equation 𝑦̂ = −44.61 + 4.07𝑥 was generated with
the summary data shown below.

∑𝑥 ∑ 𝑦 = 274 ∑ 𝑥 2 = 3265 ∑ 𝑥𝑦 = 6375 ∑ 𝑦 2 = 14070

= 155

(i) Estimate the estimated profit of the product if its weight is 100. (3 marks)
(ii) Calculate the correlation coefficient of this data (4 marks)
(iii) Interpret the correlation coefficient (2 marks)

[Total: 20 Marks]

29
QUESTION THREE

(a) A department store manager is interested in the number of complaints about the
quality of electrical products sold by the store. Records over ten months’ period yield
the following data:

Month 1 2 3 4 5 6 7 8 9 10
Complaints 19 13 11 17 9 4 14 12 4 11

Required:

(i) Find the mean number of monthly complaints for the population.
(4 marks)

(ii) Find the median number of monthly complaints in this population.

(3 marks)

(b) Below are given the figures of production of a sugar factory.

Year Production (thousand tons)

2001 93
2002 84
2003 95
2004 93
2005 93
2006 111

Required:

(i) Apply the method of least squares to determine the trend values. (9 marks)

(ii) Find out the short term fluctuations. (4 marks)

[Total 20 Marks]

QUESTION FOUR

(a) A problem in business statistics is given to three students X, Y and Z. Their chances
1 1 1
of not solving the problem are 3
, 4
and 5
respectively.

What is the probability that the problem will be solved? (5 marks)

(b) Suppose that the student’s file contains information on the individual’s sex, major,
age, religion, grade point average, and monthly income of parents.

(i) State whether each variable is qualitative or quantitative. (6 marks)

(ii) Describe how to code qualitative variable numerically. (3 marks)

30
 (iii) State which variables are discrete and which are continuous. (6 marks)

[Total: 20 Marks]

QUESTION FIVE

(a) If the standard deviation of the spot speed of vehicles in a highway is 9.9 km/h and
the mean speed of the vehicles is 34 km/h. it has been observed the data is normally
distributed.

Required:

(i) Calculate the coefficient of variation in speed. (3 marks)

(ii) Find the probability that the spot speed exceed 30 km/h. (4 marks)

(iii) Calculate the probability that the spot speed is between 25 km/h and 33
km/h. . (4 marks)

(b) The probability distribution for days taken in a construction project is shown in the
table below:

Days (X) 1 2 3 4
P(X) 0.23 0.14 0.50 0.13

Required:

(i) What is the probability that the construction takes less than three (3) days?
(2 marks)

(ii) Find the expected value of the time taken for completion of the construction
project. (3 marks)

(iii)
Calculate the standard deviation of days taken for the completion of the
construction project. (4 marks)
[Total 20 marks]
QUESTION SIX

(a) State and define the four (4) components of time series data. (6 marks)

(b) Thirty (30) adults were asked which of the following conveniences they would find
most difficult to do without: television (T), refrigerator (R), air conditioning (A),
public transportation (P), or microwave (M). Their responses are listed below.

R A R P P T R M P A
A R R T P P T R A A
R P A T R P R A P R

31
Required:

(i) Prepare a frequency distribution table. (3 marks)

(ii) Calculate the relative frequencies and percentages for all categories.
(5 marks)

(iii) What percentage of these adults named refrigerator or air conditioning as the
convenience that they would find most difficult to do without? (2 marks)

(iv) Draw a bar chart for the relative frequency distribution. (4 marks)

[Total: 20 Marks]

END OF PAPER

32
CA 1.2 SUGGESTED SOLUTIONS

1.1 D

1.2 B

1.3 A

1.4 D

1.5 A

1.6 B

1.7 B

1.8 C

1.9 D

1.10 C

33
SOLUTION TWO

(a) (i) qualitative data is the descriptive and conceptual findings collected through
questionnaires, interview or observation.

Examples are: Letter of grades in an exam, color of cars in a parking lot

(any example so long a particular number is not assigned to the description)

(ii) quantitative data is defined as the value of data in the form of counts or numbers
where each data set has a unique numerical value.
Examples are: revenue in kwacha, weight, height, grades in percentage for a class
etc.

(b) (i) probability of profit in maize(M), eggplant E, vegetable (V) and beans (B) is
= 𝑃(𝑀)𝑃(𝐸)𝑃(𝑉)𝑃(𝐵)
= 0.6 × 0.6 × 0.6 × 0.6
= 0.1296

(ii) probability of loss in all products is

= (1 − 0.6)(1 − 0.6)(1 − 0.6)(1 − 0.6)
= 0.4 × 0.4 × 0.4 × 0.4
= 0.0256

(c) (i) 𝑦̂ = −44.61 + 4.07𝑥

𝑦 = −44.61 + 4.07(100)
𝑦 = −44.61 + 407
𝑦 = 362.39

(ii)

∑𝑥∑𝑦
∑ 𝑥𝑦 −
𝑟= 𝑛
(∑ 𝑥)2 (∑ 𝑦)2
√(∑ 𝑥 2 − ) (∑ 𝑦 2 − )
𝑛 𝑛
155 × 274
6375 − 8
155 2 (274)2
√(3265 − ) (14070 −
8 8 )
1066.25 1066.25
= = = 0.963
√(261.875)(4685.5) √1227015.3125
(iii) there is a very strong positive correlation between the weight of the product and its
profitability

34
SOLUTION THREE

(a)
Month (𝑥) Complaints (𝑓) 𝑥𝑓 𝐹
1 19 19 19
2 13 26 32
3 11 33 43
4 17 68 40
5 9 45 69
6 4 24 73
7 14 98 67
8 12 96 99
9 4 36 83
10 14 140 117
∑ 𝑓 = 117 ∑ 𝑥𝑓 = 585

∑ 𝑥𝑓 585
i) 𝜇= ∑𝑓
= 117 = 5

ii) Position of median = 0.5(117) = 58.5𝑡ℎ 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛

The median number of monthly complaints is 17

(b) Let time be 𝑥 and 𝑦 production then

Year (𝑥) Production 𝑥2 𝑦2 𝑥𝑦

(‘000’)(𝑦)
1 93 1 8649 93
2 84 4 7056 168
3 95 9 9025 285
4 93 16 8649 372
5 93 25 8549 465
6 111 36 12321 666
∑ 𝑥 = 21 ∑ 𝑦 = 569 ∑ 𝑥 2 = 91 ∑ 𝑦2 ∑ 𝑥𝑦 = 2049
= 45 700

𝑛 ∑ 𝑥𝑦 − ∑ 𝑥 ∑ 𝑦 6(2049) − (21)(569)
𝑏= = = 3.29
𝑛 ∑ 𝑥 2 − (∑ 𝑥)2 6(91) − (21)2

𝑎 = 𝑦̅ − 𝑏𝑥̅ = 94.83 − 11.5 = 83.33

𝑦̂ = 83.33 + 3.29𝑥

35
Short term fluctuations

Year 𝑦 Trend Fluctuations

𝑦 − 𝑦̂
2001 93 86.6 +6.4
2002 84 89.9 -5.9
2003 95 93.2 +1.8
2004 93 96.5 -3.5
2005 93 99.8 -6.5
2006 111 103.0 +8

36
SOLUTION FOUR

1 1 1
(a) Let (𝑋) = 3 , 𝑃(𝑌) = 4 and 𝑃(𝑍) = 5 i.e., the probability that the problem being
solved by the individual student respectively.
2
The 𝑃(𝑋̅) = 1 − 𝑃(𝑋) = 3 the probability that the problem cannot be solve by
student 𝑋.
1 3 1 4
𝑃(𝑌̅) = 1 − 4
= 4 and 𝑃(𝑍̅) = 1 − 5
= 5. Therefore, the required probability that
the problem is solved is equal to
2 3 4 3
1 − 𝑃(𝑋̅)𝑃(𝑌̅ )𝑃(𝑍̅) = 1 − ( ) ( ) ( ) =
3 4 5 5

(b)
(i)
Quantitative variables
1 Age
2 Grade point average
3 Monthly income of parents

Qualitative variables
1 Sex
2 Major
3 Religion

(ii) Coding

Qualitative variables
Sex 0 or 1
major 0, 1, 2, 3, . . .
Religion 0, 1, 2, …

(iii)

Continuous variables
1 Age
2 Grade point average
3 Monthly income of parents

Discrete variables
1 Sex
2 Major
3 Religion

37
SOLUTION FIVE
𝜎 9.9
(a) i) The coefficient of variation is 𝐶𝑉 = 𝜇 × 100 = 34
× 100 = 29.12%

𝑿−𝟑𝟒
ii) 𝑷(𝑿 > 𝟑𝟎) = 𝑷(𝒛 > 𝟗.𝟗
)
𝟑𝟎−𝟑𝟒
= 𝑷(𝒁 > 𝟗.𝟗
)
𝟒
= 𝑷(𝒁 > )
𝟗. 𝟗
𝑷(𝒁 > 𝟎. 𝟒𝟒) = 𝟎. 𝟑𝟑𝟎𝟎
𝑿−𝟑𝟒 𝑿−𝟑𝟒
iii) 𝑷(𝟐𝟓 < 𝑿 < 𝟑𝟑) = 𝑷( <𝒁< )
𝟗.𝟗 𝟗.𝟗
𝟐𝟓 − 𝟑𝟒 𝟑𝟑 − 𝟑𝟒
= 𝑷( <𝒁< )
𝟗. 𝟗 𝟗. 𝟗
= 𝑷(−𝟎. 𝟗𝟏 < 𝒁 < 𝟎. 𝟏𝟎)
𝟏 − 𝑷(𝒁 < −𝟎. 𝟗𝟏) − 𝑷(𝒁 > 𝟎. 𝟏) = 𝟏 − 𝟎. 𝟏𝟖𝟏𝟒 − 𝟎. 𝟒𝟔𝟎𝟐
= 𝟎. 𝟑𝟓𝟖𝟒

(b)

i) 𝑷(𝑿 < 𝟑) = 𝑷(𝟏) + 𝑷(𝟐) = 𝟎. 𝟐𝟑 + 𝟎. 𝟏𝟒

= 𝟎. 𝟑𝟕
ii) 𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒗𝒂𝒍𝒖𝒆 = ∑ 𝒙𝒑(𝒙) = 𝟏(𝟎. 𝟐𝟑) + 𝟐(𝟎. 𝟏𝟒) + 𝟑(𝟎. 𝟓) + 𝟒(𝟎. 𝟏𝟑)

= 𝟎. 𝟐𝟑 + 𝟎. 𝟐𝟖 + 𝟏. 𝟓 + 𝟎. 𝟓𝟐 = 𝟐. 𝟓𝟑 𝒅𝒂𝒚𝒔

iii) the standard deviation

𝟐
𝒔𝒅 = √𝑬(𝑿𝟐 ) − (𝑬(𝑿))

= [𝟏𝟐 (𝟎. 𝟐𝟑) + 𝟐𝟐 (𝟎. 𝟏𝟒) + 𝟑𝟐 (𝟎. 𝟓) + 𝟒𝟐 (𝟎. 𝟏𝟑)] − [ 𝟐. 𝟓𝟑𝟐 ]

= [𝟎. 𝟐𝟑 + 𝟎. 𝟓𝟔 + 𝟒. 𝟓 + 𝟐. 𝟎𝟖] − [𝟔. 𝟒𝟎𝟎𝟗]

= [𝟕. 𝟑𝟕 − 𝟔. 𝟒𝟎𝟎𝟗 = 𝟎. 𝟗𝟔𝟗𝟏

38
SOLUTION SIX

(a)
(i) Trend component-usually characterized by long-run increase or decrease in time
(ii) seasonal component-this is characterized by regular and predictable changes the
time series data experiences which recur every year
(iii) Cyclic: These are long term oscillations occurring in a time series.
(iv) Irregular or random noise component-might contain irregular cyclical components
of unknown frequency fluctuating around zero
(b)
(i)

Conveniences Frequency R. Frequencies Percentages

4
Television (T) 4 30 13.33
10
Refrigerator (R) 10 30 33.33
7
Air conditioning (A) 7 30 23.33
8
Public transportation (P) 8 30 26.67
1
Microwave (M) 1 30 3.33
Totals 30 1 100

(ii)
Conveniencies R. Frequencies Percentages
4 4
Television (T): 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 = 30 30
× 100 = 13.33
10 4
Refrigerator (R): 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 = 30 30
× 100 = 13.33
7 4
Air conditioning (A): 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 = 30 30
× 100 = 13.33
8 4
Public transportation (P): 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 = × 100 = 13.33
30 30
1 4
Microwave (M): 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 = 30 30
× 100 = 13.33

10 7 17
(iii) 𝑃(𝑅 𝑜𝑟 𝐴) = 𝑃(𝑅) + 𝑃(𝐴) = 30 + 30 = 30

Therefore the percentage is;

17
× 100 = 56.7%
30

39
(iv)

Bar Chart of Conveniencies

0.35

0.3

0.25
R.Frequency

0.2

0.15

0.1

0.05

0
Television (T) Refrigerator (R) Air conditioning (A) Public transportation microwave (M)
(P)
Conveniencies

END OF SOLUTIONS

40
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA CERTIFICATE IN ACCOUNTANCY
_________________

CA1.3: BUSINESS ECONOMICS

___________________

TUESDAY 14 JUNE 2022

__________________
TOTAL MARKS – 100: TIME ALLOWED: THREE (3) HOURS
__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO (2) sections:

Section A: Ten (10) compulsory multiple choice questions.
Section B: One (1) compulsory scenario question.
Plus Four (4) scenario questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

41
SECTION A – (COMPULSORY)

Attempt all Ten (10) multiple choice questions.

QUESTION ONE

Each of the following questions has only one (1) correct answer. Write the letter of the
correct answer you have chosen in your answer booklet. Marks allocated are indicated
against each question.

1.1 How do perfectly competitive firms compete?

A. They engage in none price competition
B. They engage is price competition
C. There is no competition between firms
D. Through heavy advertising
(2 marks)

1.2 If the price of a movie ticket is increased by 3% and the quantity demanded
decreased by 1%, then the demand for movie tickets can best be described
as…………….
A. Elastic
B. Inelastic
C. Unitary
D. Perfect
(2 marks)

1.3 Which of the following statements is correct for a planned economy?

A. The price mechanism determines the allocation of resources
B. Individual firms make decisions for themselves about what to produce and
how to produce it
C. All the prices are determined by the interaction of demand and supply
D. There is likely to be a large public sector
(2 marks)
1.4 What is the main difference between variable costs and fixed costs?
A. Fixed costs are constant with output while variable cost are not
B. Variable costs are constant with output while fixed costs are not
C. Variable costs rise with output and so do fixed costs
D. Fixed costs are more expensive than variable costs
(2 marks)

1.5 The credit multiplier is ………………………………..

A. An injection of government spending which increases national income
B. The process where banks borrow from other banks
C. Cash leaks out of the banking system into less formal accumulations
D. Government control the creation of credit

42
 (2 marks)
1.6 Implicit costs are the opportunity costs of using the resources of …………..
A. Outsiders
B. Owners
C. Banks
D. Retained earnings
(2 marks)

1.7 In the circular Flow of income model, which one of the following statements is
correct about the role of firms?
A. The buy goods and factors of production
B. They sell goods and factors of production
C. They sell goods and buy factors of production
D. They sell factors of production and buy goods
(2 marks)

1.8 Which of the following is considered open market activities?

A. Raising taxes
B. Increased spending
C. Increasing reserve requirement
D. Selling bonds
(2 marks)

1.9 The infant industry argument for protectionism is based on which of the following
views?
A. Foreign buyers will absorb all the output of domestic producers in the new
industry
B. The growth of the industry that is new to a nation will be too rapid unless
trade restrictions are imposed
C. Firms in a newly developed domestic industry will have difficulty growing if
they face strong competition from established foreign firms
D. It is based on none of the above
(2 marks)

1.10 An increase in consumers’ incomes increases the demand for oranges. As a result
of the adjustment to a new equilibrium, there is a (an)……………………………….
A. Leftward shift of the supply curve
B. Upward movement along the supply curve
C. Rightward shift of the supply curve
D. Downward movement along a supply curve
(2 marks)

[Total: 20 Marks]

43
SECTION B

Question two (2) in this section is compulsory and must be attempted. Then
attempt any three (3) from the remaining four (4) questions.
QUESTION TWO - (COMPULSORY)
Meat production industry in Country X has experienced significant changes since the 1990s
when Pork was the most frequently purchased meat. The consumption of all types of meat
has increased since the 1990s; however, Fish has now replaced Pork as the most frequently
purchased meat.

The Fish-meat production industry in Country X is now dominated by just two large
producers who supply 70% of the fish. A few medium-sized companies supply another 22%,
and the remainder is supplied by small producers. Producers claim that the market structure
of the Fish-meat production industry meets the needs of both consumers and producers.

Required:

(a) Identify the likely market structure of the fish-pork production industry in Country X.
Justify your answer. (4 marks)

(b) Use the knowledge of elasticity to determine the nature of the goods that pork and
fish are? (2 marks)

(c) Outline any two (2) assumptions under which the Production Possibility Frontier is
constructed? (2 marks)

(d) Suppose that a Fish feed manufacturing company, which sells its feed at K120 per
bag, has the following cost structure.

Output Total Cost

0 80
1 100
2 140
3 210
4 280
5 400
6 600
7 840

(i) Compute Average cost, Marginal cost, Total revenue and Marginal revenue.
(8 marks)

(ii) Explain the implications of freedom of entry and exit of firms under perfect
competition. (4 marks)

[Total: 20 Marks]

44
QUESTION THREE
A perfectly competitive market is characterized by many firms producing an identical product
and so each firm is a price-taker, firms have freedom of entry and exit, and buyers are
perfectly informed about the product sold in the market. All those assumptions rarely hold
together in a given market, and therefore we rarely see a perfectly competitive market in
reality.

Required:

Suppose that in a large city there are many taxi firms which can provide identical services.

(a) Explain and show on a diagram the possible changes in a taxi firm’s economic profit,
price and output given the following events. Use diagrams which are initially in long
run equilibrium and take each event separately for both the industry and the firm.

(i) The city council decides to ease traffic congestion by banning cars from inner
city areas but not taxis. (7 marks)

(ii) The price of petrol and diesel fuel increases. (7 marks)

(b) Outline two (2) factors which explain the shape of a firm's average cost curve in the
short and the long run. (6 marks)

[Total: 20 Marks]

45
QUESTION FOUR
The Chinese Government is becoming increasingly concerned about higher rates of inflation.
Rising oil and petrol prices have increased costs to industry and firms are being forced to
raise their prices to cover these higher costs. In addition, rising demand for food from a
wealthier population, together with supply problems resulting in excess demand, have led to
the price of pork rising by 63% and fresh vegetable prices by 46%. The People’s Bank of
China has just increased interest rates by a further 0.27%. This is the third increase in less
than a year. A spokesman from Goldman Sachs, the investment bank, reported that the
increase shows that the central bank is now much more prepared to use interest rates to
manage the economy and tighten monetary policy at the first signs of the booming economy
overheating. China’s GDP increased by 10.7% in 2007, and the Prime Minister has said that
this rate of growth is becoming ‘unsustainable’. Chinese leaders face conflicting pressures in
balancing the top priority of maintaining high-speed economic growth to create millions of
new jobs each year. (David Berg et al., 2011)

Required:
(a) State any four (4) reasons why high inflation is not good. (4 marks)

(b) Are these causes of inflation described in the scenario above cost-push or demand-
pull pressures? Give reasons to explain your answer. (3 marks)

(c) If the Chinese government increased interest rates again, explain what impact this
could have on:

(i) a consumer spending on luxury goods (3 marks)

(ii) spending on new expansion projects by Chinese businesses (3 marks)
(iii) the exchange rate of China’s currency. (3 marks)
(d) Explain how a tight monetary policy would control inflation. (4 marks)

[Total: 20 Marks]

46
QUESTION FIVE

Suppose that a country can produce two (2) goods: X and Y. To produce one (1) unit of X it
requires one (1) worker. To produce one unit of Y it requires two workers. The allocation of
resources towards the production of the two goods can be depicted on a production
possibility frontier (PPF). The PPF shows the different combinations of goods and services
that can be produced with a given amount of resources in their most efficient way. Since
resources are scarce, allocating and re-allocating resources to produce one good to another,
involves an opportunity cost.

Required:

(a) Define what ‘opportunity cost’ is? (2 marks)

(b) Construct a hypothetical production possibility frontier using the information in the
scenario. (4 marks)

(c) Explain any three (3) reasons why the production possibility frontier will shift
outwards. (6 marks)

(d) Outline any four (4) advantages of the market economy. (8 marks)

[Total: 20 Marks]

47
QUESTION SIX

The Keynesian theory of instability lends directly to a model for government policy. From a
Keynesian perspective, an insufficient aggregate demand causes unemployment and an
excess aggregate demand causes inflation. Since the market itself will not correct these
imbalances between aggregate demand and the productive capacity of the economy the
government must. Specifically, government must increase aggregate demand when it is low
and decrease aggregate demand when it is excessive. By balancing aggregate demand and
full-employment GNP in this way, government can achieve macroeconomic goals of full
employment, price stability and sustained economic growth. The use of fiscal policy to alter
the level of expenditure is called stabilisation of the budget. From the Keynesian
perspective, the pursuit of stable economic growth implies that expenditures and receipts
will not always be equal.

Required:
(a) In detail distinguish between fiscal discipline and monetary policies. (4 marks)

(b) The new Minister of Finance on his appointment emphasized that for Zambia to
revert to higher growth figures of above 7.5 percent with adherence to fiscal
consolidation and stimulation of productivity out of recession. Discuss any two (2)
macroeconomic policy mixes that can be pursued to realise the 7.5 per cent
economic growth? (8 marks)

(c) Zambia has been facing a budget deficits in the past decade despite numerous
budget planning made.

(i) What is a budget deficit? (2 marks)

(ii) Explain intuitively how government finances the budget deficit through the help
of Bank of Zambia by auctioning government securities (6 marks)

[Total: 20 Marks]

END OF PAPER

48
CA 1.3 SUGGESTED SOLUTIONS

1.1 C
1.2 B
1.3 D
1.4 A
1.5 D
1.6 B
1.7 C
1.8 D
1.9 C
1.10 B

49
SOLUTION TWO
(a)

 The market structure is oligopoly. An oligopoly is an industry where there is a high

level of market concentration.
 A rule of thumb is that an oligopoly exists when the top five firms in the market
account for more than 60% of total market sales.

(b) Cross-price elasticity

1. If the cross price elasticity is positive the pork and fish would
be classified as substitutes
2. If the cross price elasticity is negative the pork and would be
classified as complements
(c)
1. Two –goods model
2. Fixed technology
3. Fixed amount of resources
(d)

i) Compute AC, MC, TR and MR

Output Total Cost Average Marginal Total Marginal

cost cost revenue revenue
0 80 - - 0 -
1 100 100 20 120 120
2 140 70 40 240 120
3 210 70 70 360 120
4 280 70 70 480 120
5 400 80 120 600 120
6 600 100 200 720 120
7 840 120 240 840 120

ii) Implications are:

 Freedom of entry and exit of firms under perfect competition means that
there are no costs or barriers a firm faces to enter or exit the market as the
cost of exit and entry is considered zero. The implication of this is that in the
long run each firm earns only normal profit.
 Suppose in the short run, existing firms are earning super normal profits, new
firms enter the industry as they are attracted by profits. This raises the
market supply and reduces the market price. As firms accept the lower
market price, profits reduce. This process continues till profits reduce to
normal levels in the long run.
 The opposite occurs if firms are earning losses as firms leave the industry.
This reduces market supply and raises market price till losses get wiped out
and firms earn only normal profit in the long run

50
SOLUTION THREE

(a)
(i) In the short run there would be a greater demand for taxis, demand shifts right for
the industry and prices and quantity traded increase. For the firm, a new SR
equilibrium experiencing abnormal profit would result. In the long run due to the
characteristics of the market, new firms enter and normal profits are restored.

(ii) Starting from an initial equilibrium – The higher AVC would shift the supply curve
upwards and to the left. Therefore ATC and MC would all shift up resulting in higher
prices and lower quantity traded. Losses would lead to firms exiting the market in
the short run.

(b)
In the short run the law of diminishing returns is the relevant factor in determining short run
average costs. As increasing amounts of a variable factor of production are added to a given
amount of a fixed factor, marginal and average product initially tend to rise implying a fall in
short run average costs. However, after a certain point marginal and eventually average
product begin to decline. As average product declines then short run average costs rise.

Long run average costs are affected by economies and diseconomies of scale. In the long
run all factors of production are variable. If increasing all inputs increases output more than

51
proportionately then long run average costs decline. Examples of economies of scale
include: discounts for bulk purchasing, lower borrowing costs etc. Eventually diseconomies
of scale may set in e.g. bureaucracy, inflexibility etc. When diseconomies of scale outweigh
economies of scale then long run average cost will begin to rise.

52
SOLUTION FOUR

(a) The negative effects of inflation are as follows:

 Inflation redistributes income: Retired people who are on fixed incomes suffer a
lot from inflation. Some people earn K20, 000 per month as pension. At the
time of retirement, they were able to purchase a lot of goods and services from
that amount, but due to inflation their purchasing power and standards of living
falls.
 Inflation distorts consumer behaviour. Consumers purchase a lot of goods
because of expected future price increases. They hoard goods hoping to ‘beat’
inflation and in the process create shortages.
 Inflation undermines business confidence. Businesses are unable to make
concrete future plans because of uncertainty in price fluctuation in addition, they
have to change the price tags on products on a regular basis and this can be so
costly and time consuming.
 Inflation and interest rate and savings. The real rate of interest, which is the
money rate of interest after making an allowance for inflation, is reduced.
Lenders demand for high money rates to compensate for lower real values.
 Lower real interest rates discourage savings and encourage spending. This may
have a long-term effect on long-term finance for investment.
 Inflation reduces a country’s international competitiveness: High prices make
products (exports) unattractive on the international market; consumers are likely
to prefer cheaper imports to locally produced products. This affects the balance
of payments. A country has an adverse balance of payments when exports are
lower than imports.
 Inflation causes the currency to depreciate when there is a low demand for
exports, therefore, the demand for the currency is low compared to its supply,
and the currency depreciates in value.
 Inflation redistributes wealth; it causes borrowers to gain at the expense of
lenders as it reduces the value of the debt. The lenders receive less relative to
what they had lent. This is related to the time value of money.
 Inflation leads to uncertainty in price forecasting, both at central government
level and at corporate business level.

(b) The causes of inflation are both demand pull and cost-push

Demand-pull: rising demand for food from a wealthier population

Cost-push: Rising oil and petrol prices have increased costs to industry

(c) If the Chinese government increases interest rates;

i) Consumer spending will reduce because consumers will not be able to borrow
enough money from the banks due to high rates. Luxury goods are by nature
very expensive. Without enough money, consumers will not be able to afford
luxury goods.
ii) High interest rates will discourage business from borrowing as a result of
increased government expenditure which has a crowding out eff3ect on
investment

53
 iii) An increase in interest rates will lead to an increase in the flow of foreign
funds. The foreign flow of funds will put pressure on the exchange rate
thereby the Chinese currency will appreciate.
(d)

 Monetary policy can be used to reduce the money supply, the central bank has
to curtail the borrowing and spending by limiting the commercial bank’s capacity
to create credit, create deposits and therefore ‘create money’. One of
instruments that the central bank uses to control the money supply is the interest
rate.
 The importance of central bank rate is that other rates of interest used, depend
on it, the rate charged to discount houses, the rates charged on advances to
customers and the rate offered on deposit accounts.
 These rates move up or down with central bank rate. To check inflation, i.e. to
reduce the money supply, the interest rate is raised to make credit expensive and
as such discourage people from borrowing.

54
SOLUTION FIVE
(a) Opportunity cost is defined as the next best alternative foregone.

(b) The production possibility frontier

(c) The production possibility frontier will shift when:

 There are improvements in productivity and efficiency perhaps because of the
introduction of new technology or advances in the techniques of production)
 More factor resources are exploited perhaps due to an increase a rise in the
amount of capital equipment available for businesses
 An increase in the size of the workforce perhaps due to increase in population or
more people being educated.
 Discovery of a natural resource that supports the production of the two goods.

(d) Advantages of market economy

 Any individual or firm has the right to act on his/her/its own account to satisfy
the needs of others
 Competition between different firms leads to increased efficiency
 There is more innovation as firms look for new products to sell and cheaper ways
to produce goods and services
 The size, power and cost of the State bureaucracy is reduced, as various
activities that are usually associated with the public sector are taken over by
private enterprise
 Choice –no compulsion for any individual to buy a product
 Provides information about the preferences and beliefs of consumers.

55
SOLUTION SIX

(a) Fiscal discipline is the central government mandate to avoid budget deficit by spending
within the limits of the mobilized revenue while monetary policy is the actions of the
central bank in managing the growth of money supply.
(b) In a recession, aggregate demand is generally low hence through expansionary fiscal
policy; the government can increase government expenditure through public works
hence stimulating industrial output. On the monetary policy side, the central bank can
pursue reasonable policy rate that will caution inflationary pressure from a possible
over-stimulated economy.
In an effort to manage and stimulate aggregate demand, the government can reduce
taxes hence increasing the purchasing power through increased disposable income. At
the same point the central bank can pursue reasonable intervention such as paucity
increase in RRR or market interest rates to curb possible upswings in commercial bank
credits and stabilizes the prices.
(c) (i) Budget deficit is when government expenditure exceeds government revenue
ii) Government can finance the deficit by auctioning government securities by selling
bonds and treasury bills on the Open market at attractive market rates. Through the
sale, the Bank of Zambia raises money that can be used to finance the budget deficit.
Further, the bank of Zambia can finance by contracting external debt through the
issuance of Eurobonds

END OF SOLUTIONS

56
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA CERTIFICATE IN ACCOUNTANCY
___________________

CA 1.4: COMMERCIAL AND CORPORATE LAW

___________________

FRIDAY 17 JUNE 2022

___________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This paper is divided into TWO sections:

Section A: Ten (10) compulsory multiple choice questions.
Section B: One (1) compulsory scenario question.
Plus Four (4) scenario questions. Attempt any Three (3) questions.
3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

57
SECTION A – (COMPULSORY)

Attempt all Ten (10) multiple choice questions

QUESTION ONE

Each of the following questions has only one (1) correct answer. Write the letter to the
correct answer you have chosen in your answer booklet. Marks allocated are indicated
against each question.

1.1 Winding up of the company by the court for its failure to pay debts is an example of.

A. Compulsory winding up

B. Creditors’ winding up

C. Members’ winding up

D. PACRA Registrar’s winding up

(2 marks)

1.2. In Zambia, customary law is part of ……………………..

A. The Constitution of Zambia

B. Written law

C. Unwritten law

D. International law

(2 marks)

1.3 At an auction sale, the call for bids by the auctioneer is …………………….

A. An offer

B. An acceptance

C. An invitation to treat

D. An advertisement

(2 marks)

1.4. Which of the following is not a right of an unpaid seller in respect of the goods
which have become a property of the buyer?

A. A lien on the goods

B. A right to damages for breach of warranty by the seller

C. A right to stoppage in transit

58
 D. A right to resale (2 marks)

1.5. A contract of employment for a garden boy who reports for work three times a week,
uses his own tools and at times sends his young brother to do the work when he is
not feeling well, is an example of ………

A. Contract for services

B. Contract of service

C. Contract of employment

D. Master and servant

(2 marks)

1.6. …………….is an agent who acts without authority to preserve the property or interest
of the principal?

A. Agent of necessity

B. Agent with apparent authority

C. Agent by Will

D. Agent by estoppel

(2 marks)

1.7 Debenture stock in a company is an example of ……………………. Capital?

A. Share capital

B. Loan capital

C. Share subscription

D. Equity capital

(2 marks)

1.8 The amount of a company’s capital registered with the Registrar of Companies is
known as……………

A. Authorized capital

B. Issued capital

C. Subscribed capital

D. Reserve capital

59
 (2 marks)

1.9 Which one is not a distinction between partnerships and limited liability companies?

A. A limited liability company can own assets in its name whereas a partnership
cannot.

B. A limited liability company can be dissolved upon the death of a shareholder

where as a partnership cannot.

C. A limited liability company can sue and be sued in its own name where as a
partnership cannot.

D. A limited liability company (if publicly listed) can have its accounts published
in public media where as a partnership is not.

(2 marks)

1.10 Which of the following is not an equitable remedy in contract law?

A. Specific performance

B. Injunction

C. Damages

D. Restitution.

(2 marks)
[Total 20 Marks]

60
SECTION B

Question Two (2) in this section is compulsory and must be attempted.

Attempt any three (3) questions out of the remaining four (4)

QUESTION TWO – (COMPULSORY)

(a) Statutory interpretation is the process by which judges bring out the meanings of the
words used in statutes. The main rules of interpretation being the Literal Rule,
Golden Rule, and Mischief Rule. There are instances where a precedent may be
termed to be a bad precedent. Several reasons can be advanced for such an
occurrence.

State some of the reason that may lead to a precedent being a bad precedent.
(6 marks)

(b) Discuss the main types of companies recognized in Zambia. (12 marks)

(c) Describe an agency relationship. (2 marks)

[Total: 20 Marks]

QUESTION THREE

Chisepo works as a truck driver for Mukanda Transport and Logistics limited. He transports
various goods across the country for different clients. He is on a fixed monthly salary and,
when he is not transporting goods, he is required to report for work at 9:00 AM. The
company engaged him to transport goods to Kitwe from Lusaka. It is company policy not to
carry unauthorized passengers in the trucks whenever on duty. On his way to Kitwe, he
decided to stop by in Kapiri Mposhi to meet up a friend. The friend lived about 5 kilometers
from the main road. After about an hours’ visitation, he set off on his journey. Before
reaching the main road however, he hit into a vehicle carrying vegetables to the market.
The vegetables are destroyed and the vehicle carrying them has suffered extensive damage
at the rear. Mboshi the owner of the vehicle carrying the vegetables on inquiry from Chisepo
discovers that Chisepo was just employed as a driver and did not own the truck. Mboshi
does not believe Chisepo can meet the compensation for the damage caused to his vehicle
and the vegetables. He wants to be guided on how to proceed.

Required:

(a) With reference to the above scenario, explain the elements of negligence.
(6 marks)

(b) Define vicarious liability (2 marks)

(c) Explain what elements should be established for Mukanda transport to be vicariously
liable. (7 marks)

(d) Discuss the elements to be established for the existence of a master servant
relationship. (5 marks)
[Total: 20 Marks]

61
QUESTION FOUR

(a) Making reference to the Constitution of Zambia, give the jurisdiction of the Zambian
Courts. (10 marks)

(b) Explain what the position of the law is on transfer of title by a seller without title.
(2 marks)

(c) Explain how a warranty can be distinguished from a guarantee. (4 marks)

(d) Discuss how a hire purchase differs from a credit sale. (4 marks)
[Total: 20 Marks]

QUESTION FIVE

Chongo bought a car from Lubono Mpande for K34,000 and used it for four (4) months. It
later transpired that Lubono Mpande had bought the car from someone who had stolen it,
and it had to be returned to the true owner. Chongo is now in your office and seeks legal
advice on the same.

Required:

(a) Explain to Chongo on the legal implication of the above case. (10 marks)
(b) Explain to Chongo the distinction between a contract of sale and an agreement to
sell. (10 marks)
[Total: 20 Marks]
QUESTION SIX

Jombo is a teacher who has worked over ten years in government schools. Jombo is certain
in his mind that the time is now for him to take a leap of faith and join the world of
entrepreneurship. He therefore wants to start his own school. He has never started any
business before and therefore everything about business is foreign to him. He has no idea
on the types of business entities there are, how they are established, how and why they
may be wound up and how they can actually raise capital to expand their operations etc. He
has heard that you are a consultant in matters of corporate affairs and has come to you for
assist.

Required:

(a) Explain the effect of incorporating a company in Zambia. (4 marks)

(b) Discuss the term “Partnership”. (4 marks)

(c) Explain the process of declaration of bankrupt. (4 marks)

(d) Discuss the powers of a Receiver. (4 marks)

(e) In the event of winding up, state what a statement of affairs is. (4 marks)
[Total: 20 Marks]

END OF PAPER

62
CA1.4 - SUGGESTED SOLUTIONS

SOLUTION ONE

1.1. A

1.2. C

1.3. C

1.4. B

1.5. A

1.6. A

1.7. B

1.8. A

1.9. B

1.10. C

63
SOLUTION TWO

(a) There are several reasons that can be responsible for a precedent being bad.
One of the reasons is when a judge arrives at a decision ‘per incuriam’
meaning he did not take into account an essential point of law; in certain
cases a judge may misdirect himself in law; or the judge’s decision can be
declared too wide and the ratio decidendi may be declared too obscure.

(b) The following are the main types of companies in Zambia:

(i) Public Company which by nature is limited by shares meaning it raise its capital by
listing its shares on the stock exchange

(ii) Private company limited by shares which raises its capital through selling its
shares to private individuals or companies and the liability of its members is limited
to the extent of the balance owing on their shares.

(iii) Private limited by guarantee where the company does not necessarily sell shares
and the liability of its members is determined by the amount they guarantee at
inception indication how much they will contribute in the event that the company
goes into liquidation.

(iv) Private unlimited company which has no amount specifies as to how much each
member will contribute in the event of winding up.

(c) An agency relationship is a relationship where a principal, appoints a middleman

known as an agent who concludes commercial business transactions on behalf of
the principal. The acts of the agent are deemed as if they are the acts of the
principal.

64
SOLUTION THREE

(a) Negligence involves a wrongful act or omission by the defendant which is in

breach of a duty of care and tends to cause damage to the plaintiff. Negligence
arises accidentally without intention on the part of the tortfeasor to do the act or
bring about the out of the act. There are mainly three elements that ought to be
established for a claim of negligence to be made up that is, duty, breach and
damage.
-duty is the obligation imposed on persons by law to ensure one’s actions or
omissions do not in fact cause any harm to others. This duty is primarily fixed by
law hence; there is no need for there to be any prior relationship between the
plaintiff and the defendant for the defendant to be held liable for his/her
wrongful action or omission. The neighbor principle established in Donoghue v
Stevenson [1932] 1 AC brings everyone within the scope of liability to our
neighbors, which all those we may have in contemplation as being so affected by
our actions or omissions so that we take care not to cause injury to the.
- Breach is the act of doing something contrary to the obligation imposed on us
by law. Where therefore a person does an act or omission which a reasonable
person would not do, they are then said to be I breach of their duty of care. For
instance, as in the case of Michael Chilufya Sata v Zambia Bottlers (2004), where
it was alleged that a dead cockroach was found in a bottle of sprite purchased by
the plaintiff, the presence of the dead cockroach is indicative of the breach of
duty of care. Where an act is so manifest in its revelation of a thing said to be in
breach, it is said that a res ipsa loquitor case exists and in such cases, there
would be no need for evidence to show that indeed there was a breach of duty
of care.
- Damage is the injury suffered by the plaintiff arising from the breach of duty of
care. Damage is very important as without it, a claim for negligence cannot be
made. As negligence is concerned with restitution, there is need for the claimant
to show evidence of the damage suffered for which they wish to be
compensated. Damage therefore triggers the award of damages.

(b) Vicarious liability is simply liability of one for the torts of another. Where a person
therefore does a wrongful act or omission and another suffered damage, once
evidence has been established, the liability for that negligence rather than being
borne by the person committing the tort, shall be borne by another vicariously.

(c) For vicarious liability to successfully be pleaded, the plaintiff ought to establish
three elements being:
- existence of a master servant relationship between the wrongdoer and the
one vicariously liable,
- the wrongful act being done in the course of employment and
- the wrongdoer not having been on a frolic of his own.
In the case at hand therefore, for Mboshi to successfully get compensation
from Mukanda vicariously for the negligence of Chisepo, he has to prove that
there was a relationship of master and servant existing between Mukanda
and Chisepo. Mboshi will further have to prove that at the time Chisepo
caused the accident, he did that while in the course of doing the job engaged
to do by Mukanda transport. Lastly, Mboshi would have to prove that Chisepo
was not on a frolic of his own but was doing just what he was expected to do
by his master.

65
(d) The test for establishing the existence of a master servant relationship was set in
Ready Mix Concrete (South East) Ltd v Minister of Pensions [1968] as being:
- The servant agrees that in consideration of a service for his master, a
wage/salary shall be paid.
- The servant agrees either expressly or impliedly that in the performance of
his/her work, he shall be subject to a significant degree to the control of the
master.
- The provisions of the contract are consistent with its being a contract of
service rather than for services.

66
SOLUTION FOUR

(a) In descending order the hierarchy of the courts in Zambian according to part VIII of
the constitution is as follows:
(i) Constitutional Court and Supreme Court - The Supreme Court is the highest
appellate court in the country. It has appellate jurisdiction meaning it hears
matters on appeal from the court of appeal. This court does not have original
jurisdiction meaning no matter may be originated in this court. Before the 2016
constitution came into effect, the Supreme Court was the highest court in the
country. The constitutional court stands at the level with the Supreme Court. This
court is both an appellate court and a court of first instance. Article 128 of the
constitution confers exclusive jurisdiction on the constitutional court to hear all
matters pertaining to the interpretation of the constitution. It further confers
jurisdiction on the constitutional court to hear presidential election petitions and
parliamentary election petitions appeals. The constitutional court and Supreme
Court stand pari pasu in the Zambian court hierarchy.

(ii) Court of Appeal – This court is the second highest appellate court in Zambia. Like
the Supreme Court, the court does not have original jurisdiction but appellate
jurisdiction in both criminal and civil matters.

(iii) High Court – this court is the court of first instance in all matters of a criminal
and civil nature. The court once exercised jurisdiction on matters relating to the
bill of rights before the constitutional court was established. The high court hears
several matters under its different divisions.

(iv) Subordinate Court (magistrate court) – this is the second lowest in ranking of the
courts in the hierarchy. The subordinate court hears most criminal cases as a
court of first instance. It is presided by magistrates of different classes.

(v) Local Courts - these are courts that hear customary related matters. They are the
lowest in the ranking and they are not courts of record.

(b) The rule is that a person who does not any right to property cannot transfer title to
that property. Hence, a person who does not own property that they sale may not
transfer title of the property to the buyer. Section 21 of the Sale of Goods Act 1893
makes this provision.

(c) Warranties and guarantees are terms found commonly found in commercial
transactions. Though sounding the same, they are in fact different. A warranty is an
assurance or indeed a guarantee that when a product sold by the seller fails to work
as expected within a certain expected timeframe, or where it is damaged due to no
fault of the buyer, the buyer will be entitled to a repair at the cost of the seller or
manufacturer. Conversely, a guarantee is an assurance that a product sold shall not
be damaged for a timeframe that would be given by the manufacturer. In essence
therefore it would be said that a warranty is a guarantee that if a product breaks
within a specific period, it will be repaired at the cost of the manufacturer whereas a
guarantee is an assurance that for a specific period, the goods bought would not
break.

67
(d) A hire purchase agreement is an agreement where the purchaser of goods makes a
payment towards the purchase price of the goods purchased and they take
possession of the purchased goods. They do not however have ownership of the
purchased goods and may not sale or transfer ownership in the goods sold. In the
event of a default in the payments on the balance, the seller is entitled to
repossession of the sold goods not the demand payment of the balance money. A
credit sale on the other hand is a sale where the buyer acquires the rights to the sold
goods and can do with them as they desire including selling them. Where there is a
breach in a credit sale, the seller demands for the balance of the purchase price and
not the goods sold.

68
SOLUTION FIVE

(a) The question borders on implied conditions of contract of sale and are covered
under section 12-15 of the Sale of Goods Act 1893. Section 12 provides for an
implied undertaking as to tittle……. In a contract of sale, unless the circumstances of
the contract are such as to show a different intention, there is—
(1) An implied condition on the part of the seller that in the case of a sale he has a
right to sell the goods, and that in the case of an agreement to sell he will have a
right to sell the goods at the time when the property is to pass:
(2) An implied warranty that the buyer shall have and enjoy quiet possession of the
goods:
(3) An implied warranty that the goods shall be free from any charge or
encumbrance in favor of any third party, not declared or known to the buyer before
or at the time when the contract is made.
In the case at hand, the seller was in breach of section 12. The buyer paid for the
car to become the owner. Since he did not receive what he had paid for, there was a
total failure of consideration, entitling him to a refund.
This position of the Law was buttressed in Rowland v Divall (1923).

(b) Sale takes place immediately, while an agreement to sell takes place in the future
depending upon the fulfilment of certain terms and conditions. Thus at the time of
the sale, an actual transfer takes place whereas at the time of the agreement to sell
future transfer takes place. Risks are transferred immediately in sale whereas in the
agreement of sale risks are attached to the seller till the goods are being transferred
in the future. The sale is an executed contract whereas agreement to sell is an
executory contract.

69
SOLUTION SIX

(a) Incorporation of a company is where two or more people apply through the prescribed
forms under the Zambian Company’s Act 2017 to have their company registered by the
Registrar of Companies at PACRA. The Act prescribes forms to be completed by
applicant and stipulates the documents to be lodged together with the application. Upon
approval by the registrar, the company then stands registered and is born as an artificial
person. Effects of incorporation are that the company stands alone from its sponsors and
has legal capacity to sue or be sued in its own name. Upon incorporation, the company
is liable for its debts and sponsors cannot be answerable for the company’s debts.
Salomon v Salomon is instructive on this. In the case the court held that once
incorporated, a company becomes a separate legal personality and can be held liable for
its actions and not the sponsors. Even where the company is a sole trader as long as it is
incorporated the sole owner cannot be held liable for the acts of the company.

(b) A partnership is established under the Partnership Act 1890. It requires two or more
persons coming together with a common purpose to form a business with intention to
profit. Partnerships are unlimited liability companies meaning, the partners in the ship
are all liable jointly and severally for the debts and wrongs of the company. A
partnership will usually dissolve in event of death of anyone of the partners.
Conversely, an incorporated company is registered under the Company’s Act. It has
limited liability characteristics meaning, sponsors cannot be held liable for the debts and
wrongs of the company but the company itself. A company evolves into an artificial
person able to sue and be sued in its own capacity.

(c) Bankruptcy is defined as; the state of a person who has been adjudged by a court to be
insolvent. Meaning, having more debts than assets.
Pursuant to section 20 of the Bankruptcy Act, the court may adjudge someone bankrupt
in the following events:
(i) Where the debtor applies to the court that they be declared bankrupt
(ii) On the application of the official receiver, and;
(iii) On the application of creditors pursuant to section 6(1)(a)(b) of the
Bankruptcy Act.

(d) A receiver is a person appointed by the court to protect property during the course of
liquidation. A receiver is appointed to take into account interests of creditors in
liquidation. The powers of the receiver include:
(i) Power over all the assets of the company in liquidation
(ii) Power to appoint or terminate the appointment of a special manager of the
debtor’s estate or business in the interest of the creditors according to section
12(1) of the Act
(iii) Power to appoint a duty official receiver
(iv) Power to administer oaths.
(e) A statement of affairs is a document required to be made by the debtor pursuant to
section 16 of the Act. The statement of affairs shows the assets and liabilities and the
details of the debtor’s creditors. In the case of a company, a company in liquidation is
required to prepare a statement of affairs by the date of winding up which should
indicate the assets, debts and liabilities. Names and addresses of creditors, securities
held by each of the creditors, dates on which securities were given and any other
information as requested by the liquidator. Per section 287 of the Company’s Act.
END OF SOLUTIONS

70
 CA ZAMBIA PROGRAMME EXAMINATION
___________________

CA CERTIFICATE IN ACCOUNTANCY
___________________
CA 1.5: MANAGEMENT THEORY AND PRACTICE
___________________

MONDAY 13 JUNE 2022

___________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This paper is divided into TWO (2) sections:

Section A: Ten (10) compulsory multiple choice questions.
Section B: One (1) compulsory scenario question
Plus Four (4) scenario questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

71
SECTION A

Attempt all ten (10) multiple choice questions in this section.

QUESTION ONE
Each of the following questions has only one (1) correct answer. Write the letter of the
correct answer you have chosen in your answer booklet. Marks allocated are indicated
against each question.

1.1 What is the planning horizon?

A. The distance ahead for the forecasts on which plans are made.
B. The time period within which uncertainty is very low.
C. The time ahead for which there is no information.
D. The maximum time for which managers can make plans.
(2 marks)
1.2 Which management concept suggests that low-importance decisions be handled by
subordinates, so that managers can focus on high-importance decisions?

A. management by objective
B. management by exception
C. participatory management
D. inclusionary management
(2 marks)
1.3 Scalar chain refers to ______________
A. The line of authority from top management to the lowest rank
B. Degree to which subordinates are involved in decision making
C. Every employees should receive orders from only one superior
D. People and materials should be in the right place at the right time
(2 marks)

1.4 The communication process must have a medium to convey information between
two (2) or more parties. The three (3) common media are ______________.

A. Written, spoken, and signalized

B. Visual, audio, and tactile

C. Seeing, talking, and listening

D. Seeing, listening, and touching (2 marks)

72
1.5. In general, if a policy is not thought out and established ______________
A. situation requiring action will arise
B. Social issues will cause change in the organization
C. Managers will be hired from the outside
D. There will be significant staff turnover
(2 marks)

1.6. Maslow and Herzberg are two examples of ______________ theories of motivation.
A. Expectancy
B. Content
C. Process
D. Equity
(2 marks)

1.7. Which management theorist is responsible for the motivation-hygiene theory?

A. Abraham Maslow
B. Dale Hawthorne
C. Peter Drucker
D. Frederick Herzberg
(2 marks)

1.8 . Strategic planning as a broad concept consists of ______________

A. Corporate strategy and business strategy
B. Strategy formulation and strategy implementation
C. Inputs and outputs
D. Environmental analysis and internal analysis
(2 marks)

1.9 The exact triggers for change will depend on the context of an organisation and its
industry. Identify from the following that could act as change triggers:
A. Arrival of new entrants into the market, or mergers/acquisitions between existing
competitors in the industry.
B. Changes in level or intensity of competition (prompting a need to gain or protect
market share).
C. New laws or regulations affecting an industry; or changes in government
legislation more generally.
D. All of the above (2marks)

73
1.10 The Great Man theory is associated with which of the following approaches to
studying leadership?

A. Skills
B. Intelligences
C. Styles
D. Traits

(2 marks)

[Total: 20 Marks]

74
SECTION B

Question TWO (2) in this section is compulsory and must be attempted.

Then attempt any THREE (3) questions from the remaining FOUR (4) Questions.

QUESTION TWO – (COMPULSORY)

With the excitement of the new job at the Bank, Ms Katanekwa was ready to put her dream
of working hard. However, the matter before seems to be challenging. The bank has
experienced a high employee turnover and the CEO has tasked the new manager to make a
turnaround to this problem. As a graduate in economics from Copperbelt University, she has
no in-depth understanding in employee related matters and she has approached you for
help.

Required:

(a) List down three (3) key roles of a Manager. (3 marks)

(b) Explain the three (3) major methods that can be used to make the job attractive to
the incumbent. (12 marks)

(c) State five (5) uses of performance evaluation or appraisal that management may
consider for general human resource management decisions. (5 marks)
[Total: 20 Marks]
QUESTION THREE

Virtually every organization will, at some point, undergo a transition or change in order to
remain viable and scale. Whether onboarding new employees, growing a department, or
merging with another company, these changes can have a significant impact on the
trajectory of your business. Organizational change is the movement of an organization from
one state of affairs to another. Organizational change can take many forms. It may involve a
change in a company's structure, strategy, policies, procedures, technology, or culture.
Although there is no one right or wrong way to mitigate change, there are a few tried-and-
true change management models that organizations return to again and again.

Required:

(a) Outline some of the reasons as to why employees resist change in an organization.
[10 marks]
(b) Pick any five (5) models of change and write concise notes on each. (10 marks)
[Total: 20 Marks

75
QUESTION FOUR

(a) Mwale says it is very difficult for him to work with other people because they may
not be as hard working and honest as he is. He is also worried about the sharing of
the profits because he wants to make a lot of money in a short period possible to
help him solve the financial problems which are too much for him and his family.

Required
Suggest to Mwale the type of organization ownership and any (5) of its features that
will suit his desires. (10 marks)
(b) Define the features specified by the Companies Act that make private limited
companies different from public limited companies. (10 marks)
[Total: 20 Marks]
QUESTION FIVE

(a) Suggest any five (5) impacts of globalization on firms? (10 marks)

(b) Using any five (5) features of globalization, describe its impact in the world today.

(10 marks)
[Total: 20 Marks]
QUESTION SIX

“A system of effective internal controls is a critical component of company management

and a foundation for the safe and sound operation of organizations. However, ineffective
internal controls result in ineffective programs and losses. Internal control means different
things to different people. This causes confusion among business people, legislators and
others.” Natasha attended a workshop were the facilitator Ms Fridah Mwaba emphasized the
importance of corporate governance in organization. These in-fact were described as a high-
profile collapse by the Association of Certified Chartered Accountants – ACCA, (Student
Accountant, 2008).

Required:

(a) List down four (4) functions of managements according to Henri Fayol. (4 marks)
(b) Briefly identify six (6) principles of good governance. (12 marks)
(c) Identify the four (4) points to consider in managing ethics at workplaces.
(4 marks)
[TOTAL: 20 Marks]

END OF PAPER

76
CA 1.5 SUGGESTED SOLUTIONS

SOLUTION ONE
1.1 A
1.2 B
1.3 A
1.4 4
1.5 A
1.6 B
1.7 D
1.8 B
1.9 D
1.10 D

77
SOLUTION TWO

(a) List down three key roles of a manager

Solution:
- Work planning
- Resource allocation
- Project management.

(b) Explain the three major methods that can be used to make the job attractive to the
incumbent.

Solution:
The process of restructuring the job when found to be dissatisfying was carried out
in at least the following three methods, namely job rotation, job enlargement and job
enrichment.
i. Job rotation is the most common form of individual job redesign. It involves
the moving of a person from one job or task to another aimed at adding
some variety and help remove boredom at least in the short term. This is
more pronounced where the jobs are similar and routine. Employees within
the medium term would find the new job boring again.
ii. Job enlargement involves increasing the scope of the job and the range of
tasks that a person carries out. It may be achieved by combining a number of
related operations at the same level. Job enlargement is horizontal job
redesign; it makes a job structurally bigger. It lengthens the time cycle of
operations and may offer greater variety. Not always popular with workers as
it may not improve a person's intrinsic satisfaction or sense of achievement.
Workers would see this as increasing the number of routine and boring tasks.
iii. Job Enrichment is an extension of the more basic job rotation and job
enlargement methods of job design. This method attempts to enrich the job
by incorporating motivating or growth factors such as increased responsibility
and involvement, opportunities for advancement and the sense of
achievement. Job enrichment involves vertical job enlargement. It aims to
give the person greater autonomy and authority over the planning, execution
and control of their own work. This is sometimes referred to as
empowerment.

78
(c) State five (5) uses of performance evaluation or appraisal that management may
consider for general human resource management decisions.
Solution:
Management uses performance evaluation or appraisal for general human resource
management decisions.
i. Performance evaluations are important inputs in decisions of promotion,
transfer and termination.
ii. Evaluations identify training and evaluation needs. They help pinpoint
employee skills and competences, which are currently deficient for staff
development, can be used to remedy the situation.
iii. Performance evaluation is used as criteria against which selection and
development programs are validated. Newly hired employees who
perform poorly can be identified through performance evaluation.
iv. Performance evaluation also provides a feedback to employees on how
the organization views their performance.
v. Performance evaluations are also used as a basis for reward allocations.
Thus who gets a merit increase or who gets a bonus for work output.

79
SOLUTION THREE

(a) Outline some of the reasons as to why employees resist change in an organization
 Misunderstanding about the need for change/when the reason for the
change is unclear
 Fear of the unknown
 Lack of Competence:
 Lack of competence
 Loss of power and control:
 Connected to the old ways of doing things
 Low trust
 Temporary fad
 Not being consulted
 Poor communication
 Changes to routines
 Exhaustion/Saturation
 Change in the status
 Fear to lose Benefits and reward

(b) Change Management Models

 Lewin’s Change Management Model: A 3-step approach to change

behaviour that reflects the process of melting and reshaping an ice cube.
 ADKAR Model: A people-centered approach to facilitate change at the
individual level.
 Kotter’s 8-Step Change Model: A process that uses employee's experience
to reduce resistance and accept change.
 Kubler-Ross Change Curve: A strategy that breaks down how people
process change using the 5 stages of grief.
 McKinsey 7s Model: A process centered around the alignment seven
fundamental elements of any organization

 PDCA: A cyclical and iterative change management process focused on

continuous improvement.

 Bridges Transition Model: A people-centered model focused on managing

people's experience transitioning to change.

80
SOLUTION FOUR

(a) The type of organization that will suit Mwale ‘s desires is sole
proprietorship and the following are its features:
i. Owned by one person who also provides capital
ii. They run the business and reward themselves from the profits
iii. The owner works in the business and can be assisted by some
workers and family
iv. They are personally liable for all the debts of their business
v. It is very simple to set up
vi. They are common and usually small

(b) The following are the features of the private limited company
specified by the Company Act.
i. Formed by two (2) people and no more than fifty (50)
ii. They are often small family business the main shareholders
are also directors of the company.
iii. Shares cannot be offered to the general public
iv. Shares are not transferable without the agreement of other
shareholders
v. They are much smaller than public limited companies

81
SOLUTION FIVE

(a) The following are the impacts of globalization on the firm:

i. Relocation in order to reduce on costs, avoidance of tariffs and
quotas or to take advantage of areas of industrial excellence.
ii. Markets new markets may emerge as closed markets as
nations develop and tastes and preferences change.
iii. Competition-reduce trade barriers and advances in
communications greatly increases the number of competitors
that a firm faces in the industry.
iv. Alliances-opportunities for forming alliances, merging,
acquiring may increase
v. Economic divisions- wealthy nations with advanced technology
will become more wealthy at the expense of poorer nations
(b) The following are the features of globalization and how they impact
the world today.
i. Ability to enter into transactions with individuals and
organizations based in other countries
ii. Rise of globally linked and dependent financial markets
iii. Reduction in importance of local manufacturing
iv. Reduced transaction costs through developments in
communication and transport
v. Rise of emerging, newly industrialized nations

82
SOLUTION SIX

(a) List down FOUR (4) functions of managements according to Henri Fayol
(i) Planning
(ii) Organizing
(iii) Leading (directing)
(i) Controlling
(b) Identify SIX (6) principles of good governance
(i) Probity/Honest: relates to telling the truth and not misleading shareholders and
other stakeholders.
(ii) Integrity: Being straightforward dealing and completeness. The means to to be
of high moral character.
(iii) Fairness: Being of a balanced leader in all litigations and administrative matters
(iv) Responsibility: Management accepting the credit or blame for governance
decisions
(v) Accountability: The organization and its directors are answerable in some way
for their consequences of their action
(vi) Transparency: Being open and with clear disclosure of relevant information to
shareholders and other stakeholders.
(c) Identify the FOUR (4) points to consider in managing ethics at workplaces.
(i) Understand the benefits of ethical conducts
(ii) Focus on ethical conduct through building strong organization culture around
ethics
(iii) Develop a code of ethical conduct that is documented and available to every
employee of the organization.
(iv) Promote process should incorporate ethics as part of the evaluation
(v) Link ethics to other management practices
(vi) Demonstrate ethical practices by leading by examples.

END OF SOLUTIONS

83
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________
CA CERTIFICATE IN ACCOUNTANCY
___________________
CA 1.6: BUSINESS COMMUNICATION
___________________

WEDNESDAY 15 JUNE 2022

___________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This paper is divided into TWO (2) sections:

Section A: Ten (10) compulsory multiple choice questions.
Section B: One (1) compulsory scenario question.
Plus Four (4) scenario questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

84
SECTION A – (Compulsory)

Attempt all ten (10) multiple choice questions

QUESTION ONE

Each of the following sub questions has only one (1) correct answer. Write the letter of the
one correct answer you have chosen in your booklet. Marks allocated are indicated against
each question.

1.1 What type of error will be generated by the following Spreadsheet formula =45/0?

A. #REF
B. Do not divide by zero
C. #####
D. #DIV/0
(2 marks)
1.2 Which of the following is NOT a system level?

A. Strategic
B. Executive
C. Knowledge
D. Management

(2 marks)

1.3 A file object that is placed on a webpage that are designed to monitor user behavior
is called …

A. Viruses
B. Cookies
C. Web bugs
D. Ad networks
(2 marks)

1.4 Which of the following enables information to be useful to a user?

A. Formal
B. Timely
C. Complex
D. Fast
(2 marks)

1.5 Which one is NOT a type of data processing?

A. Batch processing
B. Online processing
C. Cloud processing
D. Real time processing

85
 (2 marks)
1.6 What type of question starts by asking a general question and then goes to ask a
specific point?
A. Open question
B. Closed question
C. Leading question
D. Funneling question
(2 marks)

1.7 A memo, a notice and a press release are example of ______________.

A. Business documents
B. Business circulars
C. Meeting documents
D. Official documents
(2 marks)

1.8 The difference between a formal and an informal meeting is that a formal meeting
requires ………….

A. Special committees
B. A quorum
C. Choosing Members
D. Choosing a Chairperson
(2 marks)

1.9 In a business letter if the salutation begins with ‘Dear Mr. Banda’, what would be
the complimentary close?

A. Yours truly
B. Yours faithfully
C. Yours sincerely
D. Cordially yours
(2 marks)

1.10 What are Bar charts used for?

A. Establishing relationships between variable or groups

B. Comparing different variables or groups
C. Showing percentages of variables or groups
D. Tracking changes of things over a period of time (2 marks)

[Total: 20 Marks]

86
SECTION B

Question TWO (2) in this section is compulsory and must be attempted.

Attempt any three (3) questions from the remaining four (4)

QUESTION TWO – COMPULSORY

(a) Enterprise Resource Planning Systems (ERP systems) offer integrated software
solutions to different functions of an organisation. They primarily support business
operations that ensure that data is shared among the departments.

Required:

State four (4) functional areas within an organisation that can benefit from an ERP
giving a brief example of how each department can benefit from such a system.

(8 marks)

(b) Explain the two (2) layers of Information Technology (IT) infrastructure listed below:

(i) IT platform (4 marks)

(ii) IT Services (4 marks)

(c) Give two (2) reasons organisations need an IT Service Desk? (4 marks)
[Total: 20 Marks]

87
QUESTION THREE

(a) Organizational information systems are always vulnerable to security risks and as
such the data they house must be protected at all costs from unauthorized
modification, disclosure or destruction and ultimately viruses.

Required:

Identify five (5) types of Malware and explain how they infect the system.

(10 marks)

(b) Briefly explain what an Office Automation System (OAS) is. (2 marks)

(c) Give any four (4) examples of Office Automation Systems that you could use in your
organization and briefly describe the nature of work that each is used for. (8 marks)
[Total: 20 Marks]

88
QUESTION FOUR

(a) TMS is a national company specialising in mineral exploration. You are one of the
accountants at the company and you are responsible for keeping and interpreting
financial records.

In performing your duties, you are required to visit many of the company’s branches
each month. You are also involved in collecting data, ensuring that it is analysed and
compiled before it is sent to the head office.

Required:

Explain three (3) advantages of using Teleconferencing facilitates when

communicating with the Head Office. (6 marks)

(b) A Zambian owned audit firm desires to acquire tailor made software. Briefly discuss
two (2) ways in which this organization can acquire the desired software. (6 marks)

(c) There are different types of operating systems that are used in organizations other
than Microsoft Windows. Briefly discuss any two (2) operating systems that are
competitors to windows. (4 marks)

(d) One of the application software used in the day-to-day tasks of an accountant is
Microsoft Word. Name two (2) tabs found in the Microsoft word menu and state the
kind of commands that each contains. (4 marks)
[Total: 20 Marks]

89
QUESTION FIVE

SCENARIO

As a young graduate, you believe that you are confident and a result-oriented person who
easily gets along with other people. You also worked as an intern for 8 months at one of the
accounting firms. This background provides an added advantage as you seek for a job
opportunity that was recently advertised at GC Accounting Consultancy Limited. GC
Accounting Consultancy Limited is looking for a suitably qualified accounts assistant to fill in
that vacant position. The Job advertisement provided information that all the aspiring
candidates must apply through the office of the Human Resources Manager at GC
Accounting Consultancy, P.O Box 30041, Kitwe.

Required:
(a) Define the type of letter expected to be written from the scenario described above.
(2 marks)
(b) State any three (3) documents that may be attached to such type of letters.
(3 marks)
(c) Write a suitable letter which should include a statement on the attached documents
for the scenario described above. (15 marks)
[Total 20 Marks]

QUESTION SIX

You work with colleagues who do not understand the communication cycle. You feel that
understanding some simple aspects of communication is important for the smooth flow of
information in an organization. Therefore, you decided to explain in detail to them what is
involved in the communication process.

Required:

(a) Draw a diagram to help illustrate the communication cycle. (6 marks)

(b) Briefly explain any four (4) roles of a receiver in the communication process.
(8 marks)
(c) Give four (4) reasons feedback is important in the communication process. (4 marks)
(d) State any two (2) purposes of communication. (2 marks)
[Total: 20 Marks]

END OF PAPER

90
CA1.6 SUGGETED SOLUTIONS

SOLUTION ONE

1.1 D

1.2 B

1.3 B

1.4 B

1.5 C

1.6 D

1.7 A

1.8 B

1.9 C

1.10 B

91
SOLUTION TWO

(a) State the departments within an organization that can benefit from an ERP. Give a brief
example of how each department can benefit from such a system.

 Finance: The ERP reports the current selling prices of item on sale. It can report
a customer’s credit rating.
 Operations: Controls inventory throughout the supply chain, from procurement to
distribution.
 Accounting: Records sales and payments and tracks business performance.
 Human Resources: Recruits, trains, evaluates and compensates employees.
 Marketing: Coordinates sales activities and handles customer relationship
management.

(b) Explain the two (2) layers of Information Technology (IT) infrastructure listed below:

i) IT platform
Refers to the hardware architecture and software framework that allows software
to run. Typical platforms include a computer architecture, operating system,
programming languages and program development system.

ii) IT Services
Organization require people to run and manage their IT infrastructure, including
training employees to use the technologies. Most organizations will have an
information systems department to perform at least part of this role; others may
use external agencies or consultants to help in this role.

(c) Why do organizations need an IT Service Desk?

This is where people, process and technology blend to deliver a service. This point
provides the essential central place for daily contact between customers, users, IT
service and any relevant third party organization.
The service desk does not only handle incidences, problems and requests, but also
provides an interface for other activities such as change requests, maintenance
contracts, software licenses, configuration management, availability management
and financial management.

92
SOLUTION THREE

(a) Identify five (5) types of viruses and explain how they infect the system. (10 marks)
- Viruses: spread using email messages and replicate by mailing themselves to
addresses held in the user’s contact book.
- Worms: copy themselves from machine to machine on the network
- Trojans/trojan horses: are hidden inside a valid program but perform an
unexpected act.
- Trap doors: are undocumented access points to a system allowing controls to
be bypassed.
- Logic bombs: triggered by occurrence of a certain event.
- Ransomware: is malware that employee encryption to hold a victim’s
information at ransom
- Livewire – simulating electronic circuits using CPU or memory
- Hoax – message warning receipts of a non-existent computer virus threat

(b) An office automation system is a computerised package designed to increase the

productivity of data workers by providing access to basic systems such as email and
word processing. An OAS can help to coordinate activities within a single office or multi-
national businesses by providing access to shared resources and databases.
- It increases productivity of clerical & Knowledge workers and enhance communication

(c) Examples can include:

- Word processing software is used to write letters, technical reports, articles and
any other documents in the past would have been typed on a typewriter and to
manage general correspondence
- Desktop publisher allows the user to lay out each publication like newsletters,
business cards, calendars, brochures, etc.
- Spread sheets are used more especially for calculation using the correct formula
and data can be summarised inform of chart.
- Document Imaging Systems converts paper based documents and images into
electronic form so that they can be stored and accessed by computer.
Documents, images and drawings can be scanned into the computer and stored
on high capacity storage media such as optical disks.

93
SOLUTION FOUR

(a) Advantages of using Teleconferencing facilitates

 Teleconferences are similar to phone calls but they can expand participants on
the call to more than 2.
 Can be held using internet facilities – virtual communicating
 can be used on the move
 can reduce organizational costs such as printing or traveling
 wireless internet can work very well
 documents and comments can be posted as the conference is in session
 more than two people can participate
 there is instant feedback

(b) Tailor made software is developed to meet the specific needs of the
organisation. The software is developed from the scratch. This can be done in two
ways

- In-house development: - where employee in the IT department system

develop the software from scratch
- Outsourcing: - the organization hires outsider to develop the software on
their behalf

(c)
MacOS - Developed by Apple for its devices and hardware only
UNIX – A non-proprietary operating system that works on PC networks and
mainframe systems
LINUX - A freely distributed operating system that works on many hardware
platforms
Android – A mobile operating system developed by google and specifically
designed for touch screen devices
File – configuration of a document commands
Home – General purpose commands
Insert – Commands for inserting different items in a document
Design – commands for configuring the styles of the way content is presented in
a document
Layout – commands that allow us to specify the way a document should be
prepared
References – Commands that allow us to add references points or use them in a
document
Review – Comments for proofreading the content of a document
View - Commands that allow us to view the content from a specific perspective

94
SOLUTION FIVE
(a) The type of letter expected to be written from the scenario provided is a cover
letter or application letter. An application letter is a letter that introduces a job
applicant to potential employers by summarizing the job applicant’s strongest
points, skills and abilities for the job. It is meant to secure a job interview and finally
get a job or employment. A covering letter is a document that accompanies a
letter that is sent to a recipient.
(b) The documents expected to be attached to this type of a letter are: curriculum

vitae, copies of professional and academic certificates and a copy of a National

Registration Card / passport or a valid identification card, Letter of Recommendation

and Statement of results.

5 (c)

C/o Mr. Chanda Bwalya

Zambezi Corporation Limited

P O Box 30149

Kitwe

Date: (any date during exam time)

The Human Resources manager

G C Accounting Consultancy Limited

P O Box 30041

Kitwe

Dear sir/Madam

Subject: Application for a Job Position as an Assistant Accountant

With reference to the advertisement that you published in the Zambia Daily Mail Newspaper
on (any date during examination time), I am writing to express my strong interest in
working at your company and perform account assistant functions effectively.

I am confident I can rise to the challenge if you are seeking for a dynamic and result
oriented professional to augment your team. My ability to get along with others and make

95
necessary adjustments to meet deadlines has all contributed to my growth. I am interested
in expanding my nonprofessional horizons by seeking new challenges in the accounting field.

Thank you for your time and contribution. I look forward to meeting you to talk about this
position further.

I have enclosed a photocopy of my certificate, National Registration Card and curricular

vitae for your review. You quick response to this matter will be appreciated.

Yours faithfully,

Sender’s signature

Kelvin Maboshe

96
SOLUTION SIX

(a) Communication cycle

(b) Roles of receiver

(i) Giving feedback when the message is sent to notify the sender how effective the
message is.
(ii) To decode or interpret the message so that they a receiver a give the right
feedback to the sender of the message.
(iii) Pay attention when the message is being transmitted to minimize the barriers for
communication to be effective.
(iv) To encourage participation in the communication process.
(v) In case of oral communication, to ask questions where the other party is not
clear so that they understand the information that is being communicated.
vii) To prepare appropriate feedback.
vii) Select appropriate medium for feedback
(c) Importance of feedback
- To complete the communication process
- It shows whether or not the message has been received
- It shows whether or not the message has been understood
- It helps to correct mistakes
- It shows respect and courtesy
(d) Purpose of communication
- To inform

97
- To persuade
- To confirm
- To coordinate activities
- To educate

END OF SOLUTIONS

98
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA ZAMBIA APPLICATION ADVANCED DIPLOMA IN ACCOUNTANCY

____________________

CA 2.1: FINANCIAL REPORTING

_______________________

MONDAY 13 JUNE 2022

_________________
TOTAL MARKS – 100: TIME ALLOWED: THREE (3) HOURS
________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO sections:

Section A: ONE (1) Compulsory scenario question.

Section B: FOUR (4) Optional scenario questions. Attempt any THREE (3)
questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken
as an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

99
SECTION A

This question is compulsory and must be attempted.

QUESTION ONE

Pamba Plc. specialises in oil production and has shareholdings in two other companies,
Sunta and Anaya. You are the Group Finance Manager and the Group Chief Financial Officer
has given you the statements of financial position of all three companies as at 31 December
2021 below.

Statements of Financial Position as at 31 December 2021

Assets Pamba Sunta Anaya
K’ 000 K’ 000 K’ 000
Non-Current Assets
Property, plant & equipment 3,790 1,630 795
Investments 6,000 200 125
9,790 1,830 920
Current Assets
Inventories 1,175 765 325
Trade receivables 940 670 210
Bank 500 180 100
2,615 1,615 635
Total assets 12,405 3,445 1,555

Equity:
Equity share capital of K1 each 5,000 2,000 500
Retained earnings 5,885 710 750
10,885 2,710 1,250
Non-Current Liabilities:
5% Loan notes 100 35 30

Current Liabilities:
Contingent consideration 190 - -
Trade payables 705 600 200
Taxation 525 100 75
1, 420 700 275
Total equity and liabilities 12, 405 3, 445 1,555

Relevant additional information:

(i) Pamba acquired 1,600,000 ordinary shares in Sunta on 1 January 2021, when
Sunta’s retained earnings were K760,000. As consideration Pamba issued of
1,000,000 equity shares. The market prices of Pamba’s and Sunta’s shares at the
date of acquisition were K3.75 and K3 each respectively. In addition Pamba agreed
to pay K200,000 on 1 January 2022 which was contingent upon Sunta making an
increase in profit for the year of 25% or more for the year ending 31 December
2021. The contingent consideration had a fair value of K190,000 at the date of
acquisition; however, as at 31 December 2021 Sunta reported a loss. Pamba has
recorded both the issue of shares and the contingent consideration.

100
(ii) Pamba acquired 150,000 ordinary shares of Anaya on 1 January 2021 for cash
consideration of K560,000 when Anaya’s retained earnings were K670,000.
(iii) Other investments are equity investments in entities outside the Pamba group and
represent holdings of less than 5% of the equity of the investee.

(iv) The fair value of Sunta’s net assets on 1 January 2021 was equal to their carrying
amounts except for a building whose fair value exceeded its carrying amount by
K125,000. Sunta has not adjusted the carrying amount of this asset as a result of the
fair value exercise. At that date the asset had a remaining useful life of 5 years.
Buildings are depreciated on straight line basis.
(v) Pamba’s policy is to measure any non-controlling interests at their fair value at the
acquisition date. For this purpose Sunta’s share price at that date can be deemed to
be representative of the fair value of the shares held by the non-controlling interest.

(vi) Because of a loss made by Sunta during the year, an impairment review was
undertaken on 31 December 2021 and goodwill was found to be impaired by
K255, 000. There was no impairment in respect of the investment in Anaya.

(vii) During the financial year ended 31 December 2021, Sunta sold goods to Pamba for
K150,000. These goods were sold at a mark-up of 50%. Of these goods, 40%
remained in the inventory of Pamba at 31 December 2021. At 31 December 2021,
Pamba owed Sunta K10,000. No dividends were paid or proposed during the year by
the subsidiary and an associate.

(xi) During December 2021 Pamba sold goods to external customers with a warranty
covering customers for the cost of repairs of any defects that are discovered within
the first 3 months after purchase. Past experience suggests that 70% of the goods
sold will have no defects, 20% will have minor defects and 10% will have major
defects. If minor defects were detected in all products sold, the cost of repairs would
be K50,000; If major defects were detected in all products sold, the cost would be
K20,000. Pamba has not made any provision. Pamba also incurred K30,000 for
training employees in the use of new equipment and treated this cost as a receivable
as economic benefits are expected in the next 1 year due to skilled employees.

Required:

(a) Prepare the consolidated statement of financial position of Pamba group as at

31 December 2021. (35 marks)

(b) The Board of Directors of Pamba has been advised by the Finance Director to
issue a convertible debt as a source of finance.

Required:

Explain the accounting treatment for a convertible debt. (5 marks)

[Total: 40 Marks]

101
SECTION B
There are FOUR (4) questions in this section.
Attempt any THREE (3) questions in this section.

QUESTION TWO

Zamboni Trading Ltd has prepared the following draft financial statements for your review
Zamboni Trading Ltd
Statement of profit or loss for the year ended 31 May 2020
K000
Revenue 30,000
Raw materials consumed (9,500)
Manufacturing overheads (5,000)
Increase in inventories of work in progress and finished goods 1,400
Staff costs (4,700)
Distribution costs (900)
Depreciation (4,250)
Interest payable (350)
Interim dividend paid (200)
6,500
Statement of financial position as at 31 May 2020

K000 K000
Assets
Non-current assets
Freehold land and buildings 20,000
Plant and machinery 14,000
Fixtures and fittings 5,600
39,600
Current assets
Prepayments 200
Trade receivables 7,400
Inventories 4,600
Cash at bank 700
12,900
Total assets 52,500

Equity and liabilities

Share Capital 21,000
Revaluation reserve 5,000
Retained Earnings 14,000
Total equity 40,000
Current liabilities
7,300

Non-current liabilities
8% Loan notes 2024 5,200

102
Total equity and liabilities 52,500
Additional relevant information:
(i) Income tax of K2.1 million is yet to be provided for on profit for the current year. An
unpaid under-provision for the previous year’s liability of K400,000 has been identified
on 5 June 2020 and has not been reflected in the draft accounts.

(ii) There was a revaluation of land and buildings during the year, creating the revaluation
reserve of K5 million (land element K1 million). The effect on depreciation has been to
increase the buildings charge by K300,000. Zamboni Trading Ltd adopts a policy of
transferring the revaluation surplus included in equity to retained earnings as it is
realized. The revaluation has already been accounted for in the draft statement of
financial position. However, the transfer from the evaluation reserve is yet to be done.

(iii) Staff costs comprise 70% factory staff, 20% general office staff and 10% goods
delivery staff.

(iv) An analysis of depreciation charge shows the following:

K000
Buildings (50% production, 50% administration) 1,000
Plant and machinery 2,550
Fixtures and fittings (30% production, 70% administration) 700

Required:

Prepare the following:

(a) Statement of profit or loss and Other Comprehensive Income for the year ended
31 May 2020. (10 marks)

(b) Statement of financial position as at 31 May 2020. (6 marks)

(c) Statement of changes in equity for the year to 31 May 2020.

(4 marks)
[Total: 20 Marks]

QUESTION THREE

Vitendwe Plc is considering growth through acquisition of a 100% stake in a suitable limited
company. Vitendwe has obtained financial statements of two acquisition targets operating in
the same industry, Wiza Ltd and Kanyi Ltd

Statements of Profit or Loss for the year ended 31 December 2022

Wiza Kanyi
K’000 K’000
Revenue 24,000 41,000
Cost of sales (21,000) (36,000)
––––––- –––––––
Gross profit 3,000 5,000
Operating expenses (480) (1,000)
Finance costs (420) (1,200)

103
 –––––– ––––––
Profit before tax 2,100 2,800
Income tax expense (300) (800)
––––––– ––––--
Profit for the year 1,800 2,000
–––––––– –––––––
Note: dividends paid during the year 500 1,400
–––––––– ––––––––

Statements of financial position as at 31 December 2022

Wiza Kanyi
K’000 K’000
Assets
Non-current assets
Freehold factory (note (i)) 8,800 nil
Plant and Equipment (note (ii)) 10,000 4,400
Right of Use Assets (note (ii)) nil 10,600
–––––––– ––––––––
18,800 15,000
Current assets
Inventory 4,000 7,200
Trade receivables 4,800 7,400
Bank 1,200 nil
–––––––– ––––––––
Total assets 28,800 29,600
–––––––– ––––––––
Equity and liabilities
Equity shares of K2 each 4,000 4,000
Property revaluation reserve 1,800 nil
Retained earnings 5,200 1,600
–––––––– ––––––––
11,000 5,600
Non-current liabilities
Lease obligations (note (iii)) nil 6,400
5% loan notes 6,000 6,000
Deferred tax 1,200 200
Government grants 2,400 nil
––––– 9,600 –––– 12,600
Current liabilities
Bank overdraft nil 2,400
Trade payables 6,200 7,600
Government grants 800 nil
Lease obligations (note (iii)) nil 1,000
Current Tax 1,200 400
––––– 8,200 ––––– 11,400
–––––– ––––––
Total equity and liabilities 28,800 29,600
–––––––– ––––––––

104
Further information:

(i) The original carrying amounts in respect of the companies Plant and equipment
are as follows:
Wiza Kanyi
K’000 K’000
Owned Plant 16,000 20,000
Right of Use Assets nil 15,000

(ii) None of the companies disposed of plant during the year.

(iii) The interest rate implicit within Kanyi’s leases is 8% per annum. For the purpose of
calculating ROCE and gearing, all lease obligations are treated as long-term interest
bearing borrowings.

(iv) The Directors of Vitendwe Plc would like to undertake a comparative financial
analysis of the two acquisition targets based on the above financial statements using
the following ratios:

Return on year end capital employed – ROCE (capital employed taken as

shareholders’ funds plus long-term interest bearing borrowings – see note (iii)
above)
Pre-tax return on equity (ROE)
Net asset (total assets less current liabilities) turnover
Gross profit margin
Operating profit margin
Current ratio
Inventory holding period
Trade receivables’ collection Period
Trade payables’ payment period
Gearing (see note (iii) above
Interest cover
Dividend cover

Required:

(a) Calculate the above ratios for the Wiza and Kanyi based on the above financial
statements. (10 marks)

(b) Prepare a report to the Directors of Vitendwe Plc that assesses the relative financial
performance and financial position of Wiza and Kanyi for the year ended 31
December 2022, advising them of which acquisition target is more appropriate
based on the ratios above. (10 marks)
[Total: 20 Marks]
QUESTION FOUR

Kamonde Ltd is a farming entity with a diverse range of activities including animal and crop
husbandry. The directors of Kamonde Ltd are preparing financial statements for the year
ended 31 December 2022. They require advice on how the following transactions must be
accounted for in the financial statements:

105
Transaction 1 – Broiler poultry (chickens for meat) production

Broiler chickens are normally raised over a period of six weeks within the company’s chicken
runs. The process involves buying day old chicks and raising them to full grown chickens
which are harvested through slaughter or sold as live chickens at open markets. The
following information relates to broiler chicken production, harvesting and sales during the
year to 31 December 2022:

Opening inventory at 1 January 2022 K’000

Harvested chickens for sale in live state (2000 chickens) 200
Slaughtered and Frozen chickens (1,000 chickens) 105
Work In Progress (500 Chickens) 30
Purchases of day old chicks (32,000 chicks) 450
Production costs:
Feed 1,200
Labour 90
Power 120
Overheads 30
___ 1,440.

A total of 31,000 chickens were sold (20,000 live at average price of K108 each and 11,000
slaughtered and frozen at an average price of K115 each) during the year to 31 December
2022. There were no deaths of live chickens from the inventory at 1 January 2022 (opening
inventory). Of the day old chicks purchased during the period, the mortality rate was 1%.
Closing inventory at 31 December 2022 includes 800 chickens slaughtered in December
2022, 1,800 full grown chickens harvested for sale as live chickens (all harvested during
December 2022) and the remainder as work in progress with an average age of 4 weeks.
The open market prices during December 2022 were K110 for each full grown harvested live
chicken, K116 for each slaughtered chicken and K65 for each live 4 week old chicken. The
cost of transporting each chicken to the market/customers is K2 and (for live chickens only)
the market charges an average of K1.50 per chicken, regardless of age of the chicken. It
costs K5 to slaughter and package each chicken before sell.

Transaction 2 – Farm buildings

Kamonde Ltd constructed a farm building on 1 January 2012 at a cost of K10 million.
However, the company received a grant equal to 25% of the cost of the building from the
government on 1 April 2012.

Kamonde Ltd had originally estimated the total useful economic life of the building as 50
years. However, during the year to 31 December 2017, the total useful economic life was
revised to 45 years. The company has a policy to revalue buildings in accordance with IAS
16 Property Plant and Equipment. The building was last revalued to a fair value of K9.5
million on 1 January 2020. A revaluation to a fair value of K8.5 million on 1 January 2022 is
yet to be reflected in the financial statements for the year to 31 December 2022. Kamonde
Ltd has a policy of making transfers from the revaluation reserve to retained earnings in
respect of realised revaluation surpluses. For capital grants from the government,

106
Kamonde’s policy is to account for the received grants separately as deferred income which
is subsequently recognised in profit or loss over the related asset’s useful economic life.

Required:

(a) Briefly state the IAS 41 Agriculture, recognition and measurement provisions as
regards Biological Assets up to point of harvest. (3 marks)

(b) Explain how Kamonde Ltd must account for the broiler chickens activity in
transaction 1 above showing amounts to report in financial statements for the year
ended 31 December 2022 by way of extracts. (7 marks)

(c) Explain how Kamonde accounts for the farm building and the related grant in
transaction 2 above in accordance with IAS 16 Property Plant and Equipment, and
IAS 20 Government Grants showing amounts to report in the financial statements for
the year ended 31 December 2022 by way of extracts. (10 marks)
[Total: 20 Marks]

QUESTION FIVE

Leasing is an important source of finance for many businesses. IFRS 16 Leases provides the
principles to be adopted regarding recognition, measurement, presentation and disclosures
of leases in the books of both lessees and lessors so that they both provide relevant
information that faithfully represent the transactions.

Doka has entered into a lease agreement for an item of equipment which it has leased out
to Pinka the lessee. The equipment has an original useful economic life of six (6) years.
The lease, which commenced on 1 January 2020, has a term of five (5) years.

Legal title at the end of the lease remains with Doka, but the lessee can continue to lease
the asset indefinitely at a rental that is substantially below market value. If Pinka cancels
the lease, it must make a payment to Doka to recover its remaining investment. Gains or
losses from fluctuations in fair value of the equipment accrue to Pinka. Doka’s required rate
of return on the lease is 10%.

On 1 January 2020, Pinka made a payment for initial lease rental of K85,000 and was to pay
the same amount every 1 January from 2021 to 2024.

The equipment cost Doka K540,000 on 1 January 2020 and has a nil residual value.
Required:

(a) Explain the features in a lease that indicate a lease contract is a finance lease.
(8 marks)

(b) Explain how Doka must account for the lease with Pinka in its financial statements
for the year ended 31 December 2020. (12 marks)
[Total: 20 Marks]
END OF PAPER

107
CA2.1 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) Pamba statement of financial position as at 31 December 2021

Assets K’ 000
Non-current assets
Property, plant and equipment 3, 790 + 1, 630 + 125 w2 – 25 w2 5, 520
Goodwill 2, 255 – 255 w4 2, 000
Associate w6 584
Other investments 6, 000 – 3,750 w3 – 190 w3 – 560 w6 + 200 1, 700
9,804
Current assets
Inventory 1, 175 + 765 – 20 w5 1, 920
Receivables 940 + 670 – 30 w7 – 10 w10 1, 570
Bank 500 + 180 680
4, 170
Total assets 13,974

Equity and liabilities

Equity shares 5, 000
Retained Earnings w8 5, 777
10,777
NCI w9 1, 130
11,907
Non-current liabilities
5% Loan notes 100 + 35 135

Current liabilities
Contingent consideration 190 – 190 -
Payables 705 + 600 +12 w7 – 10 w10 1, 307
Taxation 525 + 100 625
1, 932
13,974

Workings K’ 000

W1: Group structure

Pamba in Sunta 1, 600/2, 000 x 100% = 80% NCI 20%
Pamba in Amaya 150/500 x 100% =30%

W2:
Net assets of Sunta @ acquisition 1.1.2021 @ SOFP year end
Ordinary shares 2, 000 2, 000
Share premium - -
Retained Earnings 760 710
Fair value adjustment:

108
Property 125 125
Dep on fair value 125/5yrs - (25)
2, 885 2, 810

Post acq Retained Earnings 2, 810 – 2, 885 = (75)

Parent (75) x 80% = (60) NCI = (75) x 20% = (15)

W3: Goodwill
Parent/Pamba consideration:
Shares consideration 1, 000 @ K3.75 3, 750
Contingent consideration 190
NCI: (2, 000 x 20%) x K3 1, 200
Less Net assets @ acquisition w2 (2,885)
Goodwill @ acquisition 2, 255
Less impairment loss (255)
Carrying amount 2,000

W4; Goodwill impairment

Parent 255 x 80% = 204 NCI 255 X 20% = 51

W5: Unrealised profit:

Sunta sold goods [150 x 40%] = 60 x50/150 = 20
Parent R/Earnings Dr: 20 x 80% = 16 NCI Dr:20 x 20% = 4 Inventory Cr: 20

W6: Associate
Consideration 560
Retained earnings (750 – 670) x 30% 24
584
W7: Parent/Pamba adjustments
Provision
(50 x 20%) + (20 x 10%) = 12 R/Earnings Dr: 12 Payables Cr: 12

Training cost
R/Earnings Dr: 30 Receivables Cr: 30

W8: Group/ parent Retained Earnings

Pamba R/earnings 5, 885
From subsidiary: Sunta w2 (60)
Unrealised profit w5 (16)
Goodwill impairment w4 (204)
Decrease in Contingent consideration 190
From associate: Amaya w6 24
Pamba adjustments:
Provision w7 (12)
Training cost w7 (30)
5, 777
W9: NCI
At acquisition (see goodwill working) 1, 200
From subsidiary: Sunta
R/Earnings w2 (15)
Unrealised profit w5 (4)
Goodwill impairment w4 (51)

109
 1, 130
W10: Inter-group debts
Payables Dr: 10 Receivables Cr: 10

(b)
Convertible debt
1. The present value of the debt/liability is calculated by discounting future cash flows
using the effective interest rate.
2. Equity is the difference between the total convertible debt and the present value of
the debt liability
3. Equity reported in the statement of financial position remains unchanged from
reporting period to the next.
4. The liability is measured at amortised cost annually.
5. The finance cost is calculated using the effective interest rate and it is reported in
the statement of profit or loss

110
SOLUTION TWO

(a) Zamboni Trading Ltd a) Statement of profit or loss for the year ended
31 May 2020
K000

Revenue 30,000
Cost of sales (w1) (19,650)
––––––
Gross profit 10,350
Distribution costs (w1) (1,370)
Administrative expenses (w1) (1,930)
––––––
Profit from operations 7,050
Finance costs (350)
––––––
Profit before tax 6,700
Tax (w2) (2,100 +400) (2,500)

––––––

Profit after tax 4,200

OCI

Revaluation of property 5,000

Total Comprehensive Income 9,200

b) Statement of financial position as at 31 May 2020

K000 K000
Assets
Non-current assets
Property, plant and equipment 39,600
Current assets
Inventory 4,600
Trade and other receivables (7,400 + 200) 7,600
Cash and cash equivalents 700
12,900
–––––––
Total assets 52,500
–––––––
Equity and liabilities
Capital and reserves
Equity shares 21,000
Revaluation reserve (5000-300) 4,700
Retained earnings (14000+300-2500) 11,800

111
 –––––––
Total equity 37,500
Non-current liabilities
8% Loan notes 2024 5,200
Current liabilities
Trade and other payables 7,300
Taxation (2,100 + 400) 2,500
9,800
–––––––
Total equity and liabilities 52,500
–––––––

c) Statement of changes in equity for the year ended 31 May 2020

Share Revaluati Retained

capital on reserve profits Total

K000 K000 K000 K000

Balance at beginning of year
21,000 0 7,500 28,500
Dividends paid (200) (200)

4,200 4,200
Profit for the period

Other comprehensive
income:

Revaluation of
non current assets 5,000 5,000

Transfer of excess depreciation

on
revaluation (300) 300 0
––––––– ––––––– ––––––– ––––––
Balance at end of year
21,000 4,700 11,800 37,500

––––––– ––––––– ––––––– –––––––

112
Workings
1 Allocation of expenses

Cost of Admin Distrib

sales
K000 K000 K000

Raw materials consumed 9,500

Manufacturing overheads 5,000

Increase in inventories (1,400)

Staff costs (70%/20%/10%) 3,290 940 470

Distribution costs 900

Depreciation

Building (50%/50%) 500 500

Plant and machinery 2,550

Fixtures and fittings (30%/70%) 210 490

–––––– –––––– ––––––

19,650 1,930 1,370

–––––– –––––– ––––––

2 Retained earnings

K000 K000

Accumulated profits carried forward per question 14,000

Less tax charge

- Current year estimate 2,100
- Underprovision in previous year 400
–––––

(2,500)

Add transfer of excess depreciation on revalued

building 300

––––––
11,800

113
SOLUTION THREE

(a)

Area of Ratio Formula Wiza Kanyi

analysis
Profitability ROCE PBITX100/(Equity+i (2100+420)X100/(60 (2800+1200)X100/(64
nterest bearing 00+11000) 00+6000+2400+1000
liabilities) +5600)
=14.8% =18.7%
Asset T/O Revenue/(Total 24000/20600 41000/18200
assets less current
liabilities) =1.2 times =2.3 times
GP Margin GPX100/Revenue 3000X100/24000 5000X100/41000

=12.5% =12.2%
OP Margin PBITX100/Revenue 2520X100/24000 4000X100/41000

=10.5% =9.8%
Liquidity Current Current (4000+4800+1200)/ (7200+7400)/11400
Ratio assets/current 8200
liabilities =1.2:1 =1.3:1
Inventory Closing 4000X365/21000 7200X365/36000
Holding inventoryX365/
Period (Cost of sales) =69.5 days =73 days

Trade Closing trade 4800X365/24000 7400X365/41000

Receivables receivablesX365/
Period revenue =73 days =65.9 days

Trade Closing trade 6200X365/21000 7600X365/36000

Payables payablesX365/cost
Period of sales =107.8 days =77.1 days

Gearing Gearing Interest bearing 6000X100/(6000+11 (6400+6000+2400+1

Ratio liabilitiesX100/(Equit 000) 000)X100/(15800+56
y+interest bearing 00)
liabilities) =35.3% =73.8%
Interest PBIT/Finance costs 2520/420 4000/1200
Cover
=6 times =3.3 times

Shareholders ROE PATX100/Equity 2100X100/11000 2800X100/5600

=19.1% =50%
Dividend PAT/Dividends 1800/500 2000/1400
Cover
=3.6 times =1.4 times

114
(b) REPORT
To : Directors of Vitendwe Plc
From : Financial Analyst
Date : December 2022
Subject: Relative financial performance and financial position of Wiza
and Kanyi for the year ended 31 December 20220.
________________________________________________________________________

1. INTRODUCTION

This report analyses the relative financial performance and position of Wiza Ltd and Kanyi
Ltd using ratio analysis. The areas of analysis include Profitabiity, Liquidity, Gearing and
perforformance from Shareholders’ point of view.

2. PROFITABILITY

Overall, Kanyi is much more profitable than Wiza as measured by the return on capital
employed (ROCE). Kanyi’s ROCE of 18.7% is higher than that of Wiza of only 14.8%. ROCE
is traditionally seen as a measure of management’s overall efficiency in the use of the
available capital (both debt and equity).

The main source of Kanyi’s superior profitability is its ability to generate revenue using the
available capital as measured by the Asset Turnover. Kanyi’s asset turnover stands at 2.3
times whilst that of Wiza at only 1.2 times. Kanyi’s asset turnover is therefore about double
that of Wiza. The two companies’ profit margins (gross profit and operating profit) are
broadly similar though Wiza has a slight edge on profit margin performance. It could be that
Wiza charges higher prices than Kanyi or has better cost control (both cost of sales and
other operating costs) than kanyi. Wiza has gross profit and operating profit margins of
12.5% and 10.5% compared to those of Kanyi at 12.2% and 9.8% respectively.

In conclusion, Kanyi is a better acquisition target than Wiza with regard to profitability.

3. LIQUIDITY

Both companies appear to have relatively low liquidity as measured by the current ratio.
Both Wiza and Kanyi have about the same current ratio of 1.2 and 1·3 respectively though
Wiza is in a better position with a cash balance of K1.2 million in the bank whereas Kanyi
has a bank overdraft amounting to K2.4 million. In this respect Kanyi’s policy of high
dividend
payouts (leading to a low dividend cover and low retained earnings) is very questionable.

Looking in more depth, both companies have similar inventory days; Kanyi collects its
receivables one week earlier than Wiza (perhaps its credit control procedures are more
active due to its large overdraft), and of notable difference is that Wiza receives (or takes) a
lot longer credit period from its suppliers (107.8 days compared to 77.1 days). This may be
a reflection of Wiza being able to negotiate better credit terms due to possibly having higher
credit rating.

115
 4. GEARING AND SHAREHOLDERS INTERESTS

From the gearing ratio it can be seen that 73.8% of Kanyi’s assets are financed by
borrowings with substantial financing of assets through leases. This is very high in absolute
terms and about double Wiza’s level of gearing (of only 35.3%. The effect of Kanyi’s high
gearing is a higher return on equity (ROE). Whilst this may seem advantageous to the
equity shareholders of Kanyi, it does not come without risk. The interest cover of Kanyi is
only 3·3 times whereas that of Wiza is 6 times. Kanyi’s low interest cover is a direct
consequence of its high gearing and it makes profits vulnerable to relatively small changes
in operating activity. For example, small reductions in sales, profit margins or small
increases in operating expenses could result in losses and mean that interest charges would
not be covered.

Another observation is that Wiza has been able to take advantage of the receipt of
government grants whilst Kanyi has not. This may be due to Wiza purchasing its plant
(which may then be eligible for grants) whereas Kanyi leases its plant. It may be that the
lessor has received any grants available on the purchase of the plant and passed some of
this benefit on to Kanyi via lower lease finance costs (at 8% per annum, this is considerably
lower than Merlot has to pay on its 10% loan notes).

5. CONCLUSION

Although both companies may operate in a similar industry and have similar profits after tax,
they would represent very different purchases. Kanyi’s sales revenues are over 70% more
than those of Wiza, it is financed by high levels of debt, it chooses to lease rather than buy
its replacement plant. Should Kanyi be replacing the owned plant at end the plant’s life, its
replacement will either require a cash injection if it is to be purchased (Kanyi’s overdraft of
K2·4 million already requires serious attention) or create even higher levels of gearing if it
continues its policy of leasing. In short although Kanyi’s overall return seems more attractive
than that of Wiza, it would represent a much more risky investment. Ultimately the
investment decision may be determined by Vitendwe’s attitude to risk, possible synergies
with its existing business activities, and not least, by the asking price for each investment.

116
SOLUTION FOUR

(a) IAS 41 Agriculture prescribes the accounting treatment for agricultural activity – the
transformation of biological assets (living plants and animals) into agricultural produce
(harvested product of the entity's biological assets). The standard generally requires
biological assets to be measured at fair value less costs to sell. Costs to sell are
defined as incremental costs directly attributable to the disposal of an asset, excluding
finance costs and income taxes. [IAS 41.5]

Initial recognition

An entity should recognise a biological asset or agriculture produce only when the entity
controls the asset as a result of past events, it is probable that future economic benefits will
flow to the entity, and the fair value or cost of the asset can be measured reliably. [IAS
41.10]

Measurement

Biological assets should be measured on initial recognition and at subsequent reporting

dates at fair value less estimated costs to sell, unless fair value cannot be reliably measured.
[IAS 41.12]

Agricultural produce should be measured at fair value less estimated costs to sell at the
point of harvest. [IAS 41.13] Because harvested produce is a marketable commodity, there
is no 'measurement reliability' exception for produce.

The gain on initial recognition of biological assets at fair value less costs to sell, and changes
in fair value less costs to sell of biological assets during a period, are reported in net profit
or loss. [IAS 41.26]

A gain on initial recognition of agricultural produce at fair value less costs to sell should be
included in net profit or loss for the period in which it arises. [IAS 41.28]

All costs related to biological assets that are measured at fair value are recognised as
expenses when incurred, other than costs to purchase biological assets.

Fair value measurement stops at harvest. IAS 2 Inventories applies after harvest. Fair value
at point of harvest must be taken as cost of inventory in subsequently measuring the
inventory in accordance with IAS 2.

(b) Kamonde must measure the biological assets (the 4 weeks old chickens) at their fair
value at 31 December less costs to sale. This will be computed as follows:

Number of 4 weeks old chickens:

Total Inventory of all chickens at 1.1.2022 (2000+1000+500) 3,500
Add Day old chicks added to production during the year 32,000
Less mortality 1%X32,000 (320)
Less Sales (31,000)
Less Harvested Chickens in closing inventory:
 Slaughtered (800)
 Live (1,800)
______

117
1,580
______
Valuation of biological assets (4 week old chickens) at 31.12.2022 K’000
Gross fair value 1,580X65 103
Less costs to sell (2+1.5)X1,580 (6)
_____
Fair value less costs to sale 97
_____
The K97,000 value of the 4 weeks old chickens will be presented separately in SFP under
the heading ‘Biological Assets’.

The inventory of harvested produce from biological assets will be measured at fair value at
the point of harvest (December 2022) less costs to sell. This will be computed as follows:
K’000
Live Chickens:
Gross fair value 1,800X110 198
Less costs to sell (2+1.5)X1,800 (6)
_____
Point of harvest Fair value less costs to sell 192
_____
Slaughtered Chickens:
Gross fair value 800X116 93
Less costs to sell (2+5)X800 (6)
_____
Point of harvest Fair value less costs to sell 87
_____

Therefore the total amount to report under current assets within Inventory at 31 December
2022 in respect of the harvested produce from biological assets will be K279,000 (ie
192,000+87,000).

The following amounts will be reported in the SPL for the year to 31 December 2022:
K’000 K’000
Revenue (20,000X108+11,000X115) 3,425

Cost of sales
Opening inventory (200+105) 305
Costs of managing biological assets (450+1,440) 1,890
Closing inventory (279)
Increase in value of biological assets (97-30) (67)
_____ (1,849)
_______
(c) 1. The building will be accounted for as follows:
K’000
Carrying amount b/d 1.1.2022 (9,500X35/37) 8,986
Revaluation loss at 1.1.2022 (balance) (486)
_____

Fair value at 1.1.2022 as new carrying amount upon revaluation 8,500

Depreciation charge for y/e 31.12.2022 to report in SPL 8,500/35 (243)
_____

118
 Carrying amount to report in the SFP at 31.12.2022 8,257
_____
Cost model carrying amount at 1.1.2022:
Original cost 10,000
Accum deprec to 31.12.2016 10,000/50X5 (1,000)
_____
Cost model amount at 1.1.2017 9,000
Accum depreciation to from 1.1.2017 to 1.1.2022 9,000/40X5 (1,125)
______
Cost model carrying amount at 1.1.2022 7,875
______
Since the cost model carrying amount (historic cost) of the building of K7,875,000 at
1.1.2022 is less than the carrying amount (based on past revaluations) b/d at 1.1.2022 of
K8,986,000, Kamonde Plc must have reported a revaluation reserve b/d at 1.1.2022 of
K1,111,000 (ie 8,986,000-7,875,000). Therefore, the whole revaluation loss of K486,000 at
1.1.2022 must be reported as other comprehensive income. It is a partial reversal of the
balance in the revaluation reserve at 1.1.2022. In addition, Kamonde must make a transfer
from the remainder of the revaluation reserve balance to retained earnings. Movements in
the revaluation reserve will be as follows:
K’000
Bal b/d 1.1.2022 1,111
Revaluation loss at 1.1.2022 (486)
_____
625
transfer to retained earnings 625/35 (18)
_____
Bal c/d 31.12.2022 607
_____

2. The government grant will be accounted for as follows:

K’000
Initial credit to deferred grant income account 1.1.2012 25%X10,000 2,500
Grant income recognised in SPL up to 31.12.2016 2,500/50X5 (250)
_____
2,250

Grant income recognised in SPL from 1.1.2017 to 31.12.2022

- amount per year 2,250/40 = 56.25
- total 56.25X6 (338)
_____
Deferred Grant income balance at 31.12.2022 1,912
Current liability portion (56)
_____

Non Current liability portion (balance) 1,856

_____
Extracts from fiinancial statements for the year to 31.12.2022 in respect of the building and
government grant are as follows:

SPLOCI K’000
- P/L
Deprecition (243)

119
 Government grant income 56
_____
- OCI
Loss on revaluation of building (486)
_____
SFP
- Non current assets
PPE 8,257

- Equity
Revaluation reserve 607

- Non current liabilities

Government grants 1,856

- Current liabilities
Government grants 56
_____

120
SOLUTION FIVE

(a) Features of a finance lease include:

 Finance lease transfers substantially all risks and rewards incidental to the
ownership of an asset that is subject of a lease to the lessee.
 At the inception of the lease, the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset.
 If the lessee is entitled to cancel a lease, the lessor’s losses associated with
the cancellation are borne by the lessee.
 Gains or losses from fluctuations in fair value are borne by the lessee
 The lessee has the ability to continue to lease asset for a secondary period at
a rent that is substantially lower than market rent.
 The lease transfers ownership of the asset to the lessee by the end of the
lease term.
 The lease term is for the major part of the asset’s economic life, even if title
is not transferred.
 The lessee has an option to buy the asset at a price expected to be lower
than the fair value at the time the option is exercised.
 The leased assets are of a specialized nature so that only the lessee can use
them without major modifications being made.

(b) The lease contract between Doka and Pinka is a finance lease due to the
following provisions:

 The lessee Pinka continues to lease the asset indefinitely at a rental

substantially below market rate.
 Lessee Pinka is to bear costs associated with contract cancellation.
 Lessee Pinka to bear gains and losses associated with fluctuation in fair
values of the leased asset.
 Lease term (5 years) forms major/substantial part of the asset’s useful
economic life (6 years).
Despite one feature in this contract pointing to an operating lease, that is, legal title of the
leased asset remains with lessor (Doka), the qualifying features far outweigh the non
qualifying features, hence Doka to account for the lease as finance lease.

 Doka would have to derecognize the asset from its books as it will be recognized by
Pinka (Lessee)

Net investment in finance lease

Year ending: Bal b/f Lease rental Sub-total Interest Bal c/f
‘K’ ’K’ ’K’ ’K’ ‘K’
31/12/2020 - - 455,000 45,500 500,500
31/12/2021 500,500 (85,000) 415,500

Based on the above table, Doka would recognize the asset net investment in Finance lease
(NIIFL) at 31 December 2020 in its statement of financial position in terms of current asset

121
portion of K85,000 being rental receivable within 12 months and non current asset portion
of K415,500 being remainder of the total investment in the lease at 31 December 2020.

Further, Doka would recognize interest income of K45,500 (10%* 455,500) in its statement
of profit or loss for the year ended 31 December 2020.

END OF SOLUTIONS

122
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA ZAMBIA APPLICATION ADVANCED DIPLOMA IN ACCOUNTANCY

___________________
CA 2.2: MANAGEMENT ACCOUNTING
___________________

TUESDAY 14 JUNE 2022

___________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO (2) sections:

Section A: One (1) Compulsory scenario question.

Section B: Four (4) Optional scenario Questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number
on the front of the answer booklet. Your name must NOT appear
anywhere on your answer booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be
taken as an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

123
SECTION A

This Question is compulsory and MUST be attempted.

QUESTION ONE – (COMPULSORY)

Mongu Packaging Ltd (MPL) based in the western part of Zambia, buys rice from the local
farmers, packs and sells it to other regions of the country. The company has employed 70
warehouse workers. In its 2022 expansion programme, MPL intends to export some of its
products to a neighbouring country. The current economic environment will help the
company to have a breakthrough in its export market. The world is faced with a number of
covid-19 variants and this has affected the way business is carried out. The management of
MPL has argued on the need to continue with budgeting. It has decided to enhance the
budgetary system and is hopeful to immediately address the concern of cash flows. The
currently year end closing bank balance is projected to be an overdraft of K1,085,000.
Budgetary information was gathered and is as follows:-

(i) The current sales price is currently K20.50 per kg but will be increased by 10% at
the start of Quarter 2 in 2022. Sales are projected for each quarter as follows:-

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Year 2021 - - - 200,000kgs
Year 2022 350,000kgs 485,000kgs 305,000kgs 160,000kgs

(ii) All sales are on credit and debts are settled in the quarter following sale.
Irrecoverable debts of 5% of total revenue are anticipated.
(iii) MPL’S quarterly inventory policy is 200,000 kgs of unshelled rice at the beginning
and end of each quarter.
(iv) The shelled rice is packed into 50kgs bags and stored in racks of 100 bags. 100
kgs of unshelled rice is required for each bag of 50kgs shelled rice.
(v) Labour is projected at a rate of K40.00 per hour for the first Quarter and
thereafter increased to K45. The labour time for both packing and stacking is 8
hours per day for each employee. Wages are paid in the same quarter incurred.
(vi) The variable overheads cost is K4.5 per kg and is expected to increase by K0.50
with effect from Quarter 3 of 2022. Variable overheads are paid in the same
quarter incurred.
(vii) The unshelled rice is sourced from various suppliers including small scale farmers
at a price of K9.85 per kg. MPL’s suppliers are paid in the same quarter of the
transaction.
(viii) Fixed costs are forecast to be K17,500 per month and paid on quarterly basis.
Depreciation per month is K2,895 and is not included in the forecast fixed costs
of K17,500.
(ix) Assume six (6) days in a week and four (4) weeks in a month.
Required:

(a) Explain five (5) objectives of budgetary planning and control systems.
(5 marks)
(b) Explain four (4) changes that may make it difficult to forecast future events.
(4 marks)

124
(c) Prepare a cash budget for MPL for the year 2022, providing quarterly
balances.
(20 marks)

(d) Explain possible management actions from the above cash budget, three (3)
for cash deficit and three (3) for cash surplus. (6 marks)

(e) Calculate the projected profit for 2022. (5 marks)

[Total: 40 Marks]

125
SECTION B

There are four (4) questions in this section. Attempt any THREE (3) questions in
this section.

QUESTION TWO

Lubasi Lubasi is an accountant working for Zambia Book Centre (ZBC). He is in charge of
inventory management for ZBC and one of the books he keeps in inventory is a receipt book
used by different districts in his territory. Mr Lubasi Lubasi conducted inventory taking on
December 31 2021 in the presence of external auditors and it was discovered that Mr
Lubasi Lubasi‘s bin cards were showing that he had 500 receipt book while the actual receipt
books counted were only 450 at the total cost of K4,500. Auditors requested the
organisation to amend the records accordingly to ensure that there were no misstatements
in the inventory records.

Your supervisor has provided you with additional transactions for the month of January 2022
as indicated below.

Date Description Quantity Cost Sales

Value value
(K) (K)
05 Purchases 2,000 24,000
10 Sales 1,500 9,000
15 Purchases 3,000 45,000
20 Purchases 500 10,000
29 Sales 2,500 62,500

Required:

(a) Calculate the value of the closing Inventory of receipt books for ZBC for the period
ending 31 January 2022 using :

(i) First In First Out (FIFO) Method (5 marks)

(ii) Last In First Out (LIFO) Method (5 marks)
(iii) Cumulative Weighted Average Pricing (AVCO) Method rounding off to
(2 decimal points) (5 marks)

(b) Calculate the profit made on the sales for each method in (a) above. (2 marks)

(c) Explain three (3) possible reasons why the records of Receipts books for Mr Lubasi
Lubasi are not matching with the actual receipts available as at 31 December 2021.
(3 marks)
[Total:20 Marks]

126
QUESTION THREE

Muchinga Ltd is a manufacturing company based in Lusaka. The actual production

overhead costs and activity levels for Departments X and Y of Muchinga Ltd for the month of
June 2022 were as follows:

Department X Department Y
Production overhead cost (K) 320,000 349,000
Direct labour (hours) 1,200 1,600
Machine usage (hours) 1,000 1,400

Muchinga Ltd absorbs overheads on a direct labour hour basis at K250 per hour in
Department X and on a machine hour basis at K275 per hour in Department Y.

Required:

(a) In relation to the actual production overheads costs and activity levels information
for each department:

(i) Calculate the under or over absorption of overheads for each department.
(4 marks)

(ii) Explain the accounting treatment of the under and over absorption of
overheads in the statement of profit or loss. (4 marks)

The budget and actual records of Muchinga Ltd for 2022 provided the following information
in relation to materials and labour planning and operations:

Materials planning and operations

A new product B to be produced requires raw materials cost per unit of K40.00 (2 kg of raw
materials at K20 per kg). Due to a rise in prices for the raw materials during the year, the
average market price of the raw material has risen to K30 per kg. During the year, 1,000
units of B were produced at a cost of K65,000 for 2,200 kg of raw material were used in the
production of product B.

Labour planning and operations

Product A requires three (3) hours of labour per unit at a standard rate of K120 per hour. In
a June 2022 the budget was to produce 500 units. Actual results were as follows:

Hours worked 1,700 hours

Production 540 units
Wages cost K210,000

Shortly after production was started, it was realised that the labour force would claim an
extra K5 per hour in the production of A due changes in the labour market.

127
Required:

(b) Calculate the following:

(i) Material total planning variance (2 marks)

(ii) Labour total planning variance (2 marks)
(iii) Material operational price variance (2 marks)
(iv) Material operational usage variance (2 marks)
(v) Labour operational rate variance (2 marks)
(vi) Labour operational efficiency variance (2 marks)
[Total: 20 Marks]

QUESTION FOUR

(a) Life cycle costing has a different purpose from cost accumulation systems that
measure actual costs of production and sales.

Required:

(i) Explain the purpose of life cycle costing (2 marks)

(ii) Explain any four (4) benefits of life cycle costing (4 marks)

(b) High-grade Ltd’s process costing information for the month of January 2022 is as
follows:

 Opening work in progress: 30,000 units valued at K164,000. The degree of

completion for the opening work in progress was as follows:

Materials 100%
Conversion 60%

 Units started during January: 60,000 units valued at K396,000

 Conversion cost added in January: K335,000
 Units completed during January: 80,000 units
 The balance of the units was work in progress on 31 January 2022 whose degree
of completion was as follows:

Materials 100%
Conversion 50%

 There were no losses in the process

Required:

Using the FIFO method:

(i) Calculate the equivalent units of production for each element of cost.
(3 marks)

(ii) Calculate the cost per equivalent unit of production. (3 marks)

(iii) Prepare the process account for the month of January, 2022. (8 marks)
[Total: 20 Marks]

128
QUESTION FIVE

Tizone Manufacturing Ltd (TML) was established in 2015. TML produces carbonated drinks.
The company has since grown from a single product to four products in first three (3) years
in its operations. The management is reviewing TML’s performance for the immediate past
year.
The following information concerning the four products manufactured by TML is given
below:

Product Chipokapoka Fighter Warrior Kaimbi

Selling price (K/unit) 31.50 42.75 40.95
Material X1X (kg/unit) 2.00 3.00 3.00
Material X2X (kg/unit) 3.00 3.30 2.40 4.50
Direct labour (hours/unit) 0.90 1.80 2.25 2.55
Variable production overheads (K/unit) 1.65 1.95 1.65 2.10
Fixed production overheads (K/unit) 2.25 2.40 1.96 2.10
Expected demand for next month (units) 1,425 1,500 1,350

Products chipokapoka, fighter and warrior are sold to customers of TML, while product
kaimbi is a component that is used in the manufacture of other products.

Material X1X, is expected to be in short supply in the next period. TML has just received a
delivery of 8,250kg of Material X1X and this is expected to be the amount held in inventory
at the start of the next month. The current market price for Material X1X is K3.75 per kg.

Material X2X is available at a price of K2.00 per kg and TML does not expect any problems
in securing supplies of this material.

Direct labour is paid at a rate of K4.00 per hour.

Greens Limited has recently approached TML with an offer to supply a substitute for Product
kaimbi at a price of K15.30 per unit. TML would need to pay an annual fee of K75,000 for
the right to use this patented substitute.

Required:

(a) Calculate the optimum production for Products chipokapoka, fighter and warrior for the
next period, on the assumption that additional supplies of Material X1X are not
purchased. (9 marks)

(b) Calculate the maximum price per kg that TML will be willing to pay if it decided to
purchase further supplies of Material X1X to meet demand for Products chipokapoka
fighter and warrior. (4 marks)

(c) Discuss whether TML Plc should manufacture Product kaimbi or buy the substitute
offered by Greens Limited. Your answer must be supported by appropriate calculations.
(7 marks)
[Total 20 Marks]

END OF PAPER

129
CA2.2 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) Objectives of budgetary planning and control systems

 Planning for the future in line with the objectives of the organisation.
 Controlling costs by comparing the plan or the budget with the actual results
and investigating significant differences between the two.
 Co-ordination of the different activities of the business by ensuring that
managers are working towards the same common goal (as stated in the
budget).
 Communication. The budgets communicate the targets of the organisation to
individual managers.
 Motivation. Budgets can motivate managers by encouraging them to beat
targets or budgets set at the beginning of the budget period. Bonuses are often
based on ‘beating budgets’. Budgets, if badly set, can also demotivate
employees.
 Evaluation – The performance of managers is often judged by looking at how
well the manager has performed ‘against budget’.
 Authorisation – Budgets act as a form of authorisation of expenditure.
(b) Changes that may make it difficult to forecast future events

(i) Political and economic changes

Changes in interest rates, exchange rates or inflation can mean that future sales and costs
are difficult to forecast.

(ii) Environmental changes

The eruption of pandemics might have a considerable impact on some companies' markets.

(iii) Technological changes

These may mean that the past is not a reliable indication of likely future events. For
example, new faster machinery may make it difficult to use current output levels as the
basis for forecasting future production output.

(iv) Technological advances

Advanced manufacturing technology is changing the cost structure of many firms. Direct
labour costs are reducing in significance, and fixed manufacturing costs are increasing. This
causes forecasting difficulties because of the resulting changes in cost behaviour patterns,
breakeven points and so on.
(v) Social changes
Alterations in taste, fashion and the social acceptability of products can cause forecasting
difficulties.

130
(c) Cash budget for MPL for the year 2022
Quarter 1 2 3 4
K’000 K’000 K’000 K’000
Cash receipts :
Trade sales (w1) 3,895 6,816 10,390 6,534
Total cash receipts 3,895 6,816 10,390 6,534
Cash payments:
Trade purchases (w2) (3,448) (4,777) (3,004) (1,576)
Labour cost (w3) (1,613) (1,814) (1,814) (1,814)
Variable Overheads (w4) (1,575) (2,183) (1,525) (800)
Fixed cost (w5) (53) (53) (53) (53)
Total cash payments (6,689) (8,827) (6,396) (4,243)
Net cash flow (2,794) (2,011) 3,994 2,291
Opening cash balance 1,085 (1,709) (3,720) 274
Closing cash balance (1,709) (3,720) 274 2,565

Workings:
1. Sales
Quarter 4 -2021 1-2022 2-2022 3-2022 4-2022
Shelled rice (kgs) 200,000 350,000 485,000 305,000 160,000
Selling price (K) 20.50 20.50 22.55 22.55 22.55
Sales (K) 4,100,000 7,175,000 10,936,750 6,877,750 3,608,000
Less: 5% (205,000) (358,750) (546,838) (343,888) (180,400)
irrecoverable debts
Net sales 3,895,000 6,816,250 10,389,912 6,533,862 3,427,600
Cash receipt 3,895,000 6,816,250 10,389,912 6,533,862

2. Purchases
Quarter 4 -2021 1-2022 2-2022 3-2022 4-2022
Sales (kgs) 200,000 350,000 485,000 305,000 160,000
Opening inventory (200,000) (200,000) (200,000) (200,000) (200,000)
(kgs)
Closing inventory 200,000 200,000 200,000 200,000 200,000
(kgs)
Purchases (kgs) 200,000 350,000 485,000 305,000 160,000
Purchase price (K) 9.85 9.85 9.85 9.85 9.85
Purchases cost (K) 1,970,000 3,447,500 4,777,250 3,004,250 1,576,000

3. Labour cost
Quarter 1 2 3 4
Total hours per quarter 40,320 40,320 40,320 40,320
(8x6x4x 70)
Labour rate K40/hr K45/hr K45/hr K45/hr
Labour cost (K) 1,612,800 1,814,400 1,814,400 1,814,400

131
 4. Variable overheads
Quarter 1 2 3 4
Rice (Kgs) 350,000 485,000 305,000 160,000
VOR (K/Kg) 4.5 4.5 5 5
Variable Overhead cost (K) 1,575,000 2,182,500 1,525,000 800,000

5. Fixed costs
K17,500 /mth x 3 months = K52,500 per quarter

(d) Possible Management action

The first half of the year 2022 will experience a cash deficit and therefore the following
action could be taken:
(i) Postpone some payments
(ii) Negotiate with suppliers on the possibility of credit terms
(iii) Review the credit policy with the customers by reducing the days

The second half of the year 2022 will experience a cash surplus and therefore the following
action could be taken:
(i) Pay the payables
(ii) Purchase non-current assets
(iii) Invest in short term deposits

(e) Projected profit

K K
Sales (7,175+10,936.75+6,877.75+3,608) 28,597,500
Less cost of sales:
Opening inventory (200,000 x 9.85) 1,970,000
Add purchases (3,447.5 + 4,777.25+3,004.25+1,576) 12,805,000
Less closing inventory (200,000 x 9.85) (1,970,000) (12,805,000)
Gross profit 15,792,500
Expenses:
Bad debts (358.75+546.838+343.888+180.4) 1,429,876
Labour (1,612.8 + 1,814.4+1,814.4+1,814.4) 7,056,000
Variable overheads (1,575+2,182.5 +1,525+800) 6,082,500
Fixed costs (17,500 x 12) 210,000
Depreciation (2,895 x 12) 34,740 (14,812,116)
Projected profit 979,384

132
SOLUTION TWO
(a)
(i)
FIFO METHOD FOR THE MONTH OF JANUARY 2022
DATE DESCRIPTION QTY UNIT PRICE TOTAL DATE DESCRIPTION QTY UNIT PRICE TOTAL
1 BALANCE BF 450 10 4,500 10 SALES/ISSUES 450 10 4,500
5 PURCHASES/RECEIPTS 2,000 12 24,000 1,050 12 12,600
TOTAL 1,500 17,100
11 BALANCE 950 12 11,400 -
15 PURCHASES/RECEIPTS 3,000 15 45,000 29 SALES/ISSUES 950 12 11,400
20 PURCHASES/RECEIPTS 500 20 10,000 1,550 15 23,250
- TOTAL 2,500 34,650
31 BALANCES 1,450 15 21,750 -
BALANCES 500 20 10,000 -
TOTAL 1,950 31,750 -

ANSWER THE VALUE OF CLOSING INVENTORY USING FIFO IS 31,750

(a) (ii)

LIFO METHOD FOR THE MONTH OF JANUARY 2022

DATE DESCRIPTION QTY UNIT PRICE TOTAL DATE DESCRIPTION QTY UNIT PRICE TOTAL
1 BALANCE BF 450 10 4,500 10 SALES/ISSUES 1,500 12 18,000
5 PURCHASES/RECEIPTS 2,000 12 24,000 TOTAL 1,500 18,000

11 BALANCE 450 10 4,500 -

BALANCE 500 12 6,000 29 SALES/ISSUES 500 20 10,000
15 PURCHASES/RECEIPTS 3,000 15 45,000 2,000 15 30,000
20 PURCHASES/RECEIPTS 500 20 10,000 TOTAL 2,500 40,000

31 BALANCES 450 10 4,500 -

BALANCES 500 12 6,000
BALANCES 1,000 15 15,000 -
TOTAL 1,950 25,500 -

(a) (iii)

AVCO METHOD FOR THE MONTH OF JANUARY 2022

DATE DESCRIPTION QTY UNIT PRICE TOTAL DATE DESCRIPTION QTY UNIT PRICE TOTAL
1 BALANCE BF 450 10 4,500 10 SALES/ISSUES 1,500 11.63 17,445
5 PURCHASES/RECEIPTS 2,000 12 24,000 TOTAL 1,500 17,445
TOTAL 2,450 11.63 28,500
11 BALANCE 950 11.63 11,049 -
15 PURCHASES/RECEIPTS 3,000 15 45,000 29 SALES/ISSUES 2,500 14.84 37,100
20 PURCHASES/RECEIPTS 500 20 10,000 TOTAL 2,500 37,100
TOTAL 4,450 14.84 66,049
-
31 BALANCES 1,950 14.84 28,938 -
TOTAL 1,950 28,938 -

ANSWER THE VALUE OF CLOSING INVENTORY USING AVCO IS 28,938

133
(b) PROFIT CALCULATION
DETAILS FIFO LIFO AVCO
SALES ON 10 JANUARY 9,000 9,000 9,000
SALES ON 29 JANUARY 62,500 62,500 62,500
TOTAL SALES FOR A MONTH 71,500 71,500 71,500
LESS VALUE OF ISSUED ITEMS
ISSUE OR SALES ON 10 17,100 18,000 17,445
ISSUE OR SALES ON 29 34,650 40,000 37,100
TOTAL COST OF ISSUE 51,750 58,000 54,545
PROFIT 19,750 13,500 16,955

ALTRNATIVE WORKINGS OR SOLUTION

SALES 71,500 71,500 71,500

OPENING INVENTORY 4,500 4,500 4,500
PURCHASES 79,000 79,000 79,000
TOTAL INVENTORY 83,500 83,500 83,500
LESS CLOSING INVENTORY 31,750 25,500 28,938
COST OF SALES 51,750 58,000 54,562
GROSS PROFIT 19,750 13,500 16,938

(c) The main reason inventory recorded and actual inventory may differ may be due to
any of the following reasons:
I. Theft of receipt books and the stolen books have not been recorded in the
inventory records

II. Wrong delivery of quantity specified where more or less quantity is supplied to
the organization and while Mr Lubasi records the quantity on the delivery note
which may be different from the actual delivery.

III. Errors during recording of the inventory during issue or receipt process

IV. Damages of receipt books not being recorded in the inventory record.

134
SOLUTION THREE

(a)
(i) Muchinga Ltd under or over absorption of overheads
Department X Department Y
K K
Overheads incurred 320 000 349 000
Overheads absorbed:
Department X (1 200 hrs x K250/hr) 300 000
Department Y (1 400 hrs x K275/hr) _______ 385 000
Under/(over) absorption 20 000 (36 000)

(ii) An under absorption of overheads is added to cost of sales or subtracted from the
gross profit in the statement of profit or loss whereas an over absorption is
subtracted from the cost of sales or added to the gross profit in the statement of
profit or loss

(b)
(i) Materials and labour planning variances

Materials planning variance

K
Revised standard cost (1 000 x 2 kg x K30) 60, 000
Original standard cost (1 000 x 2 kg x K20) 40, 000
Total planning variance 20, 000 (A)

(ii) Labour planning variance

K
Revised standard cost (540 x 3 hrs x K125) 202, 500
Original standard cost (540 x 3 hrs x K120) 194,400
Total planning variance 8 ,100 (A)

(iii) Material operational price and usage variances

Operational price variance

K
Actual price of actual materials (2 200 kg) 65, 000
Revised standard price of actual materials (K30 x 2 200 kg) 66, 000
Operational price variance 1, 000 (F)

(iv) Operational usage variance

Actual quantity should have been (1 000 x 2 kgs) 2, 000 kgs
But was 2, 200 kgs
Operational usage variance in Kgs 200 kgs (A)
x revised standard cost per kg x K30
Operational usage variance in kwacha K6, 000 (A)

(v) Labour operational rate and efficiency variances

Operating rate variance

K
Actual cost (for 1 700 hours) 210, 000

135
Revised standard cost of actual hours (1 700 hrs x K125) 212, 500
Total operating variance 2, 500 (F)

(vi) Operational efficiency variance

540 units should have taken (540 x 3 hours) 1, 620 hours

But took 1, 700 hours
Operational efficiency variance in hours 80 hours (A)
x revised standard rate per hour x K125
Operational efficiency variance in kwacha K10, 000 (A)

136
SOLUTION FOUR

(a)

(i) Purpose of life cycle costing

The purpose of life cycle costing is to assess the total costs of a product over its entire life,
to assess the expected profitability from the product over its full life. Products that are not
expected to be profitable after allowing for design and development costs, or clean-up costs,
should not be considered for commercial development.

(ii) Benefits of life cycle costing

The benefits associated with life cycle costing include the following:

1. It helps management to assess profitability over the full life of a product, which
in turn helps management to decide whether to develop the product, or to
continue making the product.
2. It can be very useful for organisations that continually develop products with a
relatively short life, where it may be possible to estimate sales volumes and
prices with reasonable accuracy.
3. The life cycle concept results in earlier actions to generate more revenue or to
lower costs than otherwise might be considered.
4. Better decisions should follow from a more accurate and realistic assessment of
revenues and costs, at least within a particular life cycle stage.
5. It encourages longer-term thinking and forward planning, and may provide more
useful information than traditional reports of historical costs and profits in each
accounting period.

(b)

(i) Equivalent units of production

Units Materials Conversion
% Units % Units
Completed units
From opening WIP 30 000 0 0 40 12, 000
From current prod. 50 000 100 50, 000 100 50,
000
Closing WIP 10 000 100 10, 000 50 5,,000
60, 000 67, 000

(ii) Cost per equivalent unit

Costs
Materials Conversion
K K
Costs incurred in January 396,000 335, 000

Cost per equivalent unit 396, 000 335, 000

60, 000 67, 000

137
 = K6.60/unit K5.00/unit

Total Cost per unit = K6.60+ K5.00 = K11.60/unit

(iii) Process Account

Process account
_______________________________________________________________________
Units K Units K
Opening WIP 30, 000 164 000 Finished output 80, 000 804,
000
Materials added 60,000 396 000 Closing WIP 10 000 91
000
Conversion costs 335 000
- 90, 000 895 000 90, 000
895 000

Workings
1. Valuations K K
 Finished output
From opening WIP
Value at 1st Jan 164, 000
Materials (0 x K6.60/unit) 0
Conversion (12 000 units x K5.00) 60, 000
224, 000
From current production (50 000 units x K11.6) 580, 000
804, 000
 Closing WIP
Materials (10 000 x K6.6/unit) 66, 000
Conversion (5 000 x K5.00/unit) 25, 000
91, 000

138
SOLUTION FIVE

(a)The optimum production schedule is found using limiting factor analysis.

Chipokapoka Fighter Warrior

K/unit K/unit K/unit
Material X1X 7.50 11.25 11.25
Material X2X 6·00 6.60 4.80
Labour 3.60 7.20 9.00
Variable o/h 1.65 1.95 1.65
Variable costs 18.75 27.00 26.70
Selling price 31.50 42.75 40.95
Contribution 12.75 15.75 14.25
Material X1X (kg/unit) 3 4.5 4.5
Contribution/kg 6.375 5.25 4.75
Ranking 1 2 3
Optimum Production:
Product Demand X1X used Production X1X
(units) (kg) (units) available(kg)
8,250
Chipokapoka 1,425 2,850 1,425 5,400
Fighter 1,500 4,500 1,500 900
Warrior 1,350 900 300

The optimum production schedule is 1,425 units of Product Chipokapoka, 1,500 units of
Fighter and 300 units of Warrior.

(b) Further supplies of Material X1X will be used to produce additional units of Product
Warrior. The contribution per kg of Material X1X of Product Warrior is K4.75 and so if
TML pays 4.75 + 3.75 = K8.50 per kg for Material X1X, the additional units of Product
Warrior produced will make a zero contribution towards fixed costs. K8.50 is therefore
the maximum price.
(c) The variable cost of Product Kaimbi:
K/unit
Material X2X: (4.5 x K2) 9.00
Labour: (2.55 x 4) 10.20
Variable overhead: 2.10
Total variable cost 21.30

The substitute offered by Green gives a saving of K6 per unit. However, TML plc would also
pay an annual fee of K75,000 for the right to use the substitute. The company would need
to manufacture more than 75,000/6 = 12,500 units per year of Product Kaimbi, or 1,042
units per month, in order for the offered substitute to be financially acceptable. If it needed
less than 12,500 units of Product Kaimbi per year, it would be cheaper to manufacture the
product in house. This evaluation is from a short-term perspective: in the longer term,

139
buying in may lead to fixed cost savings and lower investment, increasing the benefits of
buying in and lowering the break-even point. TML plc would also need to assure itself that
the quality of the substitute was acceptable and that this quality could be maintained: the
lower price offered by Green Ltd might be associated with poorer quality than that deemed
necessary by TML plc. Orders for the substitute product would also need to be delivered
promptly in order to avoid production hold-ups. TML plc could also become dependent on
Green Limited for supplies of the substitute product and might be vulnerable to future price
increases by the supplier. Such price increases might reduce or even eliminate the cost
saving of buying in.

END OF SOLUTION

140
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA APPLICATION ADVANCED DIPLOMA IN ACCOUNTANCY

___________________

CA 2.3: AUDITING PRINCIPLES AND PRACTICE

___________________

THURSDAY 16 JUNE 2022

___________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO (2) sections:

Section A: One (1) Compulsory scenario question.
Section B: Four (4) Optional Questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

141
SECTION A

This question is compulsory and must be attempted

QUESTION ONE – COMPULSORY

Lunsefwa Ltd is a trading company involved in the importation and sales of bearings in the
country. The customer base of Lunsefwa Ltd is wide ranging from large industrial customers
to small companies dealing in vehicle spares.

The company has a large warehouse stocking a wide range of bearings. Due to the large
range of its products, the company has relied on perpetual inventory count to determine its
closing inventory value. The previous auditors of Lunsefwa Ltd modified the audit opinion for
the financial statements for the year ended 31 December 2020 because they could not
obtain sufficient appropriate evidence for the figure of inventory which they considered
material. As a result there was a disagreement with the previous auditors and the previous
auditors did not seek re-election.

Your firm of Chartered Accountants was appointed auditor of Lunsefwa Ltd at the beginning
of the year 2021. As part of non-audit services, your firm and Lunsefwa Ltd have agreed
that you assist the company come up with good effective internal controls for the company.
Poor internal controls were part of the reasons why perpetual inventory count could not
work as expected.

The receivables figure for Lunsefwa Ltd has grown over the years with the age analysis
showing an increase in old debts arising from disputes with customers. The company has
provided 2% as an allowance for receivables according to the policy it has followed over the
last ten (10) years. You have agreed with the management of Lunsefwa Ltd that effective
the current year, a physical inventory count should be conducted to determine the correct
value of inventory at the period end. The company has engaged a temporal employee with
experience in inventory control to organize the inventory count and come up with suitable
inventory count instructions.

The audit team for the audit of the financial statements of Lunsefwa Ltd comprises of four
(4) new Audit Assistants and one (1) Audit Assistant who has worked for your firm for three
(3) years.

You have been provided with the inventory count instructions that have been prepared and
you are planning attendance at the inventory count. You are required to guide the audit
team with regards to the work that should be performed before, during and after the
inventory count.

Lunsefwa Ltd has a Stores Department, Purchasing Department, Finance Department and
Administration Department. You read in the media that there is a legal dispute with the
employees in that the company has not complied with the minimum wage legislation since
inception two (2) years ago. Non-compliance with this law could result in stiff penalties in
addition to being required to pay all underpayments with interest to staff.

142
Required:

(a) Explain briefly each of the five (5) elements of internal control systems. (10 marks)

(b) Identify and explain six (6) audit risks in the audit of the financial statements of
Lunsefwa Ltd and suggest suitable responses. (12 marks)

(c) Suggest seven (7) inventory count instructions that should be included in the
inventory count instructions for the planned year-end inventory count. (7 marks)

(d) Explain the work that the auditors who will attend the physical inventory count will
do at each of the stages below:

(i) Four (4) matters before the inventory count. (4 marks)

(ii) Four (4) matters during the inventory count. (4 marks)
(iii) Three (3) matters after the inventory count. (3 marks)
[Total: 40 Marks]

143
SECTION B

There are FOUR (4) questions in this section.

Attempt any THREE (3) questions in this section.

QUESTION TWO

You are an Audit Senior in Mulenga Accountants, a firm which provides audit and assurance
services. You are responsible for the financial statement audit for Ethics Ltd for the year
ended 31 March 2022. Ethics Ltd is a wholesaler of aluminium products such as door frames
and window frames. You are currently reviewing the governance structure of Ethics Ltd, as
part of the risk assessment process.

The company has a board of seven (7) members, comprising four (4) Non-Executive
Directors (NEDs) and three (3) Executive Directors (EDs). One (1) of the NEDs is
chairperson of the board. The Chief Executive Officer (CEO) is one (1) of the EDs.

The board members are appointed at each Annual General Meeting (AGM) by the
shareholders on the recommendation of the CEO. The CEO’s recommendations are never
questioned by the shareholders. In an effort to save costs amidst the COVID-19 pandemic,
induction of board members has been suspended.

The company secretary is concerned about the poor attendance at both the board meetings
and AGM. The board meets twice a year. The first meeting focuses on scrutinising the
strategic plans while the second meeting evaluates the performance of the Executive
Directors (EDs).

The Audit Committee is made of EDs and is headed by the Finance Director. The main roles
of the Audit Committee are ‘oversight’, ‘assessment’ and ‘review’ of other functions and
systems in Ethics Ltd. In fact, most of the board objectives relating to internal controls and
financial reporting are delegated to the Audit Committee. The Internal Audit function reports
to the Audit Committee.

The Training Partner is currently updating the training manual for Mulenga Accountants and
would like you to provide specific notes on eligibility and signing of the auditor’s report.

Required:

(a) Explain who is eligible to act as the auditor of a limited company under the
provisions of the Companies Act and state, with reasons, whether a newly qualified
CA Zambia graduate can sign the auditor’s report. (6 marks)

(b) Using the information given on the governance structure for Ethics Ltd:

(i) Explain seven (7) deficiencies in the governance principles of Ethics Ltd.
(7 marks)

(ii) Provide a recommendation on how each deficiency can be minimised.

(7 marks)
[Total: 20 Marks]

144
QUESTION THREE

You are an Audit Manager in Buka Associates, a firm of chartered accountants. The Finance
Manager for Kalulu Ltd informed the Engagement Partner that the company is ready for the
financial statement audit for the year ended 31 March 2022. He also complained that Buka
Associates may have performed last year’s financial statement audit negligently. The reason
being that the Internal Audit function was able to discover fraudulent activities relating to
receivables, a few weeks after the completion of the financial statement audit for the year
ended 31 March 2021. The board is disappointed with Buka Associates and would like to
know the external auditor’s responsibility regarding detection and prevention of fraud before
taking further action. The Engagement Partner asked you to provide appropriate details
pertaining to the external auditor’s responsibility regarding detection and prevention of fraud
since he has arranged a meeting to discuss the issue next week.

The Engagement Partner thinks there was undue reliance on receivables’ confirmation
during the financial statement audit for the year ended 31 March 2021. The use of negative
confirmation could have been wrong. Negative confirmation provides less persuasive audit
evidence and is not used as the sole substantive procedure to audit receivables unless a
number of conditions are present. It is possible that if Computer Assisted Audit Techniques
(CAATs) were used, the audit findings and conclusions in respect of receivables could have
been different. The sales and receivables systems are computerised.

For the audit of the financial statements for the year ended 31 March 2022, the Engagement
Partner wants the audit team to use positive confirmation and carry out alternative
procedures if no reply is received from the receivables’ confirmation.

Required:

(a) Define fraud and explain the extent of the responsibility of an external auditor
regarding prevention and detection of fraud. (6 marks)

(b) Describe how audit software can be used to assist in the detection of fraud when
auditing receivables in the financial statements of Kalulu Ltd. (4 marks)

(c) List the conditions which must exist before the auditors decide to use negative
confirmation. (5 marks)

(d) Suggest five (5) audit procedures which might be used to verify receivable balances,
if no reply is received from the receivables’ confirmation performed by Buka
Associates. (5 marks)
[Total: 20 Marks]

145
QUESTION FOUR

You are an Audit Supervisor responsible for the audit of Impala Ltd. Impala Ltd is a new
audit client of your firm. You are currently assisting the Audit Manager in planning the audit
of the financial statements for Impala Ltd for the year ended 30 September 2021.

The Audit Manager has stated that the auditor is unlikely to place the same amount of
reliance on evidence obtained from management compared to his own or third party
evidence because of the inherent risk in management evidence. One of the Junior Auditors
commented, however, that there is a provision in the Companies Act that gives some
assurance over the quality of management evidence.

The previous auditors have informed the Audit Manager that the area of accruals is one (1)
of the risky areas in the audit of the financial statements for Impala Ltd. The company does
not have a robust system for identifying accruals and in most cases, the figures recognised
in the financial statements under accruals tend to be grossly understated. The draft financial
statements for the year ended 30 September 2021 show an accruals figure of K600,000.

The Engagement Partner has emphasised the need to use analytical procedures in order to
minimise audit risk to an acceptably low level. This is very effective and promotes cost
effectiveness in an audit.

Required:

(a) Discuss the inherent risk in the evidence obtained from management and explain,
giving appropriate examples, three (3) key management evidence. (8 marks)

(b) Explain the provision in the Companies Act that gives confidence on audit evidence
obtained from management. (2 marks)

(c) Explain the purposes of using analytical procedures at each of the three (3) stages of
the audit for Impala Ltd. (7 marks)

(d) Recommend three (3) substantive analytical procedures you should perform on the
accruals figure shown in the draft financial statements for Impala Ltd. (3 marks)
[Total: 20 Marks]

146
QUESTION FIVE

You are an Audit Supervisor in Mambwe Associates, a firm of accountants. You are
responsible for the training of recently recruited CA-Zambia graduates and the audit of
financial statements for Njokwe Ltd.

The Managing Partner has instructed you to urgently conduct training for the recently
recruited CA-Zambia graduates on audit working papers. Last week, the CA-Zambia
graduates were given copies of audit working papers for Mambwe Associates and were told
to identify specific items of concern. Most of the recently recruited CA-Zambia graduates
have identified the following items as of particular concern:

1. Page reference
2. Client’s year-end date
3. Signature of the reviewer
4. Test objective
5. How the number of samples to test was determined.
The audit of the financial statements for Njokwe Ltd for the year ended 31 March 2022 is
currently in progress. The audit plan does not include sufficient details on the audit of trade
payables. The Auditor assigned to this area has asked for your guidance.

Required:

(a) Define audit working papers and explain five (5) reasons for maintaining audit
working papers. (7 marks)

(b) Explain the reasons for including the five (5) items mentioned in the scenario on the
audit working papers for Mambwe Associates. (5 marks)

(c) Recommend eight (8) audit procedures which should be performed regarding the
completeness of trade payables shown in the financial statements of Njokwe Ltd.
(8 marks)
[Total: 20 Marks]

END OF PAPER

147
CA2.3 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) Elements of internal control:

(i) Internal control environment:

This is the governance and management function and attitude of those
charged with governance towards internal control. This is the culture that has
been put by management and the control environment may be strong or
weak depending on the attitude of management and those charged with
governance.

(ii) The risk assessment processes of the organization:

These are the processes that management of the entity puts in place for the
identification of business risks that exist. Risk assessment is related to
internal controls in that controls are put in place in response to the risks that
have been identified.

(iii) The information system relevant to the financial statements:

This is an element of internal control that the auditor should gain an
understanding of and it relates to the information system that is used by the
client company. It consists of the procedures for initiating, recording and
processing the transactions of the entity.

(iv) Control activities:

These are the policies and procedures that the organization puts in place.
These procedures are designed to prevent or to detect and correct errors. For
example control related to authorization and other controls such as
segregation of duties.

(v) Monitoring of controls:

This is the process that the organization uses to assess the effectiveness of
internal controls. It includes the assessment of the design and operation of
the internal controls. The auditor requires to know how the organization does
this.

(b) Audit risks in the audit of the financial statements of Lunsefwa Ltd:

(i) First time to audit financial statements of Lunsefwa Ltd:

This is the first time that the firm will be auditing the financial statements of
Lunsefwa Ltd. This means that the firm may not have all the skills and
competences required to audit the company. The audit team will be learning
and therefore the detection risk is high which could result in the
misstatement of the financial statements.

148
 Audit response:
There will be need for close supervision of the work that is carried out.
Quality control review by someone not involved in the audit will be
appropriate to reduce this risk.

(ii) Opening balances:

The firm will be auditing financial statements that were audited by a different
firm of auditors in the previous year. The opening balances which are the
closing balances for the previous year could impact the financial statements
for the current year. If the opening balances are misstated, there is a risk
that the balances for the current year may be misstated resulting in the
misstatement of the current year figures.

Audit response:
Ensure that the opening balances have been correctly carried forward to the
year under audit. There will be need for the audit team to be alert and look
out for transactions in the current year that give evidence of opening
balances.

(iii) Poor internal controls:

Internal controls are meant to help prevent and detect errors and fraud in an
organization. The internal controls in Lunsefwa Ltd have been described as
poor which means that errors and fraud may not be detected. Auditors do not
perform audit procedures on all transactions and balances. Poor internal
controls could result in material errors and fraud not being detected which
may result in the financial statements being misstated.

Audit response:
In view of the internal controls that have been described as poor, no reliance
on internal controls should be placed in designing the nature and extent of
further procedures. The audit team should perform substantive audit
procedures for all material items in the financial statements.

(iv) Irrecoverable accounts receivable:

The age analysis of the receivables figure for Lunsefwa Ltd shows that there
is an increase in the old debts. The company makes a provision of 2% of the
receivables at the period end. There is a risk that the receivables in the
statement of financial position are overstated. Further, the policy used in
calculating may not be in line with the provisions of IFRS 9 Financial
Instruments resulting in the misstatement of the receivables.

149
 Audit response:
Review the receivables age analysis and assess whether the provision made
in the financial statements is in line with the provisions of IFRS 9 and if not
discuss with management.

(v) Experience of the audit team:

The composition of the audit team is such that a majority of the team
members are new and do not have auditing experience. This increases
detection risk which could result in the financial statements being misstated.

Audit response:
Consider changing the composition of the audit team and replace
inexperienced audit team members with more experienced members. Close
supervision and guidance of the audit team could also reduce this risk.

(vi) Non-compliance with laws and regulations:

Lunsefwa Ltd is not compliant with the laws on minimum wages. The
company could suffer penalties for not following the law. There is a risk that
provisions in the financial statements are understated which could have
material impact on the financial statements resulting in them being misstated.

Audit response:
Discuss this matter with management and establish the consequences of the
non-compliance with laws and regulations. If there is likelihood that the
company will be charged penalties, establish if a provision has been made in
the financial statement. The auditors may seek advice of the in-house legal
person on the consequences of not complying with the relations.

(c) Suggested inventory count instructions:

(i) There should be no sales or receiving of goods on the day of the inventory
count.
(ii) Inventory count should take place on the same day at both locations.
(iii) Inventory count sheets should be pre-numbered and accounted for at the
end of the inventory count.
(iv) Counting should be in teams of two with one member counting and the other
recording the counts in the inventory sheets.
(v) The counts should be recorded in ink to avoid alterations.
(vi) Old, obsolete and slow moving items should be separated for determination
of provision for slow moving items and inventory valuation.
(vii) Inventory held for third parties should be identified and separated so that it is
not included in the inventory for Lunsefwa Ltd.
(viii) The inventory counting should be supervised by a senior person who is not
involved in handling inventory.

150
 (ix) Ensure that all inventory is clearly marked for easy of identification and the
warehouse is tidy and orderly

(d) (i) Audit work before inventory count:

o Gain knowledge of the inventory held by Lunsefwa Ltd including
quantities and values.
o Discuss with management on the inventory count arrangements that
have been put in place.
o Assess the risks with regards inventory considering matters such as
nature and volume of the inventory, methods of accounting for the
inventory and the related internal controls and accounting systems.
o Review the inventory count instruction to confirm that they are
adequate and can be relied upon for an effective inventory count.

(ii) Audit work during inventory count:

o The need to observe the way that the inventory count is being
conducted and if it is in accordance with the inventory instructions.
o The auditor to perform test counts which will be used to compare with
the counts by the client count teams.
o Ensure that the procedures for damaged, obsolete and slow moving
items are separately identified and auditor should obtain information
about the condition of inventory.
o Ensure third party inventory is separately identified for purposes of
following up that not included in final inventory valuation for the
company.
o Conclude whether the inventory count has been properly carried out
and can be relied as a basis for inventory valuation.
o During the count gain an impression of the value of inventory and
compare with the figure in the financial.

(iii) Audit work after the inventory count

o Trace items that were test counted to final inventory sheets
o Observe whether all count records have been included in the final
inventory sheets
o Inspect that inventory sheets to ensure they are supported by count
records
o Review replies from third parties about inventory held by or for them

151
SOLUTION TWO

(a) Eligibility to act as the auditor of a limited company under the provisions
of the Companies Act 2017

Section 254 of the Companies Act 2017 states that an auditing firm may be
appointed to be the auditor of a company if—

o at least one partner of the firm is ordinarily resident in Zambia;

o all or some of the partners, including the partner who is ordinarily resident in
Zambia, are qualified for appointment as auditors;
o the firm is not indebted to the company; or
o a partner of the firm is not a member, director or employee of the company
or a related company.
Section 255 of the Companies Act 2017 states that an auditor’s report shall be
signed, on behalf of a firm appointed as the auditor of a company, by a partner of
the firm who is a qualified auditor.

According to section 256 of the Companies Act 2017, a person shall not be appointed
as auditor of a company unless that person is qualified and is registered to practice
as an auditor by a body regulating the audit practice in Zambia.

The Companies Act 2017 states that auditor has the same meaning assigned to the
word in the Accountants Act, 2008 and other written laws relating to the regulation
of auditors and appointed to perform auditing function for a company.

The Accountants Act, 2008 defines an auditor as a person holding a practicing

certificate or a firm registered under the Act and appointed to perform any auditing
function.

The newly qualified CA Zambia graduate cannot sign on auditor’s report because he
or she does not hold a practicing certificate as required by the Accountants Act,
2008. He may have the theoretical knowledge but lacks the necessary competencies.
Before he or she is given certification, he or she will be required to sit and pass
competence practice examination.

(b) (i) & (ii) Governance structure for Ethics Ltd

Deficiencies Explanations Recommendations

(1) The CEO’s It is possible that the CEO could The shareholders
recommendations are never recommend people who may should put in a place
questioned by the shareholders. not question his decisions. This an independent
is a recipe for bad governance. nomination committee
made of non-executive
directors (NEDs).
(2) Suspension of induction of Induction is important for The suspension must
board members. effective participation of board be lifted immediately.
members. Its suspension is not
good for governance and will

152
 have a negative impact of board
performance.
(3) Poor attendance at board This means oversight of Only qualified and
meetings. management could be poor. experienced persons
Direction and control is likely to who can spare
be ineffective. sufficient time for
Ethics Ltd’s business
should be appointed as
board members.
(4) The AGM is poorly attended The shareholders will be unable Shareholders should be
to hold the directors encouraged to attend
accountable, which is bad for meetings by clearly
governance. This could explaining the
eventually encourage unethical consequences of their
behaviour. non-attendance on the
company and in
particular, their
investment.
(5) The board meets twice a Meeting twice a year is grossly The board must meet
year. insufficient. The board may not at least four times in a
be spending adequate time on year.
important issues.
(6) No mention of performance Without performance evaluation At least once a year,
evaluation for the board and its for the board, it will be very the performance of the
members. difficult to: board as a whole, its
 improve board committees and its
effectiveness members should be
 maximise strengths evaluated.
 tackle weaknesses
(7) The Audit Committee is This can create a self-review The Audit Committee
made of EDs and is headed by threat which not good for should consist entirely
the Finance Director. governance. The Audit of independent non-
Committee is not independent executive directors
as it reviews its own decisions. (NEDs).
(8) The Internal Audit function The composition of the Audit At the moment, the
reports to the Audit Committee. Committee simply means the Internal Audit function
Internal Audit function could report to the
effectively reports to board and thereafter to
management. This significantly Audit Committee once
impairs the Internal Audit it is properly
function’s independence which reconstituted.
is cardinal in good corporate
governance.

153
SOLUTION THREE

(a) Fraud and responsibility of auditor

Fraud is an intentional act by one or more individuals among management, those
charged with governance, employees or third parties involving the use of
deception to obtain an unjust or illegal advantage. Fraud may be perpetrated by
an individual, or colluded in, with people internal or external to the business.

In accordance with ISA 200 Overall Objectives of the Independent Auditor the
external auditor is responsible for obtaining reasonable assurance that the
financial statements, taken as a whole, are free from material misstatement,
whether caused by fraud or error.

Therefore, the external auditor has some responsibility for considering the risk of
material misstatement due to fraud.

In order to achieve this, auditors must maintain an attitude of professional

skepticism. This means that the auditor must recognize the possibility that a
material misstatement due to fraud could occur, regardless of the auditor’s prior
experience of the client’s integrity and honesty.

ISA 315 Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment goes further than this general
concept and requires that engagement teams discuss the susceptibility of their
clients to fraud.

The engagement team should also obtain information for use in identifying the
risk of fraud when performing risk assessment procedures.

To be able to make such an assessment auditors must identify, through enquiry,

how management assesses and responds to the risk of fraud. The auditor must
also enquire of management, internal auditors and those charged with
governance if they are aware of any actual or suspected fraudulent activity.

ISA 240 The Auditor’s Responsibility Relating to Fraud in an Audit of Financial

Statements states that the primary responsibility for prevention and detection of
fraud is with those charged with governance and the management of an entity.
The external auditor is responsible for maintaining professional scepticism
throughout the audit, considering the possibility of management overriding
controls, and recognizing that audit procedures effective for detecting errors may
not be effective for detecting fraud.

154
(b) Use of audit software to assist in the detection of fraud when auditing
receivables in the financial statements
o Calculation checks – For example, re-calculation of receivable balances for a
number of customers to ensure the mathematical calculation is correct.
o Reviewing the list of receivables and printing a list of customers with overdue
balances for further investigation.
o Detecting unreasonable receivables balances – extraction of details of
invoices that have been outstanding for long for further investigation.
o Detecting violation of system rules - For example, where other people besides
the accountant responsible for receivables have been overriding system rules
like using restricted passwords to amend customer details and balances.
(c) Conditions which must exist before the auditors decide to use negative
confirmation
o The risk of material misstatement has been assessed as low
o The auditor has obtained sufficient appropriate audit evidence on the
operating effectiveness of relevant controls
o The population consists of a large number of small, homogeneous account
balances
o A very low exception rate is expected
o The auditor is not aware of circumstances or conditions that would cause
customers to disregard the requests.
(d) Alternative procedures which might be used to verify receivable balances
o If a reply is not received from the initial confirmation letter, a second request
should be sent. If a reply is not received from this second request then the
receivable should be contacted by telephone. It is important that the client’s
permission is obtained prior to any direct contact.
o If direct confirmation is not possible or successful, the following procedures
should be used:
- Review cash received after the year-end to see if the balances have been
cleared
- Agree individual outstanding invoices to independent evidence such as
delivery notes signed by the customer
- Review credit notes issued after the year-end to ensure receivable should
be reduced
- Review make-up of receivable balance and ensure that it consists of
recent invoices
- Check authorization for any unusual entries (journals, contras) in the
accounts.

155
SOLUTION FOUR

(a) Inherent risk in management evidence and examples

Management may be under pressure to distort the financial statements e.g. to meet
the expectations put on a company as a result of a profit forecast or hide their own
fraudulent activities. On any audit, therefore, the auditor must try and make a
judgement on how reliable he thinks the management evidence will be and set his
testing levels accordingly.

Examples of management evidence include:

o Letter of representation – this is a letter addressed to the auditor concerning
material decisions made by management in the production of the financial
statements. The statements in this letter should always be supported by other
corroborative evidence, but it remains a crucial form of evidence at the
completion of any audit.
o Discussions with management during the audit concerning internal control
system. The auditor may note potential weakness in the system and will
therefore need management’s comments as to the accuracy of this
information.
o Evidence regarding other auditor queries raised e.g. problems with the
financial statements. The auditor may disagree with, say, the depreciation rate
of a particular class of asset. He will therefore need management's comment
on this.
(b) Provision in the Companies Act that gives some assurance over the quality
of management evidence
The Companies Act indicates that should the management give the auditor knowingly
false information, they are guilty of a criminal offence. The auditor therefore can
gain some assurance over the quality of evidence because of this statement.

(c) Purposes of using analytical procedures

ISA 520 Analytical Procedures gives detailed guidance in this area. Analytical
procedures mean the evaluation of financial and other information, and the review of
plausible relationships in that information. The review also includes identifying
fluctuations and relationships that do not appear consistent with other relevant
information or results.

The purposes of using analytical procedures at each of the three (3) stages of the
audit for Impala Ltd are:

o Risk assessment procedures – analytical procedures are used at the

beginning of the audit to help the auditor obtain an understanding of Impala
Ltd and assess the risk of material misstatement. Audit procedures can then
be directed to these “risky areas”.
o Analytical procedures as substantive procedures – analytical procedures can
be used as substantive procedures in determining the risk of material

156
 misstatement at the assertion level during work on the audit of the financial
statement audit for Impala Ltd.
o Analytical procedures in the overall review at the end of the audit –
analytical procedures help the auditor at the end of the audit in forming an
overall conclusion as to whether the financial statements as a whole are
consistent with the auditor’s understanding of Impala Ltd.
(d) Analytical procedures can be used on accruals as follows:
o Comparison of accruals to prior periods to identify unusual changes or
fluctuations in amounts
o Comparison of accruals with budgets and/or forecasts, or the expectations of
the auditor in order to determine the potential accuracy of the accrual
o Comparison of the accruals to subsequent payments.

157
SOLUTION FIVE

(a) Working papers and reasons for maintaining working papers

ISA 230 Audit Documentation establishes standards and provides guidance
regarding documentation in the context of the audit of financial statements.

Working papers are the documents created by the auditors when performing
their work.

The reasons for maintaining working papers include:

o Provides evidence of the auditor’s basis for a conclusion about the
achievement of overall objective of the audit
o Provides evidence that the audit was planned and performed in
accordance with ISAs and applicable legal and regulatory requirements
o Assists the engagement team to plan and perform the audit
o Assists members of the engagement team responsible for supervision to
direct, supervise and review the audit work
o Enables the engagement team to be accountable for its work
o Retains a record of matters of continuing significance for future audits
(b) Reasons for including the items on the working paper for Mambwe
Associates
o Page reference – to make it easy to file the audit working papers in the
audit file or locate the working paper should there be queries. This also
makes the work of reviewers easier.
o Client’s year-end date – to ensure audit working papers are filed in the
correct year’s audit file and are related to the correct accounting period under
audit.
o Signature of the reviewer – this gives confidence that any omissions have
been noted and appropriately corrected. One of the requirements of quality
control at the individual audit level is that audit work must be reviewed by
someone else other than the one who did the work. The signature is evidence
of such reviews.
o Test objective – this highlights the financial statement assertion(s) being
verified.
o How the sample size was determined – this details how the sample size
was determined and helps determine whether sufficient and appropriate audit
evidence was obtained for the testing.

(c) Main audit procedures regarding the completeness of trade payables

shown in the financial statements of Njokwe Ltd

o Obtain a listing of trade payables and agree the total to the general ledger by
casting and cross-casting
o Test for unrecorded liabilities by enquiries of management on how
unrecorded liabilities are identified and examining post year-end transactions
o Obtain selected suppliers’ statements and reconcile these to the relevant
suppliers’ accounts

158
o Examine files of unmatched purchase orders and supplier invoices for any
unrecorded liabilities
o Perform a confirmation for a sample of trade payables
o Compare the current year balances for trade payables with the previous
year’s.
o Compare the amounts owed to a sample of individual suppliers in the trade
payables listing with amounts owed to these suppliers in the previous year
o Compare the payables turnover and payables days to the previous year and
industry data.

END OF SOLUTIONS

159
 CA-ZAMBIA PROGRAMME EXAMINATIONS
_____________________________________

CA APPLICATION ADVANCED DIPLOMA IN ACCOUNTANCY

______________________________________

CA 2.4: TAXATION
____________________________

THURSDAY 16 JUNE 2022

____________________

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

________________________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes planning time. Use it to study the examination paper
carefully so that you understand what to do in each question.
2. This paper is divided into TWO (2) sections:
Section A: ONE (1) Compulsory Question.
Section B: Four (4) Optional Questions. Attempt any THREE (3) questions
3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name MUST not appear anywhere on your answer
booklet.
4. Do NOT write in pencil (except for graphs and diagrams).
5. Cell phones are NOT allowed in the examination room.
6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. A Taxation table is provided from page 2 to page 6 of the question paper.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

160
 TAXATION TABLE

Income Tax
Standard personal income tax rates
Income band Taxable amount Rate
K1 to K54,000 first K54,000 0%
K54,001 to K57,600 next K3,600 25%
K57,601 to K82,800 next K25,200 30%
Over K82,800 37.5%
Income from farming for individuals
K1 to K54,000 first K54,000 0%
Over K54,000 10%
Company income tax rates
On income from manufacturing and other 30%
On income from farming 10%
On income from mineral processing 30%
On income from mining operations 30%
Income from farming for individuals
K1 to K54,000 first K54,000 0%
Over K54,000 10%

Company Income Tax rates

On income from manufacturing and other 30%
On income from farming 10%
On income of Banks and other Financial 30%
Institutions
On income from mineral processing 30%
On income from mining operations 30%
On income from manufacture of products 15%
made out of copper cathodes
Mineral Royalty
Mineral Royalty on Copper

Range of Norm Price Mineral Royalty Rate

Less than US$4,500 5.5% of norm value
From US$4,500 to less than US$6,000 6.5% of norm value
From US$6,000 to less than US$7,500 7.5% of norm value
From US$7,500 to less than US$9,000 8.5% of norm value
From US$9,000 and above 10% of norm value
Mineral Royalty on other minerals
Type of mineral Mineral Royalty Rate
Base Metals (Other than Copper, Cobalt and Vanadium) 5% of norm value
Cobalt and Vanadium 8% of norm value
Energy and Industrial Minerals 5% of gross value
Gemstones 6% of gross value
Precious Metals 6% of norm value
 Capital Allowances
Implements, plant and machinery and commercial vehicles:
Wear and Tear Allowance – Standard wear and tear allowance 25%
Used in manufacturing and leasing 50%
Used in farming and agro-processing 100%
Used in mining operations 20%

Non- commercial vehicles

Wear and Tear Allowance 20%
Industrial Buildings:
Wear and Tear Allowance 5%
Initial Allowance 10%
Investment Allowance 10%

Low Cost Housing (Cost up to K20,000)

Wear and Tear Allowance 10%
Initial Allowance 10%

Commercial Buildings
Wear and Tear Allowance 2%

Farming Allowances
Development Allowance 10%
Farm Works Allowance 100%
Farm Improvement Allowance 100%
Presumptive Taxes
Turnover Tax 4%

Rental Income Tax

Annual Rental Income
K800,000 or below 4%
Above K800,000 12.5%

Presumptive tax for transporters

Seating capacity Tax per annum Tax per quarter

K K
Less than 12 passengers and taxis 1,080 270
From 12 to 17 passengers 2,160 540
From 18 to 21 passengers 4,320 1,080
From 22 to 35 passengers 6,480 1,620
From 36 to 49 passengers 8,640 2,160
From 50 to 63 passengers 10,800 2,700
From 64 passengers and over 12,960 3,240

162
 Property transfer tax
Rate of tax on realised value of land, land and buildings and shares 5%
Rate on realised value of intellectual property 5%
Rate of tax on realised value on a transfer or sale of a mining right 10%
Rate of tax on realised value on a mineral processing licence or an interest in
the mineral processing licence; 10%
Value Added Tax
Registration threshold K800,000
Standard Value Added Tax Rate (on VAT exclusive turnover) 16%

Customs and Excise duties on used motor vehicles

Aged 2 to 5 years Aged 5 years and

over
Motor vehicles for the transport of ten or Customs Excise Customs Excise
more persons, including the driver duty duty duty duty
K K K K
Sitting capacity of 10 but not exceeding 14 17,778 22,223 8,889 11,112
persons including the driver
Sitting capacity exceeding 14 but not 38,924 0 13,840 0
exceeding 32 persons
Sitting capacity of 33 but not exceeding 44 86,497 0 19,462 0
persons
Sitting capacity exceeding 44 persons 108,121 0 43,248 0

Aged 2 to 5 years Aged 5 years and

over
Motor cars and other motor vehicles
principally designed for the transport of Customs Excise Customs Excise
persons including station wagons and duty duty duty duty
racing cars
K K K K
Sedans
cylinder capacity not exceeding 1000 cc 12,490 10,824 7,136 6,185
Cylinder capacity exceeding 1000 cc but not 16,058 13,917 8,564 7,422
exceeding 1500 cc
Cylinder capacity exceeding 1500 cc but not 16,545 21,508 8,423 10,950
exceeding 2500 cc
Cylinder capacity exceeding 2500 cc but not 18,049 23,463 10,528 13,687
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 22,561 29,329 12,032 15,642

Hatchbacks
cylinder capacity not exceeding 1000 cc 10,705 9,278 7,136 6,185
Cylinder capacity exceeding 1000 cc but not 14,274 12,371 8,564 7,422
exceeding 1500 cc
Cylinder capacity exceeding 1500 cc but not 15,041 19,553 8,423 10,950
exceeding 2500 cc
Cylinder capacity exceeding 2500 cc but not 16,545 21,508 10,523 13,687
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 19,553 25,419 12,032 15,642

163
Station wagons
cylinder capacity not exceeding 2500 cc 16,545 21,508 9,024 11,731
Cylinder capacity exceeding 2500 cc but not 18,049 23,463 13,357 17,598
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc but not 22,561 29,329 18,049 23,463
exceeding 2500 cc
SUVs
Cylinder capacity not exceeding 2500 cc 21,057 27,374 9,024 11,732
Cylinder capacity exceeding 2500 cc but not 24,065 31,284 13,357 17,598
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 28,577 37,150 18,049 23,463

Aged 2 to 5 years Aged 5 years and

over
Motor vehicles for the transport of goods
-with compression-ignition internal Customs Excise Customs Excise
combustion piston engine (diesel or semi- duty duty duty duty
diesel):
K K K K
Single cab
GVW exceeding 1.0 tonne but not exceeding 21,926 9,501 8,770 3,801
1.5 tonnes
GVW exceeding 1.5 tonnes but not exceeding 26,311 11,402 15,348 6,651
3.0 tonnes
GVW exceeding 3.0 tonnes but not exceeding 30,697 13,302 17,541 7,601
5.0 tonnes
Double cabs
GVW exceeding 3 tonnes but not exceeding 5 30,697 13,302 24,119 10,452
tonnes
Double cabs GVW exceeding 3.0 tonnes but 33,766 14,632 26,531 11,497
not exceeding 5.0 tonnes, with spark
ignition internal combustion piston
engine
Panel Vans
GVW not exceeding 1.0 tonne 13,353 5,786 7,630 3,061
GVW exceeding 1.0 tonne but not exceeding 15,348 6,651 8,770 3,801
1.5 tonnes
GVW exceeding 1.5 tonnes but not exceeding 17,541 7,601 15,348 6,651
3.0 tonnes
GVW exceeding 3.0 tonnes but not exceeding 21,926 9,501 17,541 7,601
5.0 tonnes
Trucks
GVW up to 2 tonnes 13,907 10,662 6,413 4,916
GVW exceeding 2.0 tonnes but not exceeding 15,453 11,847 7,726 5,923
5.0 tonnes
GVW exceeding 5.0 tonnes but not exceeding 24,724 18,955 9,272 7,108
10.0 tonnes
GVW exceeding 10.0 tonnes but not exceeding 30,905 23,694 11,744 9,004
20.0 tonnes
GVW exceeding 20 tonnes 51,898 0 19,462 0
GVW exceeding 20 tonnes, with spark 37,086 28,432 13,907 10,662
ignition internal combustion piston
engine

164
Surtax
On all motor vehicles aged more than five (5) years from year of manufacture K2,000

Customs and Excise on New Motor vehicles

Duty rates on:

1. Motor cars and other motor vehicles (including station wagons)

principally designed for the transport of less than ten persons,
including the driver:
Customs Duty:
Percentage of Value for Duty Purposes 30%
Minimum Specific Customs Duty K6,000
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes
Cylinder capacity of 1500 cc and less 20%
Cylinder Capacity of more than 1500 cc 30%
2. Pick-ups and trucks/lorries with gross weight not exceeding 20
tones:
Customs Duty
Percentage of Value for Duty Purposes 15%
Minimum specific Customs Duty K6,000
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes 10%

3. Buses/coaches for the transport of more than ten persons

Customs Duty:
Percentage of Value for Duty Purposes 15%
Minimum Specific Customs Duty K6,000
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes
Seating Capacity of 16 persons and less 25%
Seating Capacity of 16 persons and more 0%
4. Trucks/lorries with gross weight exceeding 20 tonnes
Customs Duty:
Percentage of Value for Duty Purposes 15%
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes 0%

165
SECTION A

This question is compulsory and must be attempted.

QUESTION ONE

Nchelenge Plc is a company which is listed on the Lusaka Securities Exchange (LuSE)
carrying on farming and retail operations. In January 2022, the Directors estimated the
taxable business profits from retail operations and farming operations for the tax year 2022
to be as follows:
K
Estimated taxable profit from retail operations 2,600,000
Estimated taxable profits from farming operations 15,800,000

Provisional income tax relating to the tax year 2022, was computed correctly and paid on
the relevant due dates.

At the end of the tax year 2022, the actual final taxable profit from retail operations for the
tax year 2022, after capital allowances have been established to be K3,250,000. The final
taxable profits from farming operations for the tax year 2022, have however, not yet been
determined.

The summarised statement of profit or loss from farming operations show that Nchelenge
plc made a net profit as per accounts of K18,500,400 for the year ended 31 December 2022.
This net profit figure was arrived at after accounting for the following the items:

(1) Legal and professional fees which included K26,000 for legal fees in connection with
the grant of a new five-year lease of farm land, legal fees incurred in recovering
loans from major customers of K16,600, legal fees amounting to K280,000 in relation
to defending the company against action for alleged unfair dismissal of former
employees and professional fees in respect of accountancy services amounting to
K450,000.
(2) Bad debt expenses comprising increase in specific provision for bad debts of
K123,200, trade debts written off amounting to K236,400, staff loans written off
amounting to K120,000 and loans to customers previously written off subsequently
recovered of K76,300.
(3) Staff costs amounting to K26,500,000. These comprised director’s subscriptions to
the local fitness gym of K106,000, employee’s subscriptions to the lottery club of
K32,000, lease rentals for a house leased by the company on behalf of the Marketing
Director amounting to K80,000. The Marketing Director’s gross annual emoluments
are K840,000. This amount is included within the figure for staff wages above. The
leased house has a market value of K1,500,000. Also included within staff wages are
the gross earnings for the Managing Director of K800,000 who is accommodated in a
company owned house which had a market value of K1,800,000 in the tax year
2022. The remaining balance represents employee’s salaries and wages.
(4) Other operating expenses include expenditure on staff refreshments amounting to
K26,500, leasing and hire charges for business assets of K84,500, donation to an

166
 approved amateur sporting athletic club amounting to K350,000, entertaining
suppliers of farming inputs amounting to K12,400, theft of farm produce by farm
employees valued at K44,600, traffic fines imposed on directors whilst performing
company business amounting to K18,500, traffic fines for company drivers of
K36,400, the cost of free trade samples to customers for advertising purposes
amounting to K180,500, depreciation of K444,000, amortisation of intangible assets
of K486,000, animal feed of K567,200, political party donations of K850,000 and
miscellaneous allowable business expenses of K6,347,200.
(5) Other income credited to the accounts which included debenture interest of
K170,000 (net), Government of Zambia Bond interest of K382,500 (net), dividends of
K340,000 (net) and profit on sale of farm implements of K28,000. Withholding tax
where applicable was paid on the appropriate due date.

Additional information is available:

The following additional information is available:

(i) On 1 January 2022, the income tax values of implements, plant and machinery
relating to farming operations were as follows:
ITV b/f Cost
K K
Toyota Hilux Double cab van (3,000cc) 324,000 540,000
Pool car (1,800cc) 232,800 388,000
Toyota Landcruiser Prado (2,200cc) 480,000 600,000

The pool car was used in the operations of the Marketing Department but it had
private use of 30% by the company’s Marketing Director. The Toyota Hilux Double
cab van is the Managing Director’s personal to holder motor car and it has a cylinder
capacity of 3,000 cc, his private use of the car is 60%. The Toyota Land Cruiser
Prado is the Finance Director’s personal to holder motor car and it has a cylinder
capacity of 2,600 cc. His private use of the car was 30%.

The company sold farm implement for K165,000 on 1 April 2022. The original cost of
this was K150,000 and the Income tax value at 1 April 2022 was zero.

(ii) The company incurred the following capital expenditure relating to farming business
during the year:
K
Construction animal dipping tanks 875,000
Purchase of animal feed dispensing machine 175,000
Construction of piglet barn 300,000
Construction of farm dwellings for farm employees
K120,000 each unit 600,000
Expenditure on prevention of soil erosion 190,000
Development expenditure on Citrus fruit plantation 450,000

167
Required:

(a) Calculate the amount of provisional income tax paid by Nchelenge plc for the tax
year 2022. You should clearly state the due date when the provisional income tax
was paid and the amount paid on each due date.
(7 marks)

(b) Calculate the maximum capital allowances claimable by Nchelenge plc for the tax
year 2022.
(11 marks)

(c) Compute the final tax adjusted farming profit for Nchelenge plc for the tax year
2022.
(12 marks)

(d) Calculate the final amount of income tax payable by Nchelenge plc for the tax year
2022. (10 marks)
[Total: 40 Marks]

168
SECTION B

Attempt any three (3) questions in this section.

QUESTION TWO

Joseph Mubita had been employed at GHS Limited until 31 August 2022, when he retired
from employment. In the year 2022 he was entitled to a basic salary amounting to K44,200
per month. He was also entitled to a housing allowance amounting to 22% of the basic
salary and a transport allowance amounting to 13% of the basic salary. In January 2022, he
was paid a uniform allowance amounting to K16,000.

In February 2022, he received two bonuses. The first bonus amounted to K12,800 which
was declared in December 2021 for meeting the performance targets for the last quarter of
2021. The bonus could not be paid in December 2021 due to liquidity problems. The second
bonus was a general-purpose bonus amounting to K15,000 which was declared in January
2022. The company had always paid monthly life assurance premiums amounting to K1,200
on his behalf. During the year 2022 the company paid a total amount of K21,400 towards
his children’s school fees.

On 3 May 2022, he received a labour day award consisting of a four-plate cooker valued at
K17,000 and cash amounting to K5,000.

He was provided with free meals at the company’s staff canteen. The cost of these meals on
the company amounted to K1,800 per month.

Upon retiring on 31 August 2022, he was paid the following benefits in addition to the final
salary:

K
Pension 421,300
Severance pay 47,900
Accrued leave pay 51,600
Repatriation pay 22,100

During the year ended 31 December 2022, he made the following payments:

K
Donation to political party 2,900
Donation to approved public benefit organization 11,100
Professional subscription 2,800
Travelling expenses (from home to the office) 15,000
Purchase of uniforms 14,000
Pay as you earn 102,360

The company had always deducted employees’ NAPSA contributions at a rate of 5% of his
gross employment earnings and National Health Insurance Management Authority (NHIMA)
contributions at the rate of 1% of his basic salary.

During the year ended 31 December 2022, he received the following investments income:

169
 K
Dividends from TXL Limited 17,000
Dividend from KMM mining Plc 21,000
Fixed deposit interest 12,000
Royalties 34,850

The above amounts represent the actual amounts of investments income received.
Withholding tax had been deducted at source where applicable.

Required:

(a) Calculate the amount of withholding tax paid by Joseph on each type of investment
income and the total withholding tax paid. (4 marks)

(b) Compute the amount of income tax payable by Joseph Mubita for the tax year 2022.
You should indicate in your computation by the use of a zero (0) any items of income
or benefits which are not taxable. (16 marks)
[Total: 20 Marks]

QUESTION THREE

CBG Solutions Limited is a Zambian resident company engaged in manufacturing. The

company imported the following motor vehicles in February 2022.

(1) A second hand Toyota Noah motor car with a cylinder capacity of 2,000 cc at a cost
of US$5,000 free on board. Insurance costs and freight charges amounted to
US$1,900 and US$3,100 respectively. Other incidental costs incurred up to the point
of entry into Zambia amounted to US$1,200. Costs incurred by the company to
register the vehicle in Zambia amounted to K5,000. The Toyota Noah is classified as
a station wagon. The Toyota Noah was manufactured in 2020.

(2) A second hand twenty (20) tonne Mitsubishi Canter Truck at a cost of US$10,000
free on board. Insurance costs and freight charges amounted to US$2,000 and
US$3,500 respectively. Other incidental costs incurred by the company up to the
point of entry into Zambia amounted to US$1,500. Costs incurred by the company
to register the motor vehicle in Zambia amounted to K8,000. The Mitsubishi Canter
Truck was manufactured in 2020.
The exchange rate quoted by the local Bureau de Change at the date of importation was
K16.90 per US$1. CBG Solutions paid for the motor vehicles at an exchange rate of K17.10
per US$1 which it had agreed with a financial institution in a forward contract. The
exchange rate quoted by the Bank of Zambia at the same date was K16.85 per US$1 which
the Commissioner General approved.

Required:

(a) Explain the conditions to be met for the customs officers to use transaction value
method in determining the value for duty purposes. (4 marks)

(b) Explain the functions of the customs services of the Zambia Revenue Authority.
(5 marks)

170
(c) Calculate the amount of import taxes paid by the company on the importation of the
following motor vehicles:

(i) Toyota Noah Station Wagon. (5½ marks)

(ii) Mitsubishi Canter Truck. (5½ marks)

[Total: 20 Marks]

QUESTION FOUR

Mukando Limited is a Zambian resident company registered for Value Added Tax (VAT).
During the year ended 31 December 2022, the company had the following transactions:

(1) Revenue
The revenue was made up of the following:
K
Exempt sales 500,000
Zero-rated sales 400,000
Standard-rated sales 1,600,000
Total sales 2,500,000

30% of standard-rated sales were made to non-registered customers.

(2) Purchases
The purchases comprised of the following:
K
Exempt purchases 300,000
Zero-rated purchases 300,000
Standard-rated purchases 1,000,000
Total 1,600,000

25% of the standard-rated purchases were made from non-registered suppliers.

(3) Operating expenses

Operating expenses comprised the following:
K
Entertaining customers (VAT inclusive) 16,240
Entertaining employees (VAT inclusive) 24,940
Telephone expenses (VAT inclusive) 10,672
Internet services (VAT inclusive) 29,000
Petrol 26,000
Diesel 20,000
Stationery expenses (VAT inclusive) 39,324
General overheads (VAT inclusive) 255,200
Total 421,376

(4) Non-current assets

The company bought the following non-current assets:
K
Toyota Hilux (Double Cab) Van (VAT inclusive) 240,000

171
 Office equipment (VAT inclusive) 81,200
Mitsubishi Light truck (VAT inclusive) 185,600
Non-current assets are used to make both taxable and exempt supplies in proportion to
sales.

(5) Unless stated otherwise all the above figures are exclusive of VAT.

(6) All the expenses were incurred in making both taxable and exempt supplies in proportion
to sales.

Required:

(a) Explain the differences between zero-rated supplies and exempt supplies in the
context of VAT.
(3 marks)

(b) Prepare a computation of VAT payable or refundable for the year ended 31
December 2022. You should indicate by the use of zero (0) for all the items on which
VAT is neither payable nor claimable. (15 marks)

(c) Calculate the amount of the penalty to be charged on the company if the VAT
payable calculated in part (b) above is paid late by 13 days.
(2 marks)
[Total: 20 Marks]

172
QUESTION FIVE

PNC Mining Company Limited is a Zambian resident company which completed the
exploration of base metals in 2021 in Sinazongwe District of Southern Province. The
company was issued with a license to extract vanadium and within the same year it started
mining operations meant for the export market in China. The company’s gross sales of
vanadium for the year to 31 December 2022 were K2,080,000. The value of the sales was
the norm value for the purposes of mineral royalty tax. During the year ended 31 December
2022, the company made profit before taxation of K740,000 after dealing with the following
items of income and expenditure:

Income:
K
Dividends received from TPX Limited, a company resident in Zambia 126,900
Interest from a fixed deposit account with a Zambian bank 73,100
Debenture interest from another Zambian company 29,750

All of the above income represents the actual amounts received. Withholding tax charged at
source

Expenditure:

(1) Mineral royalty tax was paid during the year and charged in the statement of profit
or loss.

(2) Depreciation charged for the year on non-current assets was K77,300.

(3) Expenditure on repairs and maintenance comprised:

K
Construction of clinic on a mine site 610,000
Construction of road in the local council Township 320,000
Repairs to the staff mine recreation club 60,000
Other repairs and maintenance (all allowable) 38,500

(4) Entertainment expenditure included; entertaining foreign customers of K95,000,

entertaining local suppliers of K70,000, entertaining staff of K45,000.

(5) The company made donations of K50,000 to a Public Benefit Organisation which is
approved by the minister of Finance and National Planning.

(6) Professional and legal fees charged during the year were as follows:
K
Accountancy and audit fees 105,000
Legal fees in connection with issue of share capital 30,000
Legal fees for the recovery of loans from former employee s 15,000
Legal fees in connection with recovery of trade debts 12,000

173
(7) A foreign exchange loss of K25,000 arising from translating US dollars held in a US
dollar account.

Additional information:

(i) The provisional income tax paid by the company during the tax year 2022, was
K386,100.

(ii) At 1 January 2022, the company held the following assets which were acquired a
year ago from local Zambian vendors and paid for in Zambian Kwacha at the
following costs:

K
Mining equipment 910,000
Office equipment 340,000
Delivery truck 523,420

Required:

(a) Calculate the amount of mineral royalty tax paid by PNC mining company for the tax
year 2022 and explain its income tax treatment when computing the taxable profit
for the year. (2 marks)

(b) Compute the capital allowances claimable on implements, plant and machinery and
other qualifying mining expenditure. (5 marks)

(c) Calculate tax adjusted mining profit for PNC mining company for the tax year 2022.
(7 marks)

(d) Calculate the company income tax payable by PNC mining company for the tax year
2022. (6 marks)
[Total: 20 Marks]
END OF PAPER

174
CA2.4 SUGGESTED SOLUTION

SOLUTION ONE

(a) COMPUTATION OF PROVISIONAL INCOME TAX

K
Estimated Taxable profit from retail operations 2,600,000
Estimated Taxable profit from retail operations 15,800,000
18,400,000

Provisional Income Tax on:

Non-farming income (K2, 600,000 x 30%) 780,000
Farming income (K15, 800,000 x 10%) 1,580,000
2,360,000

Provisional income tax paid per quarter

(K2,360,000/4) 590,000

The relevant due dates and amounts paid are as follows:

Instalment Quarter ended Due Date

Amount Paid
K
1st 31 March 2022 10 April 2022 590,000
2nd 30 June 2022 10 July 2022 590,000
3rd 30 September 2022 10 October 2022 590,000
4th 31 December 2022 10 January 2023 590,000
Total 2,360,000

(b) COMPUTATION OF CAPITAL ALLOWNACES

K K
Toyota Hilux
Wear & tear allowance
(K540, 000 x 20%) 108,000
Pool car
Wear & tear allowance
(K388, 000 x 20%) 77,600
Toyota Land cruiser
Wear & tear allowance
(K600, 000 x 20%) 120,000
Farm implements
ITV b/f 0
Proceeds (restricted to cost) (150,000)
(150,000) (150,000)
Dipping Tank
Farm improvement allowance

175
 (K875,000 x 100%) 875,000
Animal feed dispensing machine
Wear & tear allowance 175000
(K175,000 x 100%)
Piglet Barn
Farm improvement allowance
(K300,000 x 100%) 300,000
Farm dwellings
Farm improvement allowance
Restricted to K20,000x 100% x 5 100,000
Prevention of Soil erosion
Farm works allowance
(K190,000 x 100%) 190,000
Development of plantation
Development allowance
(K450,000 x 10%) 45,000
1,840,600

(c) COMPUATION OF TAXABLE FARMING PROFIT

K K
Net Profit as per accounts 18,500,400
Add:
Amortisation 486,000
Legal fees for grant of new lease 26,000
Legal fees for loan recovery from major customer 16,600
Staff loans written off 120,000
Accommodation benefit (MD's Accommodation)
(K800,000 x 30%) 240,000
Staff refreshments 26,500
Entertaining suppliers 12,400
Traffic fines for directors 18,500
Depreciation 444,000
Donation to political parties 850,000
Personal to holder motor car benefit:
- MD's Toyota Hilux 40,000
- FD's Toyota Land cruiser 30,000
2,310,000
20,810,400
Less
Debenture interest 170,000
GRZ bond interest 382,500
Dividends 340,000
Profit on sale of farm implements 28,000
Customer loans recovered 76,300
Capital allowances (W) 1,840,600
(2,837,400)
Final Taxable Profits 17,973,000

176
(d) NCHELENGE PLC
COMPANY INCOME TAX COMPUTATION FOR THE TAX YEAR 2022
K
Non-farming income
Taxable Profit from retailing 3,250,000
Debenture interest (K170,000 x 100/85) 200,000
Interest on GRZ Bonds (K382,500 x 100/85) 450,000
Total non-farming income 3,900,000
Taxable farming profit 17,973,000
Total taxable income 21,873,000

Company income Tax on non-farming income

(K3,900,000 x 30%) 1,170,000
Company income Tax on farming income
(K17,943,000 x 10%) 1,797,300
2,967,300
Less Tax already paid
WHT on loan note interest
(K200,000 x 15%) (30,000)
WHT on Copy right royalties
(K380,000 x 15%) (67,500)
Provisional income tax paid (2,360,000)
Company income Tax payable 509,800

177
SOLUTION TWO

(a) COMPUTATION OF WITHHOLDING TAX FOR THE YEAR 2022

K
Dividends from TXL Limited: K17,000 x 15/85 3,000
Dividends from KMM mining plc 0
Fixed deposit interest 0
Royalties: K34,850 x 15/85 6,150
Total withholding tax 9,150

(b) JOSEPH MUBITA

PERSONAL INCOME TAX PAYABLE FOR THE YEAR 2022
K K
Basic salary: K44,200 x 8 353,600
Housing allowance: K353,600 x 22% 77,792
Transport allowance: K353,600 x 13% 45,968
Uniform allowance 16,000
Performance target bonus 0
General purpose bonus 15,000
Life assurance premiums: K1,200 x 8 9,600
Children’s school fees 21,400
Labour day award 0
Free meals 0
Pension 0
Severance pay 0
Repatriation pay 0
Accrued leave pay 51,600
590,960
Investment income
Royalties: K34,850 x 100/85 41,000
631,960
Less:
Donation to public benefit organisation 11,100
Professional subscription 2,800
Cost of uniforms 14,000
(27,900)
Taxable income 604,060

Income Tax
First K54,000 @0% 0
Next K3,600 @ 25% 900
Next K25,200 @30% 7,560
Excess (K604,060 – K82,800) @37.5% 195,473
Income tax liability 203,933
Less:
WHT- Royalties: K41,000 x 15% (6,150)
Pay as you earn (102,360)
Income tax payable 95,423

178
SOLUTION THREE

(a) The following are the conditions to be met:

(1) There should be no restrictions to the use of the imported goods.
(2) There should be no conditions to deter the determination of the value for duty
purposes.
(3) No part of the proceeds arising on resale of the imported goods should accrue to the
seller (exporter), unless it is included in the value.
(4) No relationship should exist between the importer and the exporter which can
influence the value.
(1 mark per valid point up to 4 marks)

(b) The functions of the customs services of ZRA are as follows:

(1) Collection and management of customs and excise duties and other duties.
(2) Licensing and control of warehouses and premises for the manufacturing of certain
goods.
(3) Regulation of imports and exports.
(4) Providing statistical data to the Government on imports and exports.
(5) Facilitation of international trade, travel and movement of goods.
(1 mark per valid point up to 5 marks)

(c) Computation of import taxes on:

(i) Toyota Harrier Car
$
Cost 5,000
Insurance 1,900
Freight charges 3,100
Incidental costs 1,200
VDP in US$ 11,200
Exchange rate x K16.85
VDP in ZMW 188,720

Import taxes Value of the Import

vehicle taxes
K K
Value for duty purposes 188,720
Customs duty 16,545 16,545
Excise duty 21,508 21,508
VDP for import VAT 226,773
Import VAT @16% 36,284 36,284
Total value of the vehicle 263,057
Total import taxes 74,337

(ii) Mitsubishi Canter Truck

$
Cost 10,000
Insurance 2,000
Freight charges 3,500
Incidental costs 1,500
VDP in US$ 17,000
Exchange rate x K16.85

179
VDP in ZMW 286,450

Value of the Import

vehicle taxes
K K
Value for duty purposes 286,450
Customs duty 30,905 30,905
Excise duty 23,694 23,694
VDP for import VAT 341,049
Import VAT @16% 54,568 54,568
Total value of the vehicle 395,617
Total import taxes 109,167

180
SOLUTION FOUR

(a) The following are the differences between zero-rated supplies and exempt supplies:
(1) The trader dealing in zero-rated supplies is a taxable person for the purposes of
value added tax whereas the person dealing in exempt supplies is not.
(2) A trader dealing in taxable supplies may be permitted to register for value added tax
if he wishes to do so whereas a trader dealing in exempt supplies may not be
permitted.
(3) A trader dealing in taxable supplies can claim the input VAT on purchases and
expenses for as long as the input VAT is recoverable whereas a trader dealing in
exempt supplies cannot recover the input VAT.
(1 mark per valid point up to 3 marks)

(b) VAT payable

Output VAT K K
Exempt sales 0
Zero-rated sales 0
Standard-rated sales
(K1,600,000 x 16%) 256,000
256,000
Input VAT
Exempt purchases 0
Zero-rated purchases 0
Standard-rated purchases
(K1,000,000 x 75% x 16%) 120,000
Entertaining customers 0
Entertaining employees 0
Telephone expenses 0
Internet services 0
Petro (zero-rated) 0
Diesel (zero-rated) 0
Stationery expenses
(K39,324 x 4/29 x 80%) 4,339
General expenses
(K255,200 x 4/29 x 80%) 28,160
Toyota Hilux double cab van 0
Office equipment
(K81,200 x 4/29 x 80%) 8,960
Hino light truck
(K185,600 x 4/29 x 80%) 20,480
(181,939)
VAT payable 74,061

Recoverable input VAT = K400,000 + K1,600,000 x 100

K2,500,000
= 80%
(c) The penalty for late payment of VAT is calculated at a rate of 0.5% per day the VAT
remains unpaid. The penalty payable if the VAT calculated in part (b) is paid late by
thirteen (13) days will be: K74,061 x 0.5% x 13 = K4,814.

181
SOLUTION FIVE

(a) Mineral royalty tax = K2,080,000 x 8% = K166,400

The above amount of mineral royalty will be allowable when computing the taxable
profit of the company. Since the amount has already been charged as an expense to
the statement of profit or loss, no adjustment will be required.

(b) COMPUTATION OF CAPITAL ALLOWANCES FOT THE TAX YEAR 2022

K
Construction of clinic (610,000 x 20%) 122,000
Mining equipment (910,000 x 20%) 182,000
Office equipment (340,000 x 25%) 85,000
Delivery Truck (523,420 x 25%) 130,855
519,855
(c) PNC MINING COMPANY
COMPUTATION OF TAXABLE BUSINESS PROFIT FOR THE TAX YEAR 2022
K K
Profit before tax 740,000
ADD:
Depreciation 77,300

Construction of clinic 610,000

Construction of road 320,000
Entertaining foreign customers 95,000
Entertaining suppliers 70,000
Legal fees – Issue of share capital 30,000
Legal fees – recovery of loan 15,000
Exchange loss 25,000
1,242,300
1,982,300
LESS:
Dividends 126,900
Fixed deposit interest 73,100
Debenture interest 29,750
Capital allowances (W) 519,855
(749,605)
Taxable business profit 1,232,695

182
(d) PNC MINING
COMPANY INCOM TAX COMPUTATION FOR THE TAX YEAR 2022
K
Taxable mining profit 1,232,695
Fixed deposit interest
(K73,100 x 100/85) 86,000
Debenture interest
(K29,750 x 100/85) 35,000
121,000
1,353,695

Company Income Tax on:

Mining profits
(K1,232,695 x 30%) 369,809
Non-Mining profits
(K121,000 x 30%) 36,300
406,109
Provisional income tax (386,100)
Company income tax [payable 20,009

END OF SOLUTIONS

183
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA ZAMBIA APPLICATION ADVANCED DIPLOMA IN ACCOUNTANCY

___________________

CA 2.5: FINANCIAL MANAGEMENT

___________________

FRIDAY 17 JUNE 2022

___________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO (2) sections:

Section A: One (1) Compulsory scenario question.

Section B: Four (4) Optional scenario Questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number
on the front of the answer booklet. Your name must NOT appear
anywhere on your answer booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be
taken as an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

184
SECTION A

This question is compulsory and must be attempted

QUESTION ONE – (COMPULSORY)

JOLG Inc. is a Zambian based company which deals in specialized equipment and
machinery. The company has been reviewing its investment and financing decisions to
optimize its operations. JOLG Inc. has limited budget and also needs to improve its credit
ratings in order to obtain external financing for its investments.

The finance manager of JOLG Inc. believes that one way of optimizing its operations is
through cost management and therefore, reviewing the asset replacement policy would be
important. Further, the financing of the replacement of assets with identical ones shall be
done in the year of the optimal replacement period.

Replacement Policy

JOLG Inc. has a machine that cost K72.1 million with a maximum life of three (3) years
which is under consideration for replacement with an identical one. The following financial
information relates to the machine:

Year 1 2 3
K’million K’million K’million
Running Costs 7.21 9.61 12.1
Estimated Residual 24.1 16.61 9.61
Value

Financing of the asset

In order to finance the equipment, JOLG Inc. is considering whether to buy a new
equipment at a cost of K100 million or alternatively to lease it for annual rentals payable at
the start of each year of K35 million. If JOLG Inc. decides to buy the equipment, the
company will need to borrow funds at a before tax interest cost of 10% per year. Buying the
equipment will require payment for it on the last day of current financial year. JOLG Inc. will
use the equipment for a period of six (6) years, with a disposal value after 6 years of K10
million. The corporate tax is payable annually in arrear at an annual rate of 30%. The
equipment qualifies for capital allowances at 25% per year on a reducing balance basis.

Other information

The company has a gearing level of 30% and an equity beta of 1.3. The market expected
rate of return is 15% and the risk free rate of return is 8%. JOLG Inc. has issued
irredeemable debt of K100 nominal value with annual interest of 9% per year, based on the
nominal value. The current market price of this debt is K90.

185
Required:

(a) Explain the relationship between investment and financing decisions (4 marks)

(b) Evaluate the optimal replacement cycle for the existing machine. (13 marks)

(c) Evaluate whether JOLG Inc. should lease or buy the new equipment. (17 marks)

(d) Discuss the reasons that may cause capital rationing for JOLG Inc. (6 marks)

[Total: 40 Marks]

186
SECTION B

There are FOUR (4) questions in this section.

Attempt any THREE (3) questions in this section.

QUESTION TWO

Tiyende Ltd is an SME with positive growth prospects. Recently, the management of the
company has been assessing its working capital cash cycle. Arising from the assessment,
management is considering initiatives to reduce the cash cycle.

Tiyende Ltd currently monitors its working capital cash cycle through cash, Receivables,
Inventory and Payables. Management is considering an initiative to reduce the cash cycle in
order to manage the size and cost of the company’s working capital.

Below are the components of the current working capital of Tiyende Ltd.

K’000 Days
Cash 1,000
Receivables 4,000 30
Inventory 6,000 60
Payables 4,000 40

Management has proposed, the following changes to the current working capital of Tiyende
Ltd:

Balance Sheet Item Change

Cash 50% increase
Receivables 25% reduction
Payables 25% increase
Current ratio Reduction to 1.9 times

The cost of short term funds to the company is given as 20% per annum.

Required:

(a) Calculate the company’s net working capital under the current and proposed policies.

(5 marks)

(b) Compute the change in the company’s working capital financing and advise
management whether to implement the new policy. (3 marks)

(c) Explain two (2) benefits of the cash operating cycle in ascertaining the working
capital needs of the company. (4 marks)

187
(d) Explain three (3) advantages to be derived from an effective management of
Accounts Receivables. (3 marks)

(e) Briefly explain five (5) important functions performed by the Finance Manager for
Tiyende Ltd, in order for the company to achieve its objectives. (5 marks)
[Total: 20 Marks]

QUESTION THREE

Western Transport Plc, a trucking company, wishes to increase its fleet of trucks. Senior
management has decided to finance this expansion program by raising the funds from
existing shareholders through a one for five rights issue.

Western Transport Plc. has 500,000 ordinary shares with a par value of K15 per share. The
management team has decided that the rights issue be issued at a 25% discount to the
current market value in order for the share issue to be successful. The shares of the
company are currently being traded on the Lusaka Stock Exchange at a price: earnings ratio
of 4 times. You are advised to ignore share issue costs.

The most recent statement of profit or loss of the company is as follows:

Statement of Profit or Loss for the year ended 31 December 2021.

K000

Sales revenue 65,116

Cost of sales (17,700)

Gross Profit 47,416

Less: operating expenses (24,960)

Profit before interest and tax 22,456

Loan interest payable (1,248)

Profit before tax 21,208

Corporation tax@25% (5,302)

Profit after taxation 15,906

Required:

(a) Discuss the arguments for and against the use of a rights issue of shares rather than
a public issue of shares. (6 marks)

(b) Calculate the theoretical ex-rights price of an ordinary share in Western Transport
Plc. (6 marks)

188
(c) Calculate the price at which the rights in Western Transport Plc. are likely to be
traded. (2 marks)

(d) Evaluate, at the time of the rights issue, the impact to an investor who holds 2,000
ordinary shares before and after the announcement of the rights issue in the
following situations:

(i) Option 1 – Taking up the rights issue.

(ii) Option 2 – Selling the rights.
(iii) Option 3. – Doing nothing.
(6 marks)
[Total: 20 Marks]

QUESTION FOUR

GreyRhino is a company that is listed on a major stock exchange. The company has struggled to

maintain profitability in the last two years due to poor economic conditions in its home country

and as a consequence it has decided not to pay a dividend in the current year. However,

there are now clear signs of economic recovery and GreyRhino is optimistic that payment of

dividends will resume in the future. Forecast financial information relating to the company is

as follows:

Year 2022 (Current) 2023 2024

Earnings (K’000) 3,000 3,600 4,300
Dividends (K’000) nil 500 1,000

The company is optimistic that earnings and dividends will increase after 2024 at a constant
annual rate of 3% per year. GreyRhino currently has a before-tax cost of debt of 5% per year
and an equity beta of 1.6, and on a market value basis, the company is currently financed 75%
by equity and 25% by debt.

During the course of the last two years the company acted to reduce its gearing and was able
to redeem a large amount of debt. Since there are now clear signs of economic recovery,
GreyRhino plans to raise further debt in order to modernize some of its non-current assets and
to support the expected growth in earnings. This additional debt would mean that the capital
structure of the company would change and it would be financed 60% by equity and 40% by
debt on a market value basis. The before-tax cost of debt of GreyRhino would increase to 6%
per year and the equity beta of GreyRhino would increase to 2.

The risk-free rate of return is 4% per year and the equity risk premium is 5% per year. In order
to stimulate economic activity the Government has reduced the profit tax rate to 20% per year.
The current average price: earnings ratio of listed companies similar to GreyRhino is 5 times.

189
Required:

(a) Estimate the value of GreyRhino using the price: earnings ratio method and discuss the
usefulness of the variables that you have used. (4 marks)

(b) Calculate the current cost of equity of GreyRhino, and determine the value of the company
using the dividend valuation model. (4 marks)

(c) Calculate the current weighted average after-tax cost of capital of GreyRhino, and the
weighted average after-tax cost of capital following the new debt issue, and comment on the
difference between the two values. (6 marks)

(d) Discuss how the shareholders of GreyRhino can assess the extent to which they face any of
the following risks, explaining in each case the nature of the risk being assessed:
(i) Business risk;
(ii) Financial risk;
(iii) Systematic risk
(6 marks)
[Total: 20 Marks]
QUESTION FIVE

A Small and Medium Enterprise (SME), Soya Foods Ltd intends to borrow K500, 000 to
finance a project involving an expansion of its existing factory. It has obtained an offer from
Arc Bank. The term sheet of the loan facility is as follows:

Annual interest rate: 24%

Duration: 2 years
Interest method: compound interest with quarterly compounding
Payment plan: equal instalments at the end of each quarter

Required:

(a) (i) Compute the quarterly instalment payment . (3 marks)

(ii) Prepare a loan amortization schedule to show the periodic interest charges,
instalment payments, principal payments, and balance of the loan at the end
of each quarter. (7 marks)

(b) Explain two (2) circumstances under which the weighted average cost of capital can
be used in investment appraisal. (4 marks)

(c) Explain three (3) limitations of the dividend growth model (DGM) in estimating the
cost of equity of a company. (6 marks)
[Total: 20 Marks]
END OF PAPER

190
191
192
193
CA2.5 SUGESTED SOLUTIONS

SOLUTION ONE – (COMPULSORY)

a) Relationship between investment decisions and financing decisions.
Firm’s investment decisions are shown to be directly related to financing decisions in
that investment decisions of the firm with high creditworthiness are extremely
sensitive to the availability of internal funds. Less creditworthy firms are much less
sensitive to internal fund availability. Financing decisions includes an inflow of cash
and investment decisions includes outflow of cash. Investment decisions will impact
financing decisions. Every time a firm makes an investment decisions, it has to
decide on the form of financing that will follow that decision.
b)
One year Cash flow (K’m) d.f@14% P.V. (K’m)
replacement cycle
0 (72.1) 1 (72.1)
1 (7.21) 0.877 (6.323)
1 24.1 0.877 21.136
NPV (57.287)

Equivalent Annual Cost = K57.287million/0.877 = K65.322million

One year Cash flow (K’m) d.f@14% P.V. (K’m)

replacement cycle
0 (72.1) 1 (72.1)
1 (7.21) 0.877 (6.323)
2 (9.61) 0.769 (7.390)
2 16.61 0.769 12.773
NPV (73.04)

Equivalent Annual Cost = K73.04million/1.647 = K44.35million

One year Cash flow (K’m) d.f@14% P.V. (K’m)

replacement cycle
0 (72.1) 1 (72.1)
1 (7.21) 0.877 (6.323)
2 (9.61) 0.769 (7.390)
3 (12.1) 0.675 (8.168)
3 9.61 0.675 6.487
NPV (87.494)

Equivalent Annual Costs = K87.494million/2.322 = K37.68million

The machine should be replaced every after three (3) years.

194
 WORKINGS

Cost of Capital

kd = 9/90 x 100% =10%(1-0.30) = 7%

ke= 8% + 1.3(15%-8%) = 17.1%

WACC = (17.1% x 0.7) + (7% x 0.3) = 14%

c) Students must note that the company planned to finance the replacement following
the optimal replacement cycle and therefore, the cash flows start from year 3 which
is the optimal replacement cycle.
After tax cost of debt= 10% x (1-0.3) = 7%

Option to Lease

Year 3 4 5 6 7 8
K’m K’m K’m K’m K’m K’m
Lease (35) (35) (35) (35)
Tax saved 10.5 10.5 10.5 10.5
Net cash flow (35) (35) (24.5) (24.5) 10.5 10.5
Discount@7% 0.816 0.763 0.713 0.666 0.623 0.582
Present Values (28.56) (26.71) (17.47) (16.32) 6.54 6.11

NPV (76.41)

Option to Buy

Year 3 4 5 6 7 8
K’m K’m K’m K’m K’m K’m
Cost (100) 10
Tax relief on CA 7.5 5.63 4.22 3.16 6.49
Net cash flow (100) 7.5 5.63 4.22 3.16 6.49
Discount@7% 0.816 0.763 0.713 0.666 0.623 0.582
Present Values (81.6) 5.72 4.01 2.81 1.97 3.78

NPV (63.31)

The option to buy is much cheaper than to Lease and therefore, JOLG Ltd should buy the
machine.

Capital allowances (if bought):

WDV CA@25% Tax saved@30%

Year 0 Cost 100

C.A. 25,000 25 7.5
75,000
Year 1 C.A. (18,750) 18.75 5.63
56,250

195
Year 2 C.A. (14,062) 14.06 4.22
42,188
Year 3 C.A. (10,547) 10.55 3.16
31,641
Year 4 Scrap 10,000 21.64 6.49
C.A. 21,641

(d)
Capital rationing is a situation in which a company has a limited amount of capital to invest
in potential projects, such that the different possible investments need to be compared with
one another in order to allocate the capital available most effectively. If an organization is in
a capital rationing situation it will not be able to enter into all projects with positive NPVs
because there is not enough capital for all of the investments.
Soft capital rationing is brought about by internal factors; hard capital rationing is brought
about by external factors.
Soft capital rationing may arise for one of the following reasons.
i) Management may be reluctant to issue additional share capital because of concern
that this may lead to outsiders gaining control of the business.
ii) Management may be unwilling to issue additional share capital if it will lead to a
dilution of earnings per share.
iii) Management may not want to raise additional debt capital because they do not wish
to be committed to large fixed interest payments.
iv) Management may wish to limit investment to a level that can be financed solely from
retained earnings. They may not want to grow the company too quickly.
Hard capital rationing may arise for one of the following reasons.
i) Raising money through the stock market may not be possible if share prices are
depressed.
ii) There may be restrictions on bank lending due to government control.
iii) Lending institutions may consider an organization to be too risky (e.g., too highly
geared, poor prospects) to be granted further loan facilities.
iv) The costs associated with making small issues of capital may be too great.

196
SOLUTION TWO

(a)

Before After
K’000 K’000
Cash 1,000 1,500
Debtors 4,000 3,000
Inventory 6,000 5,000
11,000 9,500
Less creditors (4,000) (5,000)
Net working capital 7,000 4,500

Cost of capital @ 20% 1,400 900

(b)

Cost of capital @ 20% of Net Working Capital 1,400 900

Current Asset Ratio 2.75 1.9

Potential Savings = 1,400,000 - 900,0000 = K500,000

Management should therefore change the existing policy as that will

potentially give the company savings of K500, 000. The reduction in the
current ratio also confirms the potential savings, through reduction in
amounts tied up in current assets.

Item
Change in cost of capital
Advice to implement new
policy

(c)

The importance of the cash operating cycle in ascertaining the working

capital needs of the company is as follows:

 A cash operating cycle is the sum of stock or inventory days and trade
debtors or receivables days less the trade creditors or payables days.
 Investment in working capital requires financing which comes at a cost of
20% to the business. The longer the cash cycle the bigger the financing
requirement and hence the cost and vice versa.
 Any management strategy that will reduce the cash cycle to the barest
minimum will reduce the working capital locked up and its associated
cost. This will have a positive impact on the profits and vice versa.

197
(d)
Advantages of effective management of Accounts Receivable

Good receivables management is a comprehensive process which helps the company

in:

• Determining the customer’s credit rating in advance

• Frequently scanning and monitoring customers for credit risks
• Maintaining customer relations
• Detecting late payments in due time
• Detecting complaints in due time
• Reducing the total balance outstanding
• Preventing any bad debt in receivables outstanding

(e) The roles played by financial managers are:

Capital Structure
In order to meet the obligations of the business it is important to have enough cash

and liquidity. A firm can raise funds by the way of equity and debt. It is the
responsibility of a financial manager to decide the ratio between debt and equity, or
gearing. It is important to maintain a good level of gearing to avoid insolvency.

Allocation of Funds

Once the funds are raised, the funds should be allocated in such a manner that they
are optimally used. In order to allocate funds in the best possible manner the
following point must be considered:

- The size of the firm and its growth prospects

- Status of assets whether they are long-term or short-term
- Mode by which the funds are raised
These financial decisions directly and indirectly influence other managerial activities.

Profit Planning

Generating Profits is one of the primary objectives of any business organization.

Profit generation is important for the sustainability of any organization. Profit arises
due to many factors such as pricing, industry competition, state of the economy,
mechanism of demand and supply, cost and output. A healthy mix of variable and
fixed factors of production can lead to an increase in the profitability of the firm. In
this regard, finance managers minimize financial and operating gearing.

Fixed costs are incurred by the use of fixed factors of production such as land and
machinery. Fixed costs can cause huge fluctuations in profitability.

198
Dividend Policy

If company securities are traded on a stock market this involves a huge amount of
risk. Therefore a financial manger must manage the risk involved in the trading of
shares and debentures.

The financial manager makes decisions on whether to distribute profits in form of

dividends or to reinvest them to achieve company growth.

Working Capital Management (cash management)

Cash Management is an important aspect of managing a business because it allows

the process of monitoring, analyzing and adjustment of the cash flow of a business
which will enhances liquidity and profits while also reducing risk.

Risk Management

The role of a Finance Manager is to communicate risk policies and processes for an
organization. They provide hands-on development of risk models involving market,
credit and operational risk, assure controls are operating effectively, and provide
research and analytical support.

199
SOLUTION THREE

(a) When deciding between a rights issue and a public issue of shares, the following
factors need to be considered.

(1) Assuming the rights issue is fully subscribed, the shareholder control over the
company will remain unchanged as the rights are offered in proportion to the
existing holdings. A public issue of shares would mean shares would be sold to
other investors, so there will be some dilution of control for existing shareholders.

(2) A public issue of shares is expensive due to the associated fees such as
underwriting and other regulatory costs. There will also be costs in advertising
the issue to wider investors. Rights issues do not attract such high compliance
costs and the costs of circulating the information to the existing shareholders will
be lower than public issue advertising.

(3) As a result of the compliance and advertising required, a public issue will take
longer to complete than a rights issue. If the funds are wanted quickly a rights
issue may be a better option.

(4) In a public issue of shares there is greater competition for the shares on offer. If
there is strong demand for the shares then it is possible to get a higher price for
the shares and raise more capital than with a rights issue.

(5) New shares are normally issued at a discount to current market price. This
means the share issue will decrease the market value of the shares. If there is a
rights, this is not a problem provided the shareholders exercise their rights.
However, in a public issue the existing shareholders will be worse off.
Shareholders usually have “pre-emptive” rights which means that new issues
must be offered to existing shareholders first.

(b) K
Earnings per share K15906/K500 31.812

Market value per share (K31.812 X4) 127.248

Theoretical ex-rights price

K
Original Shares 5 @ K127.248 636.24
Rights share 1 at K95.436 95.436
731.676

Value of share following the rights issue K731.676/6

= K121.95

200
(c)
Value of rights
K
Value of share following rights issue 121.95
Cost of acquiring a rights share (95.436)
Value of rights (26.514)

(d) Evaluation of options

(i) Take up rights issue

K
Value of holding after rights issue
(value of holding after rights issue (2000 + 400) x K121.95) 292,680
Less: cost of acquiring rights issue (400 x K95.436) (38,174.4)
254,506

(ii) Sell rights K

Value of holding after rights issue (2000 x K121.95) 243,900

Add sale of rights (400 x K26.514) 10,606
254,506

(iii) Do nothing K

Value of holding after rights issue (2000 x K121.95) 243,900

Conclusion

The investor will be in the same financial position whether the rights offer is taken up or not.
If the investor does nothing and therefore allows the rights issue to laps, he/she will be
worse off than under the other two options.

201
SOLUTION FOUR

(a) Price/earnings ratio valuation

The value of the company using this valuation method is found by multiplying future

earnings by a price/earnings ratio.

Using the earnings of GreyRhino in Year 1 and the price/earnings ratio of similar listed

companies gives a value of 3,000,000 x 5 = K15,000,000.

Using the current average price/earnings ratio of similar listed companies as the basis

for the valuation rests on two questionable assumptions. First, in terms of similarity,

the valuation assumes similar business operations, similar capital structures, similar

earnings growth prospects, and so on. In reality, no two companies are identical. Second,

in terms of using an average price/earnings ratio, this may derive from companies that are

large and small, successful and failing, low-geared and high-geared, and domestic or

international in terms of markets served. The calculated company value therefore has a

large degree of uncertainty attached to it.

The earnings figure used in the valuation does not include expected earnings growth. If

average forecast earnings over the next three years are used (K3.63 million), the

price/earnings ratio value increases by 21% to K18.15 million (3.63 x 5). Although

earnings growth beyond the third year is still ignored, K18.15 million is likely to be a

better estimate of the value of the company than K15 million because it recognizes that

earnings are expected to increase by almost 50% in the next three years.

(b) Value of company using the dividend valuation model

The current cost of equity using the capital asset pricing model:

= 4 + (1.6 x 5) = 12%

Since a dividend will not be paid in Year 1 (2022), the dividend growth model cannot be

applied straight away. However, dividends after Year 3 (2024) are expected to grow at a

202
 constant annual rate of 3% per year and so the dividend growth model can be applied to

these dividends. The present value of these dividends is a Year 3 (2024) present value,

which will need discounting back to year 0. The market value of the company can then be

found by adding this to the present value of the forecast dividends in Years 2 (2023) and

3 (2024).

2
PV of year 2 dividend = 500,000/1.12 = K398, 597
3
PV of year 3 dividend = 1,000,000/1.12 = K711, 780

Year 3 PV of dividends after year 3 = (1,000,000 x 1.03)/(0.12 – 0.03) = K11, 444, 444
3
Year 0 PV of these dividends = 11,444,444/1.12 = K8, 145, 929

Market value from dividend valuation model = 398,597 + 711,780 + 8,145,929 =

K9, 256, 306 or approximately K9.3 million

Alternative calculation of dividend valuation method market value

The year 3 dividend of K1m can be treated as D1 from the perspective of year 2
The year 2 value of future dividends using the dividend growth model will then be:
K1,000,000/(0.12 – 0.03) = K11, 111, 111
2
Year 0 PV of these dividends = 11,111,111/1.12 = K8, 857, 710

Adding the PV of the year 2 dividend gives a market value of 8, 857, 710 + 398, 597 =

K9, 256, 308 which, allowing for rounding, is the same as the earlier calculated value.

(c) Current weighted average after-tax cost of capital

Current cost of equity using the capital asset pricing model = 12% After-tax cost of debt = 5
x (1 – 0.2) = 5 x 0.8 = 4%

Current after-tax WACC = (12 x 0.75) + (4 x 0.25) = 10% per year

Weighted average after-tax cost of capital after new debt issue

Revised cost of equity = Ke = 4 + (2.0 x 5) = 14%

Revised after-tax cost of debt = 6 x (1 – 0.2) = 6 x 0.8 = 4.8%

Revised after-tax WACC = (14 x 0.6) + (4.8 x 0.4) = 10.32% per year

203
Comment on Difference

The after-tax WACC has increased slightly from 10% to 10.32%. This change is a result of the

increases in the cost of equity and the after-tax cost of debt, coupled with the change in

gearing. Although the cost of equity has increased, the effect of the increase has been reduced

because the proportion of equity finance has fallen from 75% to 60% of the long-term capital

employed. Although the after-tax cost of debt has increased, the cost of debt is less than the cost

of equity and the proportion of cheaper debt finance has increased from 25% to 40% of the

long-term capital employed.

(d) Nature and assessment of business risk

(i) Business risk arises due to the nature of a company’s business operations, which

determines the business sector into which it is classified, and to the way in which a

company conducts its business operations. Business risk is the variability in

shareholder returns that arises as a result of business operations. It can therefore be

related to the way in which profit before interest and tax (PBIT or operating profit)

changes as revenue or turnover changes. This can be assessed from a shareholder

perspective by calculating operational gearing, which essentially looks at the relative

proportions of fixed operating costs to variable operating costs. One measure of

operational gearing that can be used is (100 x contribution/PBIT), although other

measures are also used.

Nature and assessment of financial risk

(ii) Financial risk arises due to the use of debt as a source of finance, and hence is related

to the capital structure of a company. Financial risk is the variability in shareholder

returns that arises due to the need to pay interest on debt. Financial risk can be

assessed from a shareholder perspective in two ways. Firstly, balance sheet gearing

can be calculated. There are a number of gearing measures that can be used, such as

the debt/equity ratio, the debt ratio and financial gearing, and the calculation can be

204
 based on either market values or book values. Secondly, the interest coverage ratio

can be calculated.

Nature and assessment of systematic risk

(iii) From a shareholder perspective, systematic risk is the sum of business risk and

financial risk. Systematic risk is the risk that remains after a shareholder has

diversified investments in a portfolio, so that the risk specific to individual companies

has been diversified away and the shareholder is faced with risk relating to the market

as a whole. Market risk and undiversifiable risk are therefore other names for

systematic risk.

From a shareholder perspective, the systematic risk of a company can be assessed by

the equity beta of the company. If the company has debt in its capital structure, the

systematic risk reflected by the equity beta will include both business risk and financial

risk. If a company is financed entirely by equity, the systematic risk reflected by the

equity beta will be business risk alone, in which case the equity beta will be the same

as the asset beta.

205
SOLUTION FIVE

(a) (i) Instalment (Annuity) Computation

Term Sheet Details:

Item Value
The present value of the payments (PMT), Loan principal (PVA) K500,000
Annual interest (i) 24%
Frequency (m) 4
Term (in years) - t 2
Number of periods (n) = Term x Frequency = 2 x 4 8

PVA (Prevent Value of Annuity) = PMT [PVIFA], where PVIFA = Prevent Value
Annuity Factor, PMT = Payment Amount

PMT (payment) = PVA/PVIFA = [500,000]/[(1-(1+r)-n/r)] = 500,000/[(1-(1+i/m)-

nm
/(i/m)]

= 500,000/[(1-(1+24/4)-8/(24/4)]

= 500,000/6.2097939 =K80, 517.97

That is, the company will be required to pay K80, 517.97 at the end of each
quarter to amortize the loan.

ii) Amortization schedule

Period Interest Instalment Principal Outstanding

Qtr repayment balance
0 - - - 500,000.00
1 30,000.00 80,517.97 50,517.97 449,482.03
2 26,968.92 80,517.97 53,549.05 395,932.98
3 23,755.98 80,517.97 56,761.99 339,170.99
4 20,350.26 80,517.97 60,167.71 279,003.28
5 16,740.20 80,517.97 63,777.77 215,225.51
6 12,913.53 80,517.97 67,604.44 147,621.07
7 8,857.26 80,517.97 71,660.71 75,960.36
8 4,557.61 80,517.97 75,960.35 -

(e) The weighted average cost of capital (WACC) can be used as a discount rate in
investment appraisal provided that the risks of the investment project being
evaluated are similar to the current risks of the investing company. The WACC would
then reflect these risks and represent the average return required as compensation
for these risks.

WACC can be used in investment appraisal provided that the business risk of the
proposed investment is similar to the business risk of existing operations. Essentially
this means that WACC can be used to evaluate an expansion of existing business. If
the business risk of the investment project is different from the business risk of

206
 existing operations, a project- specific discount rate that reflects the business risk of
the investment project should be considered. The capital asset pricing model (CAPM)
can be used to derive such a project-specific discount rate.

WACC can be used in investment appraisal provided that the financial risk of the
proposed investment is similar to the financial risk of existing operations. This means
that financing for the project should be raised in proportions that broadly preserve
the capital structure of the investing company. If this is not the case, an investment
appraisal method called adjusted present value (APV) should be used. Alternatively,
the CAPM-derived project-specific cost of capital can be adjusted to reflect the
financial risk of the project financing.

A third constraint on using WACC in investment appraisal is that the proposed

investment should be small in comparison with the size of the company. If this were
not the case, the scale of the investment project could cause a change to occur in
the perceived risk of the investing company, making the existing WACC an
inappropriate discount rate.

(f) The dividend growth model has several difficulties attendant on its use as a way of
estimating the cost of equity. For example, the model assumes that the future
dividend growth rate is constant in perpetuity, an assumption that is not supported
by the way that dividends change in practice. Each dividend paid by a company is
the result of a dividend decision by managers, who will consider, but not be bound
by, the dividends paid in previous periods. Estimating the future dividend growth rate
is also very difficult. Historical dividend trends are usually analyzed and on the
somewhat risky assumption that the future will repeat the past, the historic dividend
growth rate is used as a substitute for the future dividend growth rate. The model
also assumes that business risk, and hence business operations and the cost of
equity, are constant in future periods, but reality shows us that companies, their
business operations and their economic environment are subject to constant change.
It is sometimes said that the dividend growth model does not consider risk, but risk
is implicit in the share price used by the model to calculate the cost of equity. A
moment’s thought will indicate that share prices fall as risk increases, indicating that
increasing risk will lead to an increasing cost of equity. What is certainly true is that
the dividend growth model does not consider risk explicitly in the same way as the
capital asset pricing model (CAPM). Here, all investors are assumed to hold
diversified portfolios and as a result only seek compensation (return) for the
systematic risk of an investment. The CAPM represent the required rate of return
(i.e. the cost of equity) as the sum of the risk-free rate of return and a risk premium
reflecting the systematic risk of an individual company relative to the systematic risk
of the stock market as a whole. This risk premium is the product of the company’s
equity beta and the equity risk premium. The CAPM therefore tells us what the cost
of equity should be, given an individual company’s level of systematic risk.

The individual components of the CAPM (the risk-free rate of return, the equity risk
premium and the equity beta) are found by empirical research and so the CAPM
gives rise to a much smaller degree of uncertainty than that attached to the future
dividend growth rate in the dividend growth model. For this reason, it is usually

207
suggested that the CAPM offers a better estimate of the cost of equity than the
dividend growth model.

END OF SOLUTIONS

208
 CA ZAMBIA PROGRAMME EXAMINATIONS

CA APPLICATION ADVANCED DIPLOMA IN ACCOUNTANCY

_____________________

CA 2.6 STRATEGIC BUSINESS ANALYSIS

_____________________

WEDNESDAY 15 JUNE 2022

____________________

TOTAL MARKS: 100; TIME ALLOWED: THREE (3) HOURS

_____________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This paper is divided into TWO sections:

Section A: One (1) compulsory scenario question.

Section B: Four (4) Optional scenario Questions. Attempt any three (3)
questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

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SECTION A

This is compulsory and must be attempted.

QUESTION ONE – (COMPULSORY

Zoom Trucking Company (ZTC)

ZTC was founded in 1956 by a British national, Mr. Roy Smith, who was based in what was
then Southern Rhodesia (now Zimbabwe). The company’s core business was transporting
copper from the mines in Northern Rhodesia (now Zambia) through Rhodesia for onward
transmission to overseas buyers in Europe and Asia. In 1965, the white settlers in Rhodesia,
principally of British origin, unilaterally declared independence from Britain. Most countries
roundly condemned the action by the white settlers because they were a minority group,
and their move was perceived to be a coup against the majority black people who were
seeking majority rule and political independence from Britain. The United Nations considered
military intervention to wrestle political power from the white settlers but Britain, along with
its Western allies, thwarted the move and instead prevailed on the UN to impose economic
sanctions. Zambia, having attained political independence in 1964, advocated for black rule
in Rhodesia and refused to recognize the white minority Government of the white settlers.
On its part, it banned all forms of trade with Rhodesia. The Zambian Government informed
management of ZTC that it would not permit the company to haul copper from its mines to
Rhodesia. ZTC could thus no longer freight copper from Zambia through Rhodesia.

There was also another complication for ZTC. The company was headquartered in Rhodesia
and its shareholders comprised whites who were openly sympathetic to the white minority
regime that had unilaterally usurped political power and government in Rhodesia. The
company consequently considered it necessary to shift its operations and moveable assets in
Zambia to Rhodesia. The Zambian Government however objected to a free transfer of the
company’s assets to Rhodesia but allowed white personnel to move to Rhodesia if they so
wished.

In the face of these developments, ZTC was compelled to restructure the company. It
bought off the shares of a minority shareholder, Mr Ismail Singh, who had decided to sell his
fifteen percent ownership in the company in exchange for the Zambian operations and
assets of ZIC. Mr Singh then established a new company, Singh Transport Company (STC),
from the sale of his shares.

Singh had all along been domiciled in Zambia and was known to be a sympathiser of the
struggle for political independence by the African majority. His parents had immigrated to
Zambia from India when he was ten (10) years old. The stories he had heard of British
colonialism in India had not endeared Ismail to the English and his feelings had formed the
basis for his unwavering support for the struggle for political independence. Although he
was a shareholder of ZTC, Singh had refused to physically move to and reside in Rhodesia
and had insisted that Zambia was his home. He had accordingly remained in Zambia from
where he directed his business interests in Zambia and East Africa. Two (2) years after
parting company with ZTC, Singh decided to form an alliance between Singh Transport
Company and Zambia Haulage Company.

210
Zambia Haulage Company was founded by two indigenous Zambians who were former civil
servants. The two (2) gentlemen were childhood friends and had gone to school together.
At university, one of them had studied engineering and the other had studied public
administration. Upon graduation, they had both joined the Ministry of Roads and
Construction. After working for twenty (20) years, they had decided to retire from the civil
service and form their own company, Zambia Haulage Company, which specialized in
transporting goods between Zambia and Tanzania. Although there was a lot of business in
the haulage business between Zambia and Tanzania, the company was unable to fully
exploit the opportunity in the haulage business because it had an old fleet of trucks, and its
trucks were constantly breaking down. The two (2) owners of Zambia Haulage Company
welcomed the alliance with Singh Transport Company because, so they hoped, it would not
only be an opportunity to recapitalize and modernize the company’s trucks, but it might be
time they could retire into the background and leave active management of the company to
the more experienced and youthful Mr. Singh.

Required:

(a) Explain the significance of a company’s external environment in the formulation of

strategy. (5 marks)

(b) With the help of a diagram, discuss how the external environment of Zoom
Trucking Company influenced the company’s strategic direction. (15 marks)

(c) What was the strategic significance of the alliance between Singh Transport
Company and Zambia Haulage Company? (5 marks)

(d) Discuss five (5) benefits of a strategic alliance. (15 marks)

[Total: 40 Marks]

211
SECTION B

There are FOUR (4) questions in this section.

Answer Any Three (3) from the following Questions.

QUESTION TWO
Breakfast for One

MyMuesli was formed in 2007 by three (3) university graduates from Germany. Within five
(5) months of setting up in business they have achieved rapid growth in both sales and
numbers employed with their innovative business model which allows the customer to
create online their own muesli recipe from 75 different ingredients and then have the
product posted to them.

The three (3) founders are all of the same age (being in their mid-twenties) all educated at
the same university. Each of the founders studied related business subjects in public
relations, marketing and law. The M company web site is MyMuesli.com and it was
developed by them. The ingredients they use for the muesli are all sourced from organic
farmers and can be sold to customers as being their own personalized healthy high quality
designs. In their first year of operation, sales reached Euros 125,000 with a labour force of
30 people who are a mixture of fulltime and part-time workers. The three (3) founders are
looking ahead very optimistically as they believe they are riding the trend to individualization
and to quality organic food.

(Source: Thompson, J. & Martin, F. Strategic Management – Awareness and Change. Sixth
Edition. South-Western CENGAGE Learning, UK, pp.63)

Required:

(a) Define the marketing mix, its significance and describe its elements which this
company could have used. (7 marks)

(b) Describe the steps they could have followed to segment, target and position their
business. (3 marks)

(c) Given the following financial data: Trade payables = K25,000; trade receivables =
K50,000; sales = K 200,000; capital = K500,000; gross profit = K100,000; inventory
= K150,000; purchases = K80,000; credit sales = K75,000; cost of sales =
K 250,000.

Calculate the asset turnover, gross profit margin, receivables collection period,
inventory days, payables payment period. (10 marks)
[Total: 20 Marks]

212
QUESTION THREE

Northern Foods in the UK is best known for certain brands: Fox’s Biscuits, Goodfella’s Pizza
and Dalepak burgers. It had also produced own-label foods for Marks & Spencer and the
leading supermarkets. Changes to the M&S supply chain and price demands from the
supermarkets had hit its margins. A number of reasons were offered as to why Northern
Foods got into difficulties:

 It had been more concerned with cash than with sales.

 It operated from too many (dispersed) sites.
 It was too ready to say ‘yes’ to its leading customers without examining the
implications of the choices this implied.
 There had been inadequate innovation – say with healthy option foods.
 Across the business there was inadequate learning and sharing.
As a result, it faced some difficult decisions in 2009. One concerned the future of Fox’s
Biscuits. The factories were in need of improvement. There were two (2) key sites and
neither was adequate. One new factory was needed – but where should it be located?
Wherever was chosen, employee redundancies were implied.

(Source: Thompson, J. & Martin, F. Strategic Management – Awareness and Change. Sixth
Edition. South-Western CENGAGE Learning,UK, pp.625)

Required:

(a) Suppose this company had the following business units: 2 dogs, 5 stars, 3 question
marks and 4 cash cows, put these businesses on a suitable planning matrix and
explain how you can balance this portfolio in terms of the strategies and actual
actions. (6 marks)

(b) Describe the barriers to entry which the Northern Foods could use to stop
competitors coming into the industry. (4 marks)

(c) The following fictitious data could apply here: Total costs = K100m; total assets =
K400m; equity = K200m; sales = K400m.

Calculate the asset turnover, return on investment, return on equity, net income and
return on sales. (10 marks)
[Total: 20 Marks]

QUESTION FOUR

The Zambia Coal Electricity Generating Company (ZCEGC) limited has lately been having
problems in its operations. This has been chiefly due to a lift between management and
members of the Board of Directors as how the company should be economically managed.
The directors individually and severally have gone to the company to instruct management
on strategies they must take to improve company performance and mangers have resisted
this interference. Management has invited you to facilitate at a joint board and management
seminar on roles of either party.

213
Required:

(a) Discuss briefly any five (5) functions of a Board of Directors of a company.
(10 marks)

(b) Describe briefly any five (5) moral attributes that individual directors of the company
should have as contained in the King report on corporate governance. (10 marks)
[Total: 20 Marks]

QUESTION FIVE

Chintobentobe Mining Limited is a company that has been operating in North western
proving for some time. But due to financial challenges, the company has been placed under
Care and Maintenance. You have been hired by the Consultant managing the company to
advise on how a Turnaround strategy can be adopted to save the company from terminal
decline or takeover and stir the company back to life.

Required:

(a) Suggest five (5) elements critical in implementing a Turnaround strategy.

(10 marks)
(b) Zambia recently had Presidential and General Elections on 12 August, 2021. Discuss
the Political and financial risks that affect business. (10 marks)
[Total: 20 Marks]

END OF PAPER

214
CA2.6 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) Explain the significance of a company’s external environment in the formulation of

strategy.

The significance of a company’s environment

A company’s external environment refers to factors outside a firm’s control, but
which impact on a firm’s success/profitability. In the case of strategic direction of
a firm, the external environment entails opportunities and threats to success. A
strategy is a way of navigating through the external environment by exploiting
opportunities and overcoming the threats to profitability. Strategy is derived from
opportunities and threats.
(b) With the help of a diagram, discuss how the external environment of Zoom

PESTLE analysis model

Political
Factors

Economic Legal
Factors Factors

The
Organisation

ZTC
Environmental
Social
Factors factors
Technological

Factors

The external environment of Zoom Trucking Company and the company’s

strategic direction

Let’s look at each element of a PESTEL analysis.

215
Political Factors

These determine the extent to which government and government policy may impact on an
organisation or a specific industry. This would include political policy and stability as well as
trade, fiscal and taxation policies too.

Economic Factors

An economic factor has a direct impact on the economy and its performance, which in turn
directly impacts on the organisation and its profitability. Factors include interest rates,
employment or unemployment rates, raw material costs and foreign exchange rates.

Social Factors

The focus here is on the social environment and identifying emerging trends. This helps a
marketer to further understand consumer needs and wants in a social setting. Factors
include changing family demographics, education levels, cultural trends, attitude changes
and changes in lifestyles.

Technological Factors

Technological factors consider the rate of technological innovation and development that
could affect a market or industry. Factors could include changes in digital or mobile
technology, automation, research and development. There is often a tendency to focus on
developments only in digital technology, but consideration must also be given to new
methods of distribution, manufacturing and logistics.

Environmental Factors

Environmental factors are those that are influenced of the surrounding environment and the
impact of ecological aspects. With the rise in importance of CSR (Corporate Sustainability
Responsibility) and sustainability, this element is becoming more central to how
organisations need to conduct their business. Factors include climate, recycling procedures,
carbon footprint, waste disposal and sustainability.

Legal Factors

An organisation must understand what is legal and allowed within the territories they
operate in. They also must be aware of any change in legislation and the impact this may
have on business operations. Factors include employment legislation, consumer law, healthy
and safety, international as well as trade regulation and restrictions.

The external environment that faced Zoom Trucking Company was a political one which
comprised two elements. The first was the unilateral declaration of independence by the
white settlers in Rhodesia. The second was the response to the unilateral declaration of
independence by the Zambian government. These events made it untenable for the
company to carry on ferrying copper from Zambia through Rhodesia.
The political fallout resulted in the company splitting and going in different directions. The
Rhodesian wing of the company switched to doing business with South Africa and the
Zambian wing was sold off and changed direction to East Africa.

216
(c) What was the strategic significance of the alliance between Singh Transport Company
and Zambia Haulage Company?

Strategic significance of the alliance between Singh Transport Company and

Zambia Haulage Company.

The alliance between Singh Transport Company and Zambia Haulage Company is strategic,
implying that it is intended to facilitate the achievement of success. One of the partners,
namely, Zambia Haulage Company, cannot fully exploit the opportunity because it does not
have the requisite resources. The other partner seemingly has the resources but stands to
access the market that is currently owned and served by Zambia Haulage Company.

(d) Discuss five (5) benefits of a strategic alliance.

Strategic appeal or benefits for such Cross-border alliances include the

following:
1. Gaining better access to attractive country markets.
2. To capture economies of scale in production and/or marketing cost reduction
can be the difference that allows a company to be cost-competitive.
3. To fill gaps in technical expertise and/or knowledge of local markets (buying
habits and product preferences of consumers, local customers and so on.
4. To share distribution facilities and dealer networks, thus mutually
strengthening their access to buyers.
5. Cross border allies can direct their competitive energies more toward mutual
rivals and less toward one another, teaming up may help them close the gap
on leading companies.
6. Benefit comes into play when companies desirous of entering a new foreign
market, conclude that alliances with local companies are an effective way to
tap into a partner’s local market knowledge and help it establish working
relationships with key officials in the host-country government.
7. Benefit comes into play when companies desirous of entering a new foreign
market, conclude that alliances with local companies are an effective way to
tap into a partner’s local market knowledge and help it establish working
relationships with key officials in the host-country government.

217
SOLUTION TWO

(a) Define the marketing mix, its significance and describe its elements which
this company could have used.

The marketing mix is the set of controllable variables and their levels that the firm uses to
influence the target market. These variables are product, price, place and promotion and are
sometimes known as the 4Ps.

Significance

The marketing mix is a very important concept since the elements in it act partly as
substitutes for each other and they must be integrated and mutually supporting. This is so
that the product can be positioned in the market to appeal to the customer.

The Elements

Product

A product (goods or services) is anything that satisfies a need or want. It is not a ‘thing’
with ‘features’ but a package of benefits.

Form the firm’s point of view, the product element of the marketing mix is what is being
sold.

From the customer’s point of view, a product is a solution to a problem or a package of

benefits. Many products might satisfy the same customer need.

Customer value is the customer’s estimate of how far a product or service goes towards
satisfying his/her needs.

Every product has a price and so the customer makes a trade-off between the expenditure
and the value offered.

Place

Place deals with how the product is distributed and how it reaches its customers.

Channel is where the products are sold.

Logistics. The location of warehouses and efficiency of the distribution system is also
important. Arguably the speed of delivery is an important issue in place.

A firm can distribute the product itself (direct distribution) or distribute it through
intermediary organizations such as retailers.

Product push: the firm directs its efforts to distributors to get them to stock the product.

Customer pull: the firm persuades consumers to demand the product from retailers and
distributors, effectively pulling the product through the chain.

218
Promotion

This is the element of the mix which many of the practical activities of the marketing
department are related to and over which the marketing department generally has most
control over. A useful mnemonic is AIDA which summarizes the aims of promotion.

 Arouse Attention.
 Generate Interest.
 Inspire Desire.
 Initiate Action (i.e. buy the product)
Promotion in the marketing mix includes all marketing communications which let the public
know of the product or service: advertising, sales promotion, direct selling by sales
personnel, public relations.

Price

This is the only element of the marketing mix which directly brings in revenue. Price is
influenced by many factors as follows:

 Economic influences: supply and demand; price and income elasticities.

 Competitors’ prices. Competitors include other firms selling the same type of product,
as well as firms selling substitute products. Generally, firms like to avoid price wars.
 Quality connotations. High price is often taken as being synonymous with quality, so
pricing will reflect the product’s image.
 Discounts. These can make the product attractive to distributors.
 Payment terms.
 Trade-in allowances.
 The stage in the product life cycle. Penetration pricing and skimming pricing.

(b) Describe the steps they could have followed to segment, target and
position their business.

Segmentation

Step 1: Identify segmentation variables and segment the market

Step 2: Develop segment profiles.

Targeting

Step 3: Evaluate the attractiveness of each segment.

Step 4: Select the target segment(s)

Positioning

Step 5: Identify positioning concepts for each target segment.

Step 6: Select, develop and communicate the chosen concept.

219
(c) Given the following financial data: Trade payables = K 125,000; trade receivables =
K150,000; sales = K 200,000; capital = K500,000; gross profit = K 100,000; inventory
= K 350,000; purchases = K180,000; credit sales = K 75,000; cost of sales = K
250,000.
Calculate the asset turnover, gross profit margin, receivables collection period, inventory
days, payables payment period.
(5x2 Marks)

Asset turnover = Sales/Capital employed

= K200,000 / K500,000

= 0.4 x 100 = 40%

Gross profit margin = Gross profit / Sales

= K100,000/K200,000

= 0.5 x 100 = 50 %

Receivables collection period = Trade receivables / Credit sales x 365

= K150,000 / K75,000

= 2 x 365 = 730 days

Inventory days = Inventory / Cost of sales

= K350,000 / K250,000

= 1.4 days

Payables payment period = Trade payables / Purchases x 365

= K125,000 / K180,000 x 365

= 253.5 days

220
SOLUTION THREE

(a) Suppose this company had the following business units: 2 dogs, 5 stars, 3
question marks and 4 cash cows, put these businesses on a suitable planning matrix
and explain how you can balance this portfolio in terms of the strategies and actual
actions.
BCG Matrix

Relative Market Share

High Low
Market Growth High Stars (5) Question Marks (3)
Low Cash Cows (4) Dogs (2)

Portfolio balancing: The portfolio should be balanced by having cash cows providing
finance for stars and question marks, and a minimum of dogs.

Actions

A corporate parent of any type will have to make decisions about acquiring, nurturing and
disposing of business units.

Four major strategies can be pursued with respect to products, market segments and SBUs.

Build: A build strategy forgoes short-term earnings and profits in order to increase market
share.

Hold: A hold strategy seeks to maintain the current position.

Harvest: A harvesting strategy seeks short-term earning and profits at the expense of long-
term development.

Divest: A divestment strategy reduces negative cash flow and releases resources for use
elsewhere.

i. In the short term, stars require capital expenditure in excess of the cash they
generate in order to maintain their position in their competitive growth market,
but promise high returns in the future. Strategy: Build.
ii. In due course, stars will become cash cows. Cash cows need very little capital
expenditure since mature markets are likely to be quite stable and they generate
high levels of cash income. Cash cows can now be used to finance the stars.
Strategy: Hold or Harvest if weak.
iii. Question marks must be assessed as to whether they justify considerable
capital expenditure in the hope of increasing their market share, or should they
be allowed to die quietly as they are squeezed out of the expanding market by
rival products. Strategy: Build or Harvest.

221
 iv. Dogs may be ex-cash cows that have now fallen on hard time. Although they will
show only a modest net cash outflow, or even a modest net cash inflow, they are
cash traps which tie up funds and provide a poor return on investment. However,
they may have a useful role, either to complete a product range or to keep
competitors out. There are also many smaller niche businesses in markets that
are difficult to consolidate that would count as dogs but which are quiet
successful. Strategy: Divest or Hold.

(b) Describe the any four (4) barriers to entry which the Northern Foods could
use to stop competitors coming into the industry.
Barriers to Entry

(i) Scale economies. High fixed costs often imply a high breakeven point, which
depends on a large volume of sales. If the market as a whole is not growing, the
new entrant has to capture a large slice of the market from existing competitors.
This is expensive.
(ii) Product differentiation. Existing firms in an industry may have built up a good
brand image and strong customer loyalty over a long period of time. A few firms
may promote a large number of brands to crowd out the competition.
(iii) Capital requirements. When capital investment requirements are high, the barrier
against new entrants will be strong, particularly when the investment would
possibly be high-risk.
(iv) Knowledge requirements. It is much more difficult to enter an industry which
requires significant specialist knowledge and skills, than an industry where no
specialist skills are required.
(v) Switching costs. These refer to the costs (time, money, convenience) that a
customer would have to incur by switching from one supplier’s products to
another’s.
(vi) Access to distribution channels. Distribution channels carry a manufacturer’s
products to the end-buyer. New distribution channels are difficult to establish and
existing ones are hard to gain access to.
(vii) Cost advantages of existing producers, independent of economies of scale
include patent rights, experience and know-how, government subsidies and
regulations and favoured access to raw materials.

222
(c) The following fictitious data could apply here: Total costs = K100m; total assets =
K400m; equity = K200m; sales = K400m.
Calculate the asset turnover, return on investment, return on equity, net income and
return on sales.
Asset turnover = Sales/Total assets

= K400m / K400m = 1 x 100 = 100%

Return on investment = Return on sales x Asset turnover

= 0.75 x 1 = 75%

Net income = Sales – Total costs

= K400m – K100m = K300m

Return on sales = Net income / Sales

= K300m / K400m x 100 = 0.75 x 100 = 75%

Return on Equity = Return on investment x Total assets/Equity

= 0.75 x K400m/K200m

= 0.75 x 2 = 1.50 x 100 = 150%

223
SOLUTION FOUR

(a) The board of directors should:

i. Ensure that it is well informed about the company’s performance through
scheduled meetings, correspondence, and visitations to the company
operational areas from time to time.

ii. Guide and judge the Chief Executive Officer and other top managers on
agreed benchmarks and targets.

iii. Have the courage to curb inappropriate or unduly risky management

actions or strategic moves.

iv. Advice shareholders that the Chief Executive Officer is doing what the
board expects.

v. Provide insight and advice to management and

vi. Be intensely involved in debating the pros and cons of key decisions and
action and be able to challenge management on merits and demerits of
their strategic moves.

(b) The King report lists five (5) moral attributes that individual directors
should have:
i. Conscience – acting with intellectual honest and independence of
mind in the best interest of the company and its stakeholders
avoiding conflict of interest.
ii. Inclusivity – taking into account the legitimate interests and
expectations of stakeholders.
iii. Competence – having the knowledge and skills required to
govern a company effectively.
iv. Commitment – diligently performing duties and devoting enough
time to company affairs.
v. Courage – having the courage to take the necessary risks and to
act with integrity.

224
SOLUTION FIVE

(a) Suggest five elements critical in implementing a Turnaround strategy.

i. Crisis stabilization
The emphasis is on reducing costs and increasing revenue. An emphasis
on reducing direct costs and improving productivity is more likely to be
effective that efforts to reduce overheads.

ii. Management changes

It is usually likely that new managers are required at senior level. Previous
managers allowed the situation to deteriorate. Managers experienced at
turnaround are required. Managers brought from outside will not be
prisoners of the old paradigm.

iii. Communication with shareholders

The support of key stakeholder groups- groups with both a high level of
power and a high degree of interest in an organisation- such as the
workforce and providers of finance-is likely to be very critical. Stakeholder
analysis should be carried out so that various stakeholder groups are well
informed and managed properly.

iv. Attention to target markets

A clear focus on appropriate target market segments is essential; indeed,
a lack of such a focus is a common cause of decline. The organisation
must become customer-oriented and ensure that it has good flows of
marketing information.

v. Concentration on effort
Resources should be concentrated on the best opportunities to create
value. Products and market segments currently being served must be
reviewed to eliminate any distractions and poor performers. Outsourcing
for internal activities may likely be considered.

vi. Financial restructuring

Financial restructuring is mot likely. In worst case scenarios this may mean
trading out of insolvency. Even where the business may be solvent, capital
restructuring may be required, both to provide cash for investment and to
reduce cash outflows in the shorter term.

vii. Prioritisation
The eventual success of a turnaround strategy depends in part on
management’s ability to prioritize necessary activities.

225
 (b) Risk management

Discuss the Political and financial risks that affect business.

i. Political Risk: This is the risk that political action will affect the position
and value of the company. It is connected with Country Risk-the risk
associated with, or holding assets in a particular country. Nationalization,
sanctions, civil war, and political instability- all these can have impact on
business.
ii. Financial Risk: a business can be affected by changes in the interest
rates, economic climate, gearing, bad debt, risk, liquidity, insolvency. The
fundamental risk relating investment appraisal is that incorrect decisions
are made:
 Investments are made when they should not have been, or are not
made when they should have been
 When choosing between two investments, the wrong investment
is chosen.

226
 CA ZAMBIA PROGRAMME EXAMINATIONS
_____________________

CA ADVISORY PROFESSIONAL IN ACCOUNTANCY

_____________________

CA 3.1: ADVANCED FINANCIAL REPORTING

_____________________

MONDAY 13 JUNE 2022

_____________________

TOTAL MARKS: 100; TIME ALLOWED: THREE (3) HOURS

_____________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This paper is divided into TWO (2) sections:

Section A: One (1) compulsory scenario question.

Section B: Four (4) Optional scenario Questions. Attempt any three (3)
questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. Present Value and Annuity tables are attached at the end of this paper.

DO NOT OPERN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

227
SECTION A

This question is compulsory and must be attempted.

QUESTION ONE – (COMPULSORY)

The following consolidated financial statements relate to Mubanga Plc Group for the year to
31 May 2022.

Consolidated Statement of Profit or loss for the year ended 31 May

2022 K’000

Revenue 2 360
Cost of sales (884)
Gross profit 1, 476
Other income 40
Distribution cost (666)
Administrative cost (530)
Finance cost (90)
share of associate loss (120)

Profit before tax 110

Taxation (44)

Profit for the period 66

Other comprehensive income
Net actuarial gain 8

Total comprehensive Income 74

Profit for the period attributable to:
Equity holders of parent 52.8
Non-controlling interest 13.2
66.00
Total comprehensive income attributable to:
Equity holders of parent 60.80
Non-controlling interest 13.20

74

228
 2022 2021

K'000 K'000
Assets
Non-current
Property, plant and equipment 1,600 1,400
Goodwill 176 180
Investment in associate 284 300
Deferred tax - 20
2,060 1,900

Current

Inventory 200 172

Trade Receivables 280 292
Cash & cash equivalents - 26
480 490

Total Assets 2,540 2,390

Consolidated Statement of Financial Position as at 31 May

Equity and liabilities

Equity
Equity shares of K0.50 each 660 440
Share premium 132 32
Retained earnings (18) (48)

774 424

Non- controlling interests 254 232

Total Equity 1,028 656
Liabilities
Non-current
Employee benefits 448 596

Deferred Tax 34 -
20% Loan Notes 464 680
946 1,276
Current
Trade payables 260 268
Taxation 58 94
Finance cost payable 160 96

Bank overdraft 88 -

229
 566 458
Total Liabilities 1,512 1, 734
Total equity and liabilities 2, 540 2, 390

Segmental information reported externally is more useful if it conforms to information used

by management in making decisions. The information can differ from that reported in the
financial statements. Although reconciliations are required, these can be complex and
difficult to understand. Additionally, there are other standards where subjectivity is involved
and often the profit motive determines which accounting practice to follow. The Directors
have a responsibility to shareholders in disclosing information to enhance corporate value
but this may conflict with their corporate social responsibility.

The following information is relevant:

(1) Depreciation charge for the year amounted to K136,000. This was charged to cost of
sales. Further, profit on disposal of equipment was taken to other income while loss
on disposal of plant was charged to administrative cost.

(2) On 31 May 2022, Mubanga Plc acquired 80% of the equity shares of Musonda Plc for
a cash consideration of K252,000. The fair value of net assets of Musonda Plc at
acquisition was K28,000. This is summarised below:
K’000
Property, plant and equipment 27.20
Trade receivables 3.40
Bank 2.40
Trade payables (4.00)
Taxation (1.00)
28.00
There was no disposal of subsidiary during the year to 31 May 2022.

(3) It is Mubanga Plc’s group policy to value non – controlling interests using proportion
of net assets method.

(4) Consolidated goodwill and investment in associate were both impaired during the
year to 31 May 2022, with the exception of goodwill in Chama Plc in.

(5) Mubanga Plc acquired 10% additional equity shares in Chama Plc for a cash
consideration of K28,000 on 31 May 2022. This increased its shareholding to 80%.
Mubanga Plc acquired 70% of the equity shares in Chama Plc on 1 June 2019 for a
consideration of K178,000. The fair value of the net assets of Chama Plc was
K260,000 and K220,000 on 31 May 2022 and 1 June 2019 respectively. Goodwill in
Chama Plc had not been impaired since its acquisition. The movement on equity
arising from this transaction was taken to share premium.

(6) Mubanga Plc acquired 25% of equity shares in Kombe Plc on 1 November 2021 for a
cash consideration of K144,000. Mubanga Plc has significant influence in Kombe Plc.

230
 Mubanga Plc received total dividends of K16,000 from all of its associated companies
for the year to 31 May 2022. No investments in associated companies were disposed
off during the year.

(7) On 30 March 2022, Mubanga Plc disposed of equipment with a carrying value of
K76,000 for K116,000 cash. On 1 April 2022, Mubanga Plc disposed off a piece of
plant for K12,000 cash. This had a carrying value of K14,000.

(8) Mubanga Plc introduced a defined benefit plan on 1 June 2019. During the year to
31 May 2022, it paid pension contributions of K200,000 . No pension benefits were
paid out during the year. Net pension expenses were charged to administrative
costs. Net actuarial gains were taken to share premium.

(9) The 20% loan note was issued on 1 June 2020. It was correctly classified as
‘financial liability through profit or loss’. All changes in fair value are taken to
administrative expenses. There was no acquisition nor disposal of any financial
liability classified as ‘through profit or loss’ during the year.

(10) Mubanga Plc issued equity shares for cash on 31 December 2021. Further, Mubanga
Plc, its subsidiaries and associated companies paid dividends on 1 December 2021.

Required:

(a) Discuss how the ethics of corporate social responsibility are difficult to reconcile with
shareholder expectations. (4 marks)

(b) Prepare a consolidated statement of cash flows of Mubanga Plc Group using the
indirect method, for the year ending 31 May 2022 in accordance with the requirements of
IAS 7 ’Statement of cash flows’. (36 marks)
[Total: 40 Marks]

231
SECTION B

Answer ANY Three (3) questions in this section.

QUESTION TWO

Kapunda Plc (Kapunda) is a manufacturing entity with operations spread throughout

Zambia. The Directors of Kapunda seek advice on the accounting treatment of a number of
transactions including their deferred tax effects in preparing financial statements for the
year to 31 December 2022.

Transaction 1- Employee Pension Plan

Kapunda operates an employee pension sheme to provide post retirement benefits to its
employees. According to the pension scheme agreement, Kapunda periodically contributes
10% of the employees basic salary as employer pension contributions to a separate pension
fund. Employees also contribute 10% of their basic salaries. Upon retirement, employees are
entitled to a lump sum pension payment computed as final annual salary multiplied by 2%
for each year of service up to a maximum of 35 years, in addition to a monthly pension
payment which is computed as a third of the monthly salary at the time of retirement. The
following details relate to the pension:
K’m
Fair Value of plan assets at 31 December 2021 50
Accrued Pension benefits at 31 December 2021 65
Fair Value of plan assets at 31 December 2022 58
Accrued Pension benefits at 31 December 2022 69
Total cash contributions paid to the pension fund in year to 31 December 2022 10
Pension benefits paid during the year to 31 December 2022 15

Additional pension earned by plan members for the services rendered during the year to 31
December 2022 amounted to K5.5 million. Yields to maturity on high class corporate bonds
with the same term to maturity as Kapunda’s pension plan liabilities were 10% and 8% at
31 December 2021 and at 31 December 2022 respectively.

For tax purposes, tax relief for the cost of providing employee pension is obtained when
contributions are paid. (10 marks)

Transaction 2 – Directors Bonus Scheme

On 1 October 2020, Kapunda entered an arrangement with its 10 directors in which each
director was promised a cash bonus equal to the market price at the time of settlement of
100,000 Kapunda Plc equity shares upon remaining in employment with Kapunda Plc over a
3 year period commencing 1 January 2021. Kapunda Plc had initially expected that 4
Directors would leave before the end of the three (3) year period. During the year to 31
December 2021, two (2) Directors left their employment with Kapunda and as at 31
December 2021 it was estimated that no more directors would leave over the remaining 2
years. No director has left during the year to 31 December 2022 though it is estimated as at
31 December 2022 that one (1) Director will leave over the last one (1) year. Each Kapunda
Plc equity share has been trading at the following fair values to date:

232
 Date Fair value (K)
1 October 2020 10.00
1 January 2021 12.10
31 December 2021 11.95
31 December 2022 13.20
(10 marks)

For tax purposes, the cost of cash bonuses is only tax deductible in the period when the
bonus is paid.

Kapunda Plc’s directors are also concerned about the deferred tax implications of the above
transactions in the financial statements. Kapunda Plc is liable to income tax at 35%.

Required:

Explain to the directors of Kapunda Plc how the above transactions must be accounted for in
the financial statements of Kapunda Plc for the year to 31 December 2022 including the
deferred tax implications in accordance with IFRS.

[Total: 20 Marks]

QUESTION THREE

(a) Bonimotor Ltd is an international company with a presence in Zambia providing

spare parts for the automotive industry. It operates in many different jurisdictions
with different currencies. During 2022, Bonimotor experienced financial difficulties
partly due to the COVID-19 third wave pandemic marked by a decline in revenue, a
reorganisation and restructuring of the business and as a result reported a loss for
the year. An impairment test of goodwill was performed, but no impairment was
recognised. Bonimotor applied one discount rate for all cash flows for all cash-
generating units (CGUs), regardless of the currency in which the cash flows would
be generated. The discount rate used was the weighted average cost of capital
(WACC), and Bonimotor used the yield on 10-year GRZ bond as the risk-free rate in
this calculation.

Furthermore, Bonimotor built its model using a forecast denominated in the parent
company's functional currency. Bonimotor felt that any other approach would require
a level of detail that was unrealistic and impracticable. Bonimotor argued that the
different CGUs represented different risk profiles in the short term. Still, there was
no basis for claiming that their risk profiles were different over a longer business
cycle.

Bonimotor has tested for the impairment of its non-current assets. It was decided
that a building located overseas was impaired due to flooding in the area. The
building was acquired on 1 April 2022 at 25 million Zimbabwean Dollar when the
exchange rate was 2 Zimbabwean Dollar to the Zambian Kwacha. The building is
carried at cost. On 31 March 2023, the building's recoverable amount was deemed

233
 17.5 million Zimbabwean Dollar. The exchange rate at 31 March 2023 was 2.5
Zimbabwean Dollar to the Zambian Kwacha. Buildings are depreciated over 25 years.
The tax base and carrying amounts of the non-current assets before the impairment
write-down were identical. The impairment of the non-current assets is not allowable
for tax purposes. Bonimotor has not made any impairment or deferred tax
adjustment for the above. Bonimotor expects to make profits for the foreseeable
future and assume the tax rate is 25%. No other deferred tax effects must be taken
into account other than on the above non-current assets.

Required:

(i) Evaluate the acceptability of the above accounting practices under IAS 36:
Impairment of Assets. (5 marks)

Recommend the accounting treatment of the above transaction to the

directors of Bonimotor for the year ended 31 March 2023, including financial
statements extracts in accordance with relevant International Financial
Reporting Standards. (5 marks)

(b) Basilio Ltd acquired all the equity shares in Bernasio Ltd on 1 January 2022 for a
consideration of K1,250 million. The carrying amount and fair value of the
identifiable net assets at acquisition were K1,230 million. On 31 December 2024,
Basilio Ltd was in the process of selling its entire shareholding in Bernasio Ltd, and
so it was decided that Bernasio Ltd should be treated as a disposal group held for
sale in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued
Operations at that date. The carrying amounts of Bernasio Ltd’s net assets before
classification as held for sale at 31 December 2024 in the individual statement of
financial position are as follows:
K’million
Property, plant and equipment 836
Intangibles (excluding goodwill) 428
Current assets (at recoverable amount) 584
Non-current liabilities (322)
Current liabilities (254)
1,272

The group has a policy of revaluing its property, plant and equipment in accordance
with IAS 16: Property, Plant and Equipment. There have been no revaluations or any
other gains or losses included within Bernasio Ltd’s different components of equity
since the date of acquisition as the carrying amount was deemed to be a close
enough approximation to its fair value. However, on 31 December 2024, property
with a carrying amount of K330 million was considered to have a fair value of K340
million. No adjustment has yet been made for this fair value. The total fair value less
costs to sell off the disposal group at 31 December was estimated to be K1,220
million. There have been no previous impairments to the goodwill of Bernasio Ltd.

Required:

234
 Recommend to the directors of Basilio Ltd how the above transaction should be
accounted for in the consolidated financial statements as at 31 December 2024
including financial statement extracts in accordance with relevant International
Financial Reporting Standards. (10 marks)

[Total: 20 Marks]

QUESTION FOUR

Mwininkhonde Plc is a trading entity specialised in purchasing heavy equipment for resale to
its commercial customers and light equipment for resale to do-it-yourself (DIY) customers.
The directors of Mwininkhonde Plc seek advice on how they must account for the following
transactions in preparing financial statements for the year to 31 December 2022:

Transaction 1 - Forward Currency Contract

On 1 October 2021, Mwininkhonde entered an agreement in which it contracted to buy
$100,000 from a bank in six months’ time at a forward rate of K17/$. The agreement was a
hedge against a potential depreciation of Kwacha as the company planned to import an item
of plant at a cost of $100,000 in future, the date of settling the currency purchase
agreement. The spot exchange rate on 1 October 2021 was K17/$. Mwininkhonde Plc
acquired the plant on 31 March 2022, at a cost of $100,000 using the proceeds from
settlement of the currency purchase agreement. The spot exchange rate on 31 March 2022
was K18/$ whilst on 31 December 2021, it was K17.3/$. The plant is depreciated over a
useful life of five (5) years straight line basis with a nil residual value. The Directors have
evaluated the transaction for reporting purposes and have correctly concluded that it
constitutes a cash flow hedge of a highly probable future transaction in accordance with
IFRS 9 Financial Instruments. (8 marks)

Transaction 2 – Sale of equipment on extended credit terms

Mwininkhonde Plc sold and delivered equipment to a customer on 1 January 2022 for a total
price of K2.1 million payable in 3 equal instalments at 12 month intervals of K700,000, with
the first one being on 1 January 2022 (the last two being due on 31 December 2022 and 31
December 2023). The instalments due during the year to 31 December 2022 have been
received on their respective due dates. In addition, Mwininkhonde Plc will service the
equipment at no extra cost to the customer over the two (2) years following the sale, on 31
December each year. Mwininkhonde Plc would normally charge K50,000 each time the
equipment is serviced. The applicable interest rate in financing Mwininkhonde Plc’s trading
operations is 10%. (4 marks)

Transaction 3 – Issue of loan Notes

On 1 January 2022, Mwininkhonde Plc issued five million K10, 8% loan notes at a premium
of 5%. The notes have an original term to maturity of three (3) years and are redeemable
on maturity at par. Transaction costs incurred by Mwininkhonde Plc on 1 January 2022
amounted to K100,000. The specific market interest rate on the notes (the interest rate that
reflects Mwininkhonde’s credit rating) was 6.16% on 1 January 2022 whilst the general
market interest rate for this type of instrument was 8% on the same date. Mwininkhonde
issued the notes to finance the cost of investments which have been classified as Fair Value
Though Profit or Loss (FVTPL) assets. Consequently, in rectifying a potential measurement
mismatch between those assets and the loan notes, Mwininkhonde Plc has correctly
designated the loan notes as a FVTPL liability in accordance with IFRS 9 Financial
Instruments. On 31 December 2022, specific market interest rate was 7.2% whilst the
general market interest rate was 9%. (8 marks)

235
Required:

Explain to the directors of Mwininkhonde Plc how the above transactions must be accounted
for in the financial statements of Mwininkhonde Plc for the year to 31 December 2022 in
accordance with IFRS.
[Total: 20 Marks]

QUESTION FIVE

Shop Left Ltd operates supermarket chains across Zambia and the first supermarket was
opened in Kawambwa. The firm has been in commercial operation for more than two (2)
decades, growing its operations through an effective supply chain and financial
management. However, in the last few years, keen competition and worsening general
economic performance have steadied the consistent growths experienced over the years,
resulting in the entity disposing off part of its operations. Below are the financial statements
of Shop Left Ltd:
Income statement for the year ended 31 December 2020 (with comparatives)
2020 2019

Continuing Discontinued Total Continuing Discontinued Total

operation operations operation operations
s s
K000 K000 K000 K000 K000 K000
Revenue 37,400 5,650 43,050 31,350 7,440 38,790
Cost of sales (32,190) (4,830) (37,020) (26,030) (6,390) (32,420)
Gross profit 5,210 820 6,030 5,320 1,050 6,370
Distribution costs (1,302) (425) (1,727) (1,160) (502) (1,662)

Administrative (2,225) (657) (2,882) (1,330) (460) (1,790)

expenses
Interest payable (340) (12) (352) (284) (31) (315)

Profit/(loss) before 1,343 (274) 1,069 2,546 57 2,603

tax
Tax (expense) (826) 50 (776) (1,210) (45) (1255)
/credit
Profit for the 517 (224) 293 1,336 12 1,348
period

Statement of financial position as at 31 December 2020 (with comparatives)

2020 2019
K000 K000
Non-current assets 11,775 14,080
Current assets:
Inventories 4,986 5,445
Other current assets 4,044 6,525
Total assets 20,805 26,050

236
 Share capital & reserves 8,896 8,798
Non-current liabilities:
Loan note 5,800 9,100
Current liabilities 6,109 8,152
Total equity and liabilities 20,805 26,050

Additional information

(i) No additional equity shares were issued and no dividends were paid in 2020.

(ii) a class meeting of key shareholders and Loan holders held on 30 June 2020, a
decision was taken to sell the entire operations of one of the firm's major retail
shops as a response to teething operational difficulties that started in the early part
of the current period. Operations, however, continued until 30 September 2020,
when the sale transaction finally closed and proceeds received. Results from these
operations for the current period are separately shown in the above income
statement. Loss on sale of the operations amounting to K217,000 has been included
within administrative expenses.

(iii) Shop left Ltd gave all employees a salary increment of 11% effective January 2020.

(iv) On 31 December 2020, there was litigation and claim amounting to K2.05 million
against the company by a supplier whose contract was terminated as part of the
closure process. Its legal counsel has advised the company that it has a good
defence against the claim. Accordingly, no provision has been made in respect of the
potential liability in these financial statements.

(v) The following ratios have been computed based on the 2019 financial statements:
Gross profit margin 16.42%
Profit (before interest and tax) margin 6.71%
Return on equity 15.32%
Return on capital employed 16.30%
Inventory turnover 5.95
Current ratio 1.47
Assets turnover 2.17
Debt/debt+equity ratio 50.84%

Required:

Write a report to the Board of Directors analysing the financial performance and
position of Shop Left Ltd, drawing their attention to the effects (or potential effects)
of the discontinued operations and the contingencies on overall performance.

[Total: 20 Marks]

END OF PAPER

237
238
239
CA3.1 SUGGESTED SOLUTIONS

SOLUTION ONE – (COMPULSORY)

(a)

Traditional ethical conduct relating to disclosure is insufficient when applied to

corporate social responsibility (CSR) disclosure because the role of company is linked
with the role of citizen, which is held to a higher ethical standard. Corporate citizens
are companies acting on behalf of a social interest, which may or may not affect
revenues. These socially beneficial actions

raise the ethical standard for such companies because of altruistic intentions, which
is entirely different from the profit-generating purpose of a company. The ethical
expectations of corporate citizens are thus more demanding than those for
businesses without a social interest, especially in the way corporate citizens
communicate their practices.

The ethics of corporate social responsibility disclosure are difficult to reconcile with
shareholder expectations. Companies must remain profitable but there may be
conflict. Maintaining integrity becomes more challenging when a company may report
less profit and thus lower directors’ bonuses. The problem that faces many
companies is how to ethically, legally, and effectively disclose information while
maintaining their market position.

It can be argued that increased CSR disclosure is in itself a form of socially

responsible behaviour, and that by offering more information to the public,
companies better meet their responsibilities to stakeholders. There are ethical
implications of companies using CSR reporting for the sole purpose of improving
revenue. The ethical implications are exacerbated if the desired effects of disclosing
responsible conduct are solely to improve profitability. Disclosing good conduct solely
for profit is unacceptable because it exploits something of much higher value (right
conduct) to promote something which may be thought as being of lower value
(profit).

(b)

Mubanga Group
Consolidated Statement of Cashflow for the year ended 31 May 2022
K'000 K'000
Cash flow from operating activities

Profit before tax Add 110.00

back:
Share of associate loss 120.00
Finance cost expense 90.00
Depreciation 136.00
Net pension expense W9 60.00
Loss on disposal of plant (12 -14) 2.00
Profit on disposal of equipment (116 -76) (40.00)

240
Decrease in fair value of loan note (680 - 464) (216.00)
Goodwill impairment W2 233.60
Increase in inventory (200 - 172) (28.00)
Decrease in trade receivables (280 -292 - 3.4 ) 15.40
Decrease in trade payables (260 - 268 - 4) (12.00)
Cash generated from operations 471
Pension contribution paid (200.00)
Taxation paid W4 (27.00)
Interest paid W10 (26.00)
Net cash inflow from operating activities 218.00
Cash flow from investing activities
Purchase of Musonda Plc (252 - 2.4) (249.60)
Purchase of shares in Chama Plc (28.00)
Purchase of shares in Kombe Plc (144.00)
Purchase of PPE W1 (398.80)
Proceeds from disposal of PPE (116+12) 128.00
Dividends received from associates 40.00
Net cash outflow from investing activities (652.40)
Cashflow from financing activities
Proceeds from issue of shares W6 314.00
Cash received from NCI W8 29.20
Other dividends paid W7 (22.80)

Net cashinflow from financing activities 320.40

Decrease in cash & cash equivalents (114.00)

Opening cash & cash equivalents 26.00

Closing cash & cash equivalents (88.00)

WORKINGS
W1 Property, plant & equipment

K'000
Opening balance 1,400.00

Depreciation charge (136.00)

New subsidiary 27.20

Disposals (76+14) (90.00)

Acquisition (bal. fig.) 398.80

Closing balance 1,600.00

W2 Goodwill

K'000
Opening balance 180.00

241
 New subsidiary 252 – (80% x 28) 229.60

Impairment (bal fig.) (233.60)

Closing balance 176.00

W3 Investment in associate

K'000
Opening balance 300.00

Acquisition 144.00

Share of loss (120.00)

Disposal -

Dividends received (40.00)

Closing balance 284.00

W4 Taxation

K'000
Opening balance (94 - 20) 74.00

Profit or loss 44.00

New subsidiary 1

Cash paid (bal. fig) (27.00)

Closing balance (58+34) 92.00

W5 Movement on Equity - 10% shareholding

K'000
NCI at 31 May 2022 before disposal (30% x 2600) 78

Decrease in NCI 10/30 x 78 26

Consideration paid 28
Negative movement on equity (2)

W6 Issue of shares
K'000
Opening balance (440 + 32) 472.00

Net actuarial gain 8.00

Shares issued for cash (bal. fig) 314.00

Movement on equity W5 (2.00)

Closing balance (660 + 132) 792.00

242
W7 Retained Earnings

K'000
Opening balance (48.00)

Profit or loss 52.80

Dividends paid (Bal. fig) (22.80)

Closing balance (18.00)

W8 Non - Controlling Interest

K'000
Opening balance 232.00

New subsidiary 20% x 28 5.60

Profit or loss 13.20

Decrease in NCI W5 (26.00)

Cash received (Bal. fig) 29.20

Closing balance 254.00

W9 Employee Benefits

K'000
Opening balance 596.00

Net actuarial gain (8.00)

Net pension expense (Bal. fig) 60.00

Contribution paid (200.00)

Closing balance 448.00

W10 Interest Payable

K'000
Opening balance 96.00

Profit or loss 90.00

Cash paid (Bal.fig) (26.00)

Closing balance 160.00

243
SOLUTION TWO

Transaction 1

In accordance with IAS 19 Employee Benefits, the pension plan appears to be a

defined benefit plan as the employer defines the eventual benefits upon retirement
before hand regardless of how much contributions will be made to the fund.
Kapunda seems to have a continuing obligation to meet the promised pension per
benefit formula. The following amounts will therefore be reported in the FS for the
year to 31.12.2022:

a) Net Pension liability to report as a non current liability in SFP at 31.12.2022:

K’m
Plan liabilities at 31.12.2022 69
Plan assets at 31.12.2022 (58)
____
Net pension liability at 31.12.2022 11
____

b) Pension cost to report in SPLOCI

K’m
Net plan liability at 1.1.2022 (65-50) 15
Changes in y/e 31.12.22 other than pension cost
- Cash contribution paid (10)
____
5
Total pension cost for the year (balance) 6
____
Net plan liability at 31.12.2022 11
____
Reporting the total pension cost:
Total pension cost as above 6
Amount to report in P/L:
- Current service cost 5.5
- Net interest 15X10% 1.5
___ (7)
____
Remeasurement component to report in OCI (1) gain
(actuarial gain) ____

c) Deferred tax implications of the pension plan amounts:

Accounting base amounts must be the Net pension asset or liability reported in the
SFP. The tax base amount must be nil as tax relief is only recognised on cash basis,
when the contributions are paid. The following are therefore the deferred tax effects
for the year to 31 December 2022:

Date Accounting Tax Temporary Deferred

(31.12) base base difference tax liability/(asset)
K’m K’m K’m K’m

244
 2022 11 0 11 tax deductible 11X35% = (3.85)
2021 15 0 15 tax deductible 15X35% = (5.25)
____
Net decrease in the deferred tax asset for the period 1.4
Deferred tax expense on the actuarial gain to in OCI 35%X1 (0.49)
_____
Deferred tax expense to report in P/L 1.05
_____

Transaction 2

The bonus arrangement is a cash settled share based transaction in accordance with
IFRS 2 Share Based Payments. The total estimated cost of the bonus must be
spread over the 3 year performance period on a straight line basis. A liability must
be reported in the SFP equivalent to the cumulative expense recognised in P/L to
date. The following amounts are applicable:

a) Share based payment (SBP) liabilities and expenses K’m

SBP liability at to report at 31.12.2022 (10-2-0-1) X 100,000 X13.2 x2/3 6.16
Less SBP liability at 31.12.2021 (10-2-0)X100,000X11.95 x 1/3 (3.19)
_____
SBP expense for the year to 31.12.2022 (credit to P/L) (2.97)
______

b) Deferred tax implications of the SBP bonus

The accounting base is the SBP liability reported in the SFP. The tax base amount
must be nil as tax relief is only recognised on cash basis, when the bonus is paid.
The following are therefore the deferred tax effects for the year to 31 December
2022:

Date Accounting Tax Temporary Deferred

(31.12) base base difference tax liability/(asset)
K’m K’m K’m K’m
2022 6.16 0 6.16 tax deductible 6.16 X35% = (2.16)
2021 3.19 0 3.19 tax deductible 3.19X35% = (1.12)
____
Deferred tax credit to report in P/L 1.04
_____

245
SOLUTION THREE

(a)
i)
The discount rate used by Bonimotor Ltd has not been calculated in accordance
with the requirements of IAS 36 Impairment of Assets. According to IAS 36, the
future cash flows are estimated in the currency in which they will be generated
and then discounted using a discount rate appropriate for that currency. IAS 36
requires the present value to be translated using the spot exchange rate at the
date of the value in use calculation.

Furthermore, the currency in which the estimated cash flows are denominated
affects many of the inputs to the WACC calculation, including the risk-free interest
rate.
Bonimotor Ltd has used the 10-year government bond rate for its jurisdiction as
the risk-free rate in the calculation of the discount rate. As government bond rates
differ between countries due to different expectations about future inflation, value
in use could be calculated incorrectly due to the disparity between the expected
inflation reflected in the estimated cash flows and the risk-free rate.

According to IAS 36, the discount rate should reflect the risks specific to the asset.
Accordingly, one discount rate for all the CGUs does not represent the risk profile
of each CGU. The discount rate generally should be determined using the WACC
of the CGU or of the company of which the CGU is currently part. Using a
company’s WACC for all CGUs is appropriate only if the specific risks associated
with the specific CGUs do not diverge materially from the remainder of the group.
In the case of Bonimotor Ltd, this is not apparent.

ii) A number of IASs are required to answer this question, which include the
knowledge of IAS 16, IAS 36, IAS 12 and IAS 21
• Carrying amount of building at 31 March 2023:
- 25/2 x 24/25 = K12 million
• Recoverable amount of building at 31 March 2023
- 17.5 million Zimbabwean Dollar/2.5 = K7 million.
• Impairment loss to profit or loss = K5 million (K12 million – K7 million)

The tax base and carrying amount of the non-current assets are the same before
the impairment charge. After the impairment charge, there will be a difference of
K 5 million. This will create a deferred tax asset of K5 million x 25%, = K1·25
million.

As Bonimotor Ltd expects to make profits for the foreseeable future, this can be
recognised in the financial statements.

Statement of profit or loss for the year ended 31/3/2023 extract

K million
Impairment of building (5)
Depreciation of building 12.5 /25 yrs (0.5)

246
 Statement of financial position extracts as at 31/3/2023
Non-current assets:
Deferred tax assets 1.25
Building (12 – 5) 7

(b) Bernasio Ltd

• Goodwill in Bernasio Ltd would originally be calculated as K20 million

(K1,250 million – K1,230 million). The net assets in Bernasio Ltd are now
K1,292 million at 31st December 2024 (K1,272 million per question and K20
million goodwill).
• Since the group has a revaluation policy under IAS 16 Property, Plant and
Equipment, the group must revalue the property plant and equipment of
Bernasio Ltd to fair value of K340 million on classification as held for sale. A
gain of K10 million (K340 million – K330 million) would be recorded within
other components of equity.
• The net assets of Bernasio Ltd would now have a carrying amount of
K1,302 million including K846 million for property, plant and equipment. On
classification as held for sale, Bernasio Ltd must be measured at the lower of
carrying amount and fair value less costs to sell. An impairment arises of K82
million (K1,302 million – K1,220 million).
• This will first be allocated to the goodwill of K20 million. The remaining
impairment of K62 million is allocated to non-current assets to which the
measurement requirements of IFRS5 Non-current Assets Held for Sale and
Discontinued Operations apply. No impairment will therefore be allocated to
the current assets of Bernasio Ltd.

Calculations
The remaining impairment loss of K62 million should be allocated to property,
plant and equipment and other intangible assets in proportion to their
respective carrying amounts as follows:
Property, plant and equipment K62 million x (K846m/ (K846 million + K428
million)) = K41 million Other intangible assets K 62 million x (K428 million/(
K846 million + K428 million)) = K21 million.

Alternatively
The table below summarises the allocation of the impairment:
Carrying amount Allocated Carrying
Allocated Carrying impairment amount
amount before after
reclassified allocation of
impairment
impairment after
loss
allocation of as
held for sale
K million K million K million
Goodwill 20 (20) Nil
Property, plant and equipment 846 (41) 805
Other intangible assets 428 (21) 407

247
Current assets 584 nil 584
Non-current liabilities (322) nil (322)
Current liabilities (254) nil (254)
Total 1,302 (82) 1,220

The assets and the liabilities of the disposal group should be separately
presented within the current assets and current liabilities of the consolidated
financial statements. K1,796 million (K805 million + K407 million + K584
million) or (K836 + K10 + K428 – K62 + K584) will be included within current
assets and K576 million (K322 million + K254 million) within current liabilities.

Statement of financial position as at (extract)

K million
Current assets:
Current assets -held for sale (805+407+584) 1,796
Equity and Liability
OCI – revaluation gain (340 – 330) 10

Current Liabilities:

Current liabilities – held for sale (322 + 254) 576

Statement of profit or loss for the year ended 31/12/2024

K million

Impairment losses (82)

248
SOLUTION FOUR

Transaction 1

In accordance with IFRS 9, where a cash flow hedge results in recognition of a non
monetory item, the remeasurement gains and losses on the hedging instrument that are
within the effective part of the hedge must initially be reported in OCI (items to be
reclassified in P/L) and reclassified upon recognition of the non monetory item by setting off
the accumulated gain in OCI against the initial carrying amount of the non monetory item.

The forward currency contract (FCC) is a derivative instrument and will therefore be
classified as FVTPL item and measured normally at FV each reporting date. However, only
gains and losses outside the effective part of the hedge will be immediately reported in P/L.

The following amounts will be reported in the FS for the year to 31.12.2022:

a) FCC K’m
FCC asset b/d 1.1.2022 (17.3-17)X100000 0.03
Remeasurement gain to report in OCI for y/e 31.12.2022 (balance) 0.07
____
FCC asset at 31.3.2022 (18.-17)X100000 0.1
____

b) Plant and equipment K’m

Purchase cost 31.3.2022 $100000X18 1.8
Less reclassification of accumulated gain on FCC 100000X(18-17) (0.1)
____
Initial carrying amount of the plant on 31.3.2022 1.7
Depreciation charge for the y/e 31.12.2022 17/5X9/12 (0.3)
_____
Carrying amount of the plant on 31.12.2022 1.4
_____

Transaction 2

Revenue from the sale and servicing of the equipment must be recognised in accordance
with IFRS 15 Revenue From Contracts with customers. The standard requires that revenue
must only be recognised upon meeting the performance obligations. In this case, there are
two performance obligations, the delivery of the equipment and the subsequent servicing.
Revenue attributable to delivery of the equipment must be recognised on 1.1.2022 whilst
that for each service on the date of the service (31.12.2022 and 31.12.2023). The total
amount receivable must therefore be split and attributed each performance obligation.
Further, amounts receivable after performance obligations are met must be discounted. It
can be assumed that the consideration for each service is from the instalment due on the
date of the service, in which case there is no need to discount the revenue for servicing.
The following amounts are applicable in preparing FS for the year to 31.12.2022:
K’m
Revenue to recognise on 1.1.2022 (for equipment delivery)
(0.7 +[(0.7-0.05)X1.09^-1] +[(0.7-0.05)X1.09^-2]) 1.83
Revenue from servicing on 31.12.2022 0.05
____
Total revenue to recognise in the year to 31.12.2022 1.88

249
 Finance income amounts previously discounted on 1.1.2022 0.11
9%X([(0.7-0.05)X1.09^-1] +[(0.7-0.05)X1.09^-2]) ____
Total income recognised to date at 31.12.2022 1.99
Less cash reeived to date at 31.12.2022 0.7X2 (1.4)
____
Receivable at 31.12.2022 0.59
____

Transaction 3

An instrument classified as FVTPL in accordance with IFRS 9 Financial Instruments will

initially be measured at FV excluding transaction costs.
Transaction costs are expensed in P/L for the period the contract is entered.

Subsequently, the instrument will be remeasured to FV each reporting date with gains and
losses primarily reported in P/L. However, for non derivative liabilities designated as FVTPL,
any remeasurement gains or losses arising from changes in the credit worthiness of the
reporting entity must be reported in OCI.

The following are applicable for the year to 31.12.2022:

a) In the SFP at 31.12.2022, the loan notes are reported at FV computed as PV of future
liability cash flows discounted at the entity’s current specific market interest rate as
follows:
K’m
Future interest 8%X10X5[(1.072^-1)+(1.072^-2)] 7.21
Principal 10X5X(1.072^-2) 43.51
_____
FV to report as carrying amount in SFP at 31.12.2022 50.72
_____
b) Amounts to report in the SPLOCI for the y/e 31.12.2022:
K’m
In P/L:
Transaction costs (0.1)
Finance cost 6.16%X[5XK10X1.05] (3.23)
Remeasurement gain (Working) 0.76
_____
(2.57)
_____
In OCI
Remeasurement gain (1.01-0.77) 024
_____

Working – Remeasurement gain/loss on the FVTPL liability

K’m
FV at 1.1.2022 [5XK10X1.05] 52.5
Finance costs y/e 31.12.2022 52.5X6.16% 3.23
Less cash paid 31.12.2022 8%X5X10 (4)
____
Carrying amount at 31.12.2022 before remeasurement 51.73
Total remeasurement gain (balance) (1.01)
_____

250
 FV to report at 31.12.2022 as computed above 50.72
_____
Gain/loss to report in P/L:
Carrying amount before remeasurement 51.73
Gain to report in P/L (balance) (0.76)
_____
Expected FV at 31.12.2022 without change in credit rating (W) 50.97
______
Working - Expected FV at 31.12.2022 without change in credit rating
Expected specific interest rate without change in credit rating
9/8X6.16 = 6.93%
______
Expected Fair value at 31.12.2022

K’m
Future interest 8%X10X5[(1.0693^-1)+(1.0693^-2)] 7.24
Principal 10X5X(1.0693^-2) 43.73
_____
Expected FV at 31.12.2022 50.97
_____

251
SOLUTION FIVE

Report

To: Board of Directors of Shop LeftPlc

From: Accountant

Date: Date of Exam

Subject: Analysis of the financial performance and position of Shop Left Plc

Following the discussion we had on the above subject matter, this report is
submitted for your perusal. The report looks at profitability, working capital
management and gearing of the company for the year ended 31 December
2020, as against its comparative period. This report should be read with the
attached appendix.

Profitability
There has been a fractional improvement in revenue in 2020 over 2019. This
steady rise in revenue resulted largely due to discontinuation of the retail
shop. The sold shop contributed 13.12% of the total revenue generated in
2020 against 19.18% in 2019. The company could however not keep its
operational costs in line with the revenue changes as all the profitability
measures have dropped in 2020. Management did poorly in controlling both
direct trading costs and overheads as gross profit margin as well as net profit
margin has fallen. A separate analysis carried out on margins between
continuing and discontinued operations reveals that while the stopped
operations may have significantly contributed to the poor operating margins
especially because of the disposal loss recorded this part of the entity
operated on better gross margins than the rest of the company. Hence, the
company is likely not become any better after the sale of the operations if cost
controls are not significantly tightened for the remaining operations.

The low margins have had hugely negative impact on returns made for
providers of capital in 2020. Both ROCE and return on equity have slipped
considerably even though the company has seen some noticeable
improvements in net asset and inventory turnovers. Asset turnover shows that
the firm turned its resources roughly three times into sales this year as against
little over two times in 2019. Thus, the decline in profitability can be clearly
attributed to high operating cost levels.

Working capital management

Overall, working capital has been effectively managed by Shop Left Plc. With
current ratio of 1.48 in 2020, Shop Left Plc’s current assets provide a good
cover for its short-term obligations. And this ratio is slightly up from 1.47 it
had back in 2019. Current ratio measures how well a firm is positioned to
apply current assets to pay off current liabilities when they mature. The

252
 current ratio of 1.48 implies that the company maintains K1.48 of current
assets to pay every K1 of current debt owed. As a cushion, Shop Left achieves
a good inventory turnover rate and records a clear improvement over last
year. This should reduce any fear of liquidity concerns. On inventory turnover
of 7.42 (as against 5.95 in 2019), the company is able to empty its warehouse
7.5 times on average within 2020, as against approximately 6 times back in
2019. The strong liquidity situation is further helped by Shop Left Plc being a
retail firm which makes it more likely that it would convert resources into liquid
assets at an accelerated rate. However, were the contingent liability to
crystallize any time soon, it would have a damaging effect on liquidity by
bringing it down below 2019’s level.

Gearing
This measures the extent to which the firm finances its operations with funds
provided by external parties. Under this section, investors and lenders
determine how much risk the firm exposes them to. The proportion of debts in
the total long term capital has seen a decline, as shown by its capital gearing
ratio. While little more than half of the total resources in 2019 was provided by
lenders, around six percent of total funds came from within for 2020. The
reduction in debt used implies that the firm is facing lower financial risk now,
and the company is looking healthy. But if profitability concerns are not
overturned sooner than later, keeping even minimal level of gearing may be
unsustainable.

Conclusion
The analysis above has revealed that Shop LeftPlc’ profitability has worsened
and operational costs seem out of control. However, liquidity, efficiency and
gearing levels do not raise any concerns. Management are therefore entreated
to institute investigation into unearthing how best it can put costs under check
and consolidate its strong position.

I am available to provide any further clarification, if so needed. Thank you

(Signed)

Accountant

Appendix
Ratios Formula 2020 2019
(given)

Gross profit margin Gross profit/sales x 100 6,030 x 100

43,050
= 14.01% 16.42%

Profit before Interest and tax margin

253
 PBIT/sales x 100 Sales

= 3.30% 7.52%

Return on PAT/equity x 100 293 x 100

equity 8,896
= 3.29% 15.32%

ROCE PBIT/CE x 100 (1,069+352) x 100

(8,896+5,800)
=9.67% 16.30%

Inventory turnover Cost of sales

Inventory

= 7.42 5.95

Current ratio Current asset

Current liabilities

=1.48 1.47

Assets turnover Sales 43,050

Capital employed 14,696
=2.93 2.17

Gearing Ratio Long-term loan x 100 5,800 x 100

(Long-term loan + (5,800+8,896)
Equity) = 39.47% 50.84%

Separate analyses
Ratios 2020 2019

Continuing Discontinued Continuing Discontinued

operations operations operations operations

Revenue share 37,400 x 100 5,650 x 100 31,350 x 100 7,440 x 100
43,050 43,050 38,790 38,790
= 86.88% =13.12% = 80.82% =19.18%

254
Gross profit 5,210 x 100 820 x 100 5,320 x 100 1,050 x 100
margin 37,400 5,650 31,350 7,440
= 13.93% =14.51% = 16.97% =14.11%

Profit/(loss) 1,683 x 100 (262) x 100 2,830 x 100 88 x 100

before Interest 37,400 5,650 31,350 7,440
and tax margin = 4.5% =(4.6%) = 9.02% =1.18%

END OF SOLUTIONS

255
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA ADVISORY PROFESSIONAL IN ACCOUNTANCY

___________________

CA 3.2: ADVANCED AUDIT AND ASSURANCE

___________________

THURSDAY 16 JUNE 2022

___________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO (2) sections:

Section A: One (1) Compulsory scenario question.
Section B: Four (4) Optional Questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

256
SECTION A

This question is compulsory and must be attempted.

QUESTION ONE – COMPULSORY

You are an Audit Manager responsible for the financial statement audit for Chimuka
Technologies Ltd and you are planning the final audit of the financial statements for the
year ending 31 March 2022. Your firm was appointed external auditor for Chimuka
Technologies Ltd on 1 June 2021 and the Managing Partner of your firm is very happy with
the audit fee charged because Chimuka Technologies Ltd now contributes a significant
amount of the total firm’s income.

The company operates through ten (10) divisions spread throughout the Republic of
Zambia. However, during the interim audit, most of the Audit Trainees on the assignment
expressed ignorance regarding the nature of an attestation engagement and a direct
engagement, and wanted to know whether the financial statement audit is an attestation
engagement or a direct engagement. The divisions are considered as profit centers and any
transfers between them are charged at variable cost.

Chimuka Technologies Ltd is a supplier of hardware and software. It also conducts tailor-
made Information Technology (IT) training to clients. Chimuka Technologies Ltd uses a lot
of fuel to effectively monitor client systems and attend to emergencies. The recent removal
of subsidies on fuel has led to increases in fuel prices.

During the final part of the year, Chimuka Technologies Ltd entered into a three (3) year
lease agreement for most of the office furniture and equipment. This followed an evaluation
which was carried out by the Management Accountant regarding the lease or buy decision.

The Government has made significant changes to the tax legislation applying to companies
such as Chimuka Technologies Ltd. These are meant to ensure the sector contributes a
reasonable amount to the public purse. According to the Minister of Finance and National
Planning these changes are long overdue. The Finance Director for Chimuka Technologies
Ltd has recognized a general provision of K2.5 million in the financial statements for the
year ended 31 March 2022 to address the effects of the tax changes on the company.

The statement of financial position as at 31 March 2022 shows no movement in the deferred
tax liability balance. The Finance Director stated that there were no temporary differences
during the year. The Finance Director asked your firm to value the pension benefits for the
employees so that the financial statements could be finalized. The experts who performed
the actuarial valuations last year have relocated to Canada.

Chimuka Technologies Ltd has been offering various Information Technology (IT) services to
your firm and the company wants this to continue. Chimuka Technologies Ltd has qualified
and experienced Information Technology (IT) personnel who give clients value for their
money. Your firm currently owes Chimuka Technologies Ltd K200,000 for various
information technology (IT) services. A review of the correspondence file indicates that
Chimuka Technologies Ltd has been considering taking legal action to recover the debt owed

257
by your firm. The Managing Partner is proposing a set off against the audit fees to avoid
any reputational risk.

The Audit Senior has heard about the need to exercise professional skepticism in respect of
the financial statement audit for Chimuka Technologies Ltd, and wants you to give more
guidance.

Required:

(a) Discuss the nature of an attestation engagement and a direct engagement and
advice the Audit Trainees whether the financial statement audit is an attestation
engagement or a direct engagement. (6 marks)

(b) Evaluate eight (8) audit risks and recommend appropriate audit responses for each
identified audit risk, using the information given in the scenario. (16 marks)

(c) Using the information in the scenario:

(i) Identify and explain four (4) ethical threats. (6 marks)

(ii) Suggest suitable safeguards for each ethical threat. (4 marks)

(d) Suggest, giving justification for each, two (2) audit procedures which your firm
should undertake in respect of the general provision. (4 marks)

(e) Advise the Audit Senior regarding four (4) key areas which will require appropriate
levels of professional skepticism in respect of the financial statement audit for
Chimuka Technologies Ltd. (4 marks)
[Total: 40 Marks]

258
SECTION B

There are FOUR (4) questions in this section.

Attempt any THREE (3) questions in this section.

QUESTION TWO

(a) You are an Audit Manager in Chushi & Associates, a firm of chartered accountants.
Chushi & Associates are the auditors of the financial statements of Silver Ltd and you
are the Audit Manager for this client.

Silver Ltd is a company in the agricultural industry and its main line of business is in
the rearing of dairy animals. The company owns two (2) breeds of dairy animals and
owns a large number of animals at its two (2) farms. Silver Ltd is the main supplier
of milk to a local dairy company which has strict quality control systems to ensure
that only milk meeting its quality standards is purchased.

The inventory of Silver Ltd at the year-end comprises the dairy animals and milk
awaiting delivery to the dairy company. Milk is kept in special tanks in batches
depending on when it was produced. Milk that does not meet the quality standard is
valued at a lower cost and is packed and sold to local retailers by Silver Ltd under its
brand name.

Silver Ltd uses the services of Mint Consultants in determining the value of the dairy
animals at the period end. The Production Manager of Silver Ltd is also in charge of
quality control. He is responsible for the quality of the milk produced and at the
period end, he determines the volumes of milk that meets the quality control
requirements of its main customer and that which does not meet the quality control
standard.

Required:

(i) Distinguish an auditor expert from a management expert. (2 marks)

(ii) Evaluate the need for the services of Mint Consultants in the audit of the
financial statements of Silver Ltd, stating the impact on the audit report of
the use of the work of Mint Consultants. (4 marks)

(iii) Suggest four (4) factors that should be considered before deciding to use the
services of Mint Consultants in the audit of the financial statements of Silver
Ltd. (4 marks)

(b) You are a chartered accountant and member of the Audit Committee of Kilimanjaro
Plc. The audit for the financial statements of Kilimanjaro Plc is almost complete and
the draft audit report has been submitted to the company by the external auditors.

You are planning to attend a meeting of the Audit Committee at which the draft
audit report will be reviewed before being submitted to the Board of Directors.

259
The following has been extracted from the draft audit report:

To: The Board of Directors of Kilimanjaro Plc.

Opinion:
In our opinion, except for the effects of the matter described in the Key Audit
Matters paragraph of our report, the accompanying financial statements give a true
and fair view as at 31 December 2021.

Key Audit Matters:

The Company’s inventory in the financial statements of K2.5 million has not been
stated at the lower of cost and net realizable value but has been stated solely at cost
which constitutes a departure from IFRSs. The amount involved is considered
material to the financial statements.

Other information:
Management is responsible for the other information contained in the financial
statements. We have no responsibility with regards to the other information and as
such our opinion does not include the other information.

Required:

(i) Explain the need for the draft audit report to be discussed by the Audit
Committee and the Board of Directors before being finalized and signed by
the auditors. (2 marks)

(ii) Evaluate the extracts from the draft audit report and comment as
appropriate. (8 marks)
[Total: 20 Marks]

260
QUESTION THREE

You work for Kabibi Accountants, a small firm of chartered accountants. You were recently
promoted to the position of Senior Manager and you have been given additional
responsibility of reviewing all client relationships.

You are currently reviewing the relationship with one of your long standing clients,
Chambeshi Ltd. Chambeshi Ltd is an owner-managed company and the Engagement
Partner for the audit of Chambeshi Ltd has informed you that the previous week, he had a
heated argument with the owner of Chambeshi Ltd at the golf club. The relationship
between him and the owner has therefore broken. The audit of the financial statements for
Chambeshi Ltd is about to commence.

The Quality Control Partner for Kabibi Accountants is carrying out a post-issuance review for
a client involved in mining. He has requested you to review the sufficiency and
appropriateness of the audit evidence obtained for each of the three (3) matters described
below:

Matter one
The payroll is outsourced to a service organization which processes all of the company’s
salary expenses. The audit team traced the payroll expenses recognized in the financial
statements back to year-end reports issued by the service organizations.

Matter two
When auditing the company’s capital expenditure, the audit team selected a material
transaction to test and found that key internal controls over capital expenditure were not
operating effectively. The audit team noted details of the internal control deficiencies and
updated the systems notes on the permanent audit file to reflect the deficiencies.

Matter three
Due to the planned disposal of one (1) of the company’s factory sites, the property and
associated assets was classified as held for sale in the financial statements. The audit team
checked whether reclassification was in line with the guidance given in IFRS 5 Non-Current
Assets held for Sale and Discontinued Operations. All computations were checked for
arithmetical accuracy.

Required:

(a) Explain four (4) main reasons why companies change their auditors. (8 marks)

(b) Advise the Engagement Partner on whether Kabibi Accountants should continue as
external auditors for Chambeshi Ltd. (3 marks)

(c) Explain the sufficiency and appropriateness of the audit evidence obtained in each of
the three (3) matters described in the scenario. (9 marks)
[Total: 20 Marks]

261
QUESTION FOUR

You are an Audit Senior in Kudu Accountants, a firm of chartered accountants. Kudu
Accountants has three (3) partners and five (5) managers. The Engagement Partner for the
audit of Joma Ltd delegated to you the planning work for the audit of the financial
statements for the year ended 31 March 2022.

The following information was given to you by the Director of Finance of Joma Ltd:

1. Joma Ltd’s principal activity is the manufacture and sale of quicklime, hydrated lime,
and other lime products. The company’s plant was constructed in 1920 and
operations started the following year. The plant has a capacity to produce more than
1,000 tons of high grade lime products. However, the demand has been negatively
affected by the restrictions imposed by the government due to the COVID-19
pandemic.

2. The company sources its raw materials from its quarry which was bought when the
plant was constructed. The heavy duty vehicles used in the transportation of the raw
materials are imported from Europe. Regular maintenance is carried out by a local
engineering company which is expensive. Foreign maintenance providers are
relatively cheaper but to protect the local industries, the country’s regulations do not
allow the use of foreign contractors. Most of the spares have to be imported.

The Engagement Partner responsible for the audit of the financial statements for Orange Ltd
for the year ended 31 March 2022 has requested you to assist finalize the financial
statement audit. The Audit Senior previously assigned to this audit resigned without giving
notice. The only issue outstanding which needs to be addressed is the case of the fire which
occurred on 12 April 2022. The issue has been appropriately disclosed in financial
statements under note 16.

Required:

(a) Explain why audit planning is normally considered as a series of activities instead of
as a single event. (3 marks)

(b) Write a report to the Engagement Partner in which you discuss the business risks in
Joma Ltd. (12 marks)

(c) Using the information in the scenario in respect of Orange Ltd, draft a suitable
paragraph which should be included in the auditor’s report concerning the fire. You
should assume the audit opinion will be unmodified. (5 marks)
[Total: 20 Marks]

262
QUESTION FIVE

You are an Audit Manager in Chilubi Chartered Accountants. You are responsible for the
audit of the financial statements for Lion Ltd for the year ended 30 June 2021.

Lion Ltd operates in the construction industry. The company created over six hundred (600)
permanent jobs for the local community. There is currently strong global demand for
cement.

Charles, Pinkie and Bibi own 40%, 35% and 25% of the ordinary shares of Lion Ltd
respectively. Michael, the husband to Pinkie supplies cement and other building materials to
Lion Ltd. Charles’ mother, Rosette is the Procurement Director for Lion Ltd.

The Chief Executive Officer (CEO) is from Zimbabwe and has over twenty (20) years’
experience in the construction industry. He has managed to stabilize the profitability and
liquidity of Lion Ltd. His friend, Francis, a chartered accountant provides taxation services to
Lion Ltd. Francis’ wife is the Secretary to the Human Resources Director (HRD).

On 1 October 2020, Lion Ltd received a government grant of K10 million towards the
purchase of new plant for minimizing emissions from the company operations. The plant has
a gross cost of K50 million. It is being depreciated over an estimated economic useful life of
twenty five (25) years. Charles owns 60% of the ordinary shares in a company which
supplied and installed the plant.

Required:

(a) State the audit objectives in respect of related parties in an audit of financial
statements. (6 marks)

(b) State four (4) reasons why an audit cannot be expected to detect all material related
party transactions. (4 marks)

(c) Using the information given in the scenario, identify and explain the possible related
party transactions. (6 marks)

(d) Recommend four (4) audit procedures that must be conducted when auditing the
Government grant. (4 marks)
[Total: 20 Marks]

END OF PAPER

263
CA 3.2 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) Attestation engagement and direct engagement

ISAE 3000 (Revised) Assurance Engagements other than Audits or Reviews of
Historical Financial Information gives detailed guidance in this area. It defines the
two (2) engagements as follows:

o Attestation engagement is an assurance engagement in which a party other

than the practitioner measures or evaluates the underlying subject matter
against the criteria. A party other than the practitioner also often presents
the resulting subject matter information in a report or statement. In some
cases, however, the subject matter information may be presented by the
practitioner in the assurance report. In an attestation engagement, the
practitioner’s conclusion addresses whether the subject matter information
is free from material misstatement.
o Direct engagement is an assurance engagement in which the practitioner
measures or evaluates the underlying subject matter against the applicable
criteria and the practitioner presents the resulting subject matter
information as part of, or accompanying, the assurance report. In a direct
engagement, the practitioner’s conclusion addresses the reported outcome
of the measurement or evaluation of the underlying subject matter against
the criteria.
Broadly speaking, an attestation engagement is one in which the client prepares the
information and the practitioner gives assurance on it. The auditor’s report on the
financial statements would be an example of this, except that auditor’s reports are
not within the scope of the ISAE.

(b) Audit risks and audit responses

Audit risks Explanation Audit responses

(1) New audit client This gives rise to The audit team shall obtain a
detection risk, as the firm thorough understanding of
does not have experience the business of the company
with the client, making it and perform specific audit
more difficult for the audit procedures on the opening
team to detect material balances. There will also be
misstatements. In need to undertake quality
addition, there is a risk control review.
that opening balances and
comparative information
may not be correct.
(2) Related party transactions The company operates The audit team shall discuss
through ten (10) divisions with management the work
spread throughout the carried out to identify and
Zambia and there could collate related party
be a risk that related transactions. It will also be
party transactions are not important to obtain written
adequately disclosed. representations confirming

264
 that disclosures are in line
with the requirements of IAS
24 Related Party Disclosures.
(3) The divisions are The treatment of divisions The audit team should assess
considered as profit centers as profit centers creates the related internal controls
an inherent risk of over performance
management bias as measurement for possible
Divisional Managers may management bias. More
feel under pressure to attention should be paid to
return favorable results. areas that require
management judgement.
(4) Increase in prices of fuel This will erode the The audit team shall make
margins and could impact enquiries of management
on going concern of the regarding the impact of the
company. increase in prices of fuel and
be alert for any indications of
going concern problems.
(5) Lease arrangement There is a risk that the Review the lease agreement
valuation of the right of and ensure valuations are in
use asset and the related line with the guidance given in
liabilities could wrong. IFRS 16 Leases.
(6) Significant changes to the This could result in the The audit team should be
tax legislation company being liable to alert and look out for any
penalties for not adhering evidence of non-compliance
with the regulations. with the new laws. The
Provisions may be auditors may also obtain
misstated in the financial necessary representations
statements. from management that there
has been compliance.
(7) General provision of K2.5 There is a risk that the The audit team shall make
million general provision does enquiry of management what
not meet the conditions the provision represents and if
for a provision specified in management confirms that
IAS 37 Provisions, there is no specific liability,
Contingent Liabilities and then management will be
Contingent Assets. Hence, requested to reverse it.
the accounting treatment
could be considered
incorrect.
(8) No movement in the There is a risk that Review the financial
deferred tax liability balance deferred tax could be statements and tax
misstated. The Finance computations for evidence of
Director is an interested taxable temporary difference.
party and hence his In addition, the audit team
statement must be have to check whether the
subjected to appropriate deferred tax has been
audit tests. accounted for correctly in
accordance with IAS 12
Income Taxes.

265
(c) Ethical threats and safeguards

Ethical threats Explanations Safeguards

(1) The Managing Partner is This can create a self- Safeguards in these situations
very happy with the audit fee interest or intimidation might include:
charged. This could mean the threat. The audit firm will  Taking steps to reduce
audit fees could be relatively want to impress Chimuka the dependency on the
high. Technologies Ltd so as to client
protect this lucrative  Obtaining
relationship. It is also external/internal
possible that the audit quality control reviews
fees could represent more  Having a professional
than 15% of total, which accountant review the
is generally considered as work.
a sign of dependence on
a single client. This can
seriously impair
objectivity.
(2) The Finance Director has Actuarial valuations The firm should not perform
asked the firm to value the involves making of a the valuations since the self-
pension benefits for the number of assumptions, review threat could be
employees. the application of significant.
appropriate
methodologies and
techniques, and this could
be highly subjective. The
firm could be faced with a
self-review threat as it will
be almost impossible to
question the firm’s own
work. The valuations are
likely to be material.
(3) Chimuka Technologies Ltd Independence and The close business relationship
has been offering various objectivity could be is inappropriate and should be
Information Technology (IT) impaired due to this discontinued.
services to your firm and the relationship. The firm may
company wants this to want to impress Chimuka
continue. Technologies Ltd by not
being too critical.
(4) Chimuka Technologies Ltd This can create an The Managing Partner should
had been considering legal intimidation threat and urgently source for the funds
action to recover the debt the firm may be under and liquidate the debt as the
owed by the firm. pressure to produce an threat to independence is too
unmodified audit report. significant. The auditor should
seek legal advice on how to
deal with this matter.

266
(d) Audit procedures and justification – general provision.

(i) Audit procedure:

Obtain details of the make-up of the general provisions if it relates to more
than one item. Cast the schedule and agree the balance to the relevant
general ledger account.
Justification of audit procedure:
In order to test for arithmetical accuracy as well as completeness of the
amount.
(ii) Audit procedure
Review board minutes of the meeting approving the general provision and
discuss the general provision with the Finance Director.

Justification of audit procedure

To determine whether Chimuka Technologies Ltd has any specific present
obligation (liability) as guided by IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.

(iii) Audit procedure

Check whether any payments have been made after the year-end in respect
of the item.

Justification of audit procedure

This is meant to confirm the accuracy the amount of the provision made.

(iv) Audit procedure:

Obtain written representations from management acknowledging its
responsibility for determining the figure of provisions and also to confirm the
reasonableness of the amount provided for.

Justification of the audit procedure:

Part of obtaining sufficient appropriate evidence in the absence of other
methods of confirming the amount.

(e) Key areas which will require appropriate levels of professional scepticism
in respect of the financial statement audit for Chimuka Technologies Ltd

o Fraud – e.g. do the entity’s systems provide opportunities for fraud?

o Accounting estimates e.g. are assumptions reasonable?
o Going concern – e.g. are management’s plans really feasible?
o Related party relationships and transactions e.g. transactions outside the
normal course of business – misappropriation of assets?
o Laws and regulations e.g. where non-compliance may call into question
going concern.
o During the risk assessment in identifying audit risks that could impact the
design of further audit work that requires to be done.

267
SOLUTION TWO

(a) (i) Meaning of an expert:

An expert in the context of auditing is one who has special skills and
competences in areas other than auditing and accounting.

Distinction between management and auditor expert:

A management expert is one appointed by management who helps
management in determining a figure contained in the financial statements.
For example, an actuary engaged by management to determine the
sufficiency of the pension for employees.

An auditor expert – This is one engaged by the auditor to carry out work
that the auditor does not have expertise in. For example, valuing inventory
for agricultural products.
(ii) Need for use the services of an expert:
Silver Ltd is in the agricultural industry and at the end of the year it has to
value its closing inventory and work in progress. The inventory values in such
an industry are likely to be material to the financial statements.

The auditors do not have the skills and competences to be able to value the
closing inventory correctly as required by IFRSs. For this reason the auditors
will require the use of experts who will do this for them. In this case Mint
Consultants may be engaged to value the closing inventory. The auditor will
then compare the valuation as determined by Mint Consultants with the
valuation in the financial statements determined by management.

Impact of the work of the expert on the auditor’s report:

The work of Mint Consultants will only have an impact in as far as the
auditors are gathering evidence and concluding on the amounts of inventory.

Once the auditor concludes and reaches an opinion, the work of Mint
Consultants will have no impact on the audit report and reliance on the work
of the expert will not be mentioned in the report unless required by national
regulations and laws.

(iii) Matters to consider before using Mint Consultants:

The following will be considered when deciding whether to use the services of
Mint Consultants in valuing the inventory of Silver Ltd:
o Consideration of the qualifications that staff going to perform the work
have in the relevant field.
o Consideration of whether Mint Consultants have staff with relevant
experience to carry out the work.
o Any reference of work carried out by Mint Consultants on other
clients.
o Membership of staff of Mint Consultants to relevant professional
bodies if any.

268
 o Any association of Mint Consultants or key staff with Silver Ltd that
may impact on their independence and objectivity.

(b) (i) Need for discussing draft report with the Audit Committee:
ISA 260 (Revised) Communication with those charged with governance gives
guidance in the area of communication between the auditors and the audit
client.
The communication is between the auditors and Those Charged with
Governance. The audit committee is a committee of the board and are
representing the Board of Directors.

The standard requires that the auditors should communicate significant

findings to Those charged with Governance which includes the circumstances
that affect the form and content of the auditor’s report. By doing so, any
misunderstandings will be resolved before the auditor’s report is finalized.
The client may not agree with the suggested opinion and will have an
opportunity to make comments and further explanations where necessary.

(ii) Evaluation of the extracts from the draft auditor’s report:

o The report is addressed to Those charged with governance which is
incorrect. The audit report should be addressed to the shareholders
who appoint them and to whom they are supposed to report.
o The suggested draft opinion suggests that the opinion has been
modified by way of a qualified opinion. The heading of the paragraph
should be ‘Qualified opinion’ and not Opinion as is the case.
o Suggesting that the basis for the opinion is contained in the Key Audit
Matters paragraph is incorrect. The basis for modifying the audit
opinion should be contained in a separate paragraph headed ‘Basis for
qualified opinion’ positions below the opinion paragraph.
o As explained above, the content of the Key Audit Matters paragraph is
inappropriately included here. Even if this may be considered a
significant matter, it should be contained in the basis for qualified
opinion.
If there are no other Key Audit Matters to report on, since this is a
listed company the auditors should simply state that there are no key
audit matters to report on.
o The statement in the Other information paragraph that the auditors
have no responsibility with regards to other information contained in
the financial statements is incorrect. In accordance with ISA 720 The
auditor’s responsibility in relation to other information in documents
containing audited financial statements, the auditors have to perform
specific procedures on the other information.

269
SOLUTION THREE

(a) Reasons why companies change auditors

1. Audit fee – the audit fee can be a very sensitive issue. Audit is required by
statute for many companies. If the directors perceive that the audit has very
little intrinsic value and therefore considers it as a necessary evil, they will
seek to obtain it for as little money as they can. Hence, the fees may be
perceived as too high, resulting in the change of auditors.
2. Size of the company – client may experience rapid growth to the point where
the audit is no longer practicable for the audit firm or client retrenches or
restructures in such a way that it no longer needs a statutory audit. In the
first instance, the auditor may no longer be able to provide the audit for
several reasons:
o Insufficient resources
o Staff
o Time
o Fee level issue
3. The auditor does not seek re-election – another reason for changing auditors
is that the auditor chooses not to stand for re-election. You should be familiar
with many of the reasons behind this:
o There could be ethical reasons behind the auditor choosing not to be
re-appointed.
o The auditor might have to resign for reasons of competition between
clients.
o The auditor might disagree with the client over accounting policies
o The auditor might not want to reduce his audit fee.
4. Audit rotation – the partners in a firm may sometimes conclude that the firm
as a whole has been associated for too long with a client and divest the audit.
5. Personality – for many small owner-managed companies, audit is almost a
personal service. The relationship between such a client and its auditor may
be based on personality, and if relationship break down, it may be necessary
for the audit relationship to discontinue.
Personality may not be such an issue for bigger entities and audit firms where
the audit engagement partner could be transferred if required, while the audit
stayed within the firm.

(b) Advice on whether Kabibi Accountants should continue as external

statutory auditors for Chambeshi Ltd
Kabibi Accountants is a small firm of chartered accountants and it may not have
many partners. It is important to note that for many small owner-managed
companies, like Chambeshi Ltd, audit is almost a personal service. The
relationship between such a client and its auditor may be strongly based on
personality, and if relationship breaks down, it may be necessary for the audit
relationship to discontinue.

It is therefore advisable that Kabibi Accountants should seriously consider

withdrawing from this engagement.

270
(c) Sufficiency and appropriateness of the audit evidence obtained
Matter one
The audit evidence obtained was not sufficient and appropriate. The audit team
should have obtained the year-end reports directly from the service organisation.
In addition, the audit team should have requested for a type 2 report from the
auditors for the service organisation. This would have confirmed the operating
effectiveness of the controls at the service organisation.

Matter two
The audit evidence was not sufficient and appropriate. The audit team should
have performed further appropriate tests such as reviewing relevant board
minutes, agreeing the expenditure to purchase invoices and to the cash book and
bank statements.

In this case the auditors should perform more substantive procedures and not
place any reliance on internal controls having concluded that the internal controls
were not effective.

Matter three
The audit evidence was sufficient and appropriate. The audit team used an
appropriate accounting standard (IFRS 5) to structure their audit work. The
computations were also checked for arithmetical accuracy.

271
SOLUTION FOUR

(a) Audit Planning

ISA 300 Planning an Audit of Financial Statements tends to conceive of audit
planning as a series of activities rather than as a single event: the planning is not
just something written out at the start of the audit which is then stuck to rigidly,
but is an activity that goes on throughout the audit process. For example, audit
procedures need to be performed with their planned objectives in mind, and it
may be necessary to revise the audit plan during the course of the audit if
significant new information or events come to light.

(b) REPORT
To: Engagement Partner

From: Audit Senior

Date: XX/XX/XXXX

Subject: Business risks in Joma Ltd

Introduction

This report discusses the business risks in Joma Ltd. I have used the information
given to me by the Director of Finance for Joma Ltd.

Business risks

The following are the risks I have identified:

1. Joma Ltd’s principal activity is the manufacture and sale of quicklime,
hydrated lime, and other lime products – This type of business is
inherently risky and is highly regulated. It is possible that the operating
licence can be cancelled for non-compliance with laws and regulations.
2. The company’s plant was constructed in 1920 – The plant is based on
very old technology which is likely to be inefficient. The company may be
failing to compete effectively which may result in going concern problems
for the company.
3. Demand has been negatively affected by the restrictions imposed by the
government due to the COVID-19 pandemic – this will eventually result in
reduced profitability and liquidity.
4. Quarry – The quarry was opened a long time ago and it is possible that
the limestone could finish soon. Mining is dealing with a wasting asset
which eventually will run out.
5. The heavy duty vehicles used in the transportation of the raw materials
are imported from Europe. This could prove to be very expensive,
especially if the exchange rate deteriorates.
6. Regular maintenance is carried out by a local engineering company which
is expensive – This may continue to have a negative impact on the
company’s cash flows which is bad for operations.

272
 7. Most of the spares have to be imported – This could prove to be very
expensive, especially if the exchange rate deteriorates. The going concern
status of the company may be questionable.

Conclusion
I will be available for a discussion of the risks identified with you at a time that is
convenient to you.

I trust that the above meets your requirements.

Audit Senior

(c) Emphasis of matter paragraph

ISA 706 Emphasis of Matter paragraph gives detailed guidance in this area. It
states that an Emphasis of Matter paragraph is a paragraph included in the
auditor’s report that refers to a matter appropriately presented or disclosed in the
financial statements that, in the auditor’s judgement, is of such importance that it
is fundamental to users’ understanding of the financial statements.

Hence, an Emphasis of Matter paragraph will be suitable. The draft Emphasis of

Matter paragraph is as follows:

“Emphasis of matter paragraph

We draw attention to Note 16 of the financial statements, which describes the

effects of a fire in the Company. Our opinion is not modified in respect of this
matter”.

273
SOLUTION FIVE

(a) Objectives in respect of related parties

According to ISA 550 Related Parties, the objectives of the auditor are:
o Irrespective of whether the applicable financial reporting framework
establishes related party requirements, to obtain an understanding of
related party relationships and transactions sufficient to be able:
o To recognise fraud risk factors, if any, arising from related party
relationships and transactions that are relevant to the identification and
assessment of the risks of material misstatement due to fraud, and
o To conclude, based on the audit evidence obtained, whether the financial
statements, insofar as they are affected by those relationships and
transactions:
 Achieve fair presentation (for fair presentation frameworks); or
 Are not misleading (for compliance frameworks)
o In addition, where the applicable financial reporting framework
establishes related party requirements, to obtain sufficient appropriate
audit evidence about whether related party relationships and
transactions have been appropriately identified, accounted for and
disclosed in the financial statements in accordance with the
framework.
(b) Why an audit cannot be expected to detect all material related party
transactions
o Related party transactions have taken place without charge
o Related party transactions are not self-evident to the auditors
o Transactions are with a party that the auditors could not reasonably
be expected to know is a related party
o Active steps have been taken by management to conceal either the
full terms of a transaction, or that a transaction is, in substance, with
a related party
o The corporate structure is complex.

(c) Possible related party transactions.

Using the information in the scenario, the following may be considered as related
party transactions:

o Supply of cement and other building materials – The supplier, Michael, is

the husband to one of the major shareholders, Pinkie, who is able to
exercise significant influence over Lion Ltd through her 35% shareholding.
o Supply and installation of plant – Charles controls the company which
supplied and installed the plant through his 60% shareholding. Charles
also owns 40% of the shareholding of Lion Ltd and has the ability to
exercise significant influence over Lion Ltd.

(d) Recommended audit procedures for the government grant

o Obtain documentation relating to the grant and confirm that it should be
classified as capital grant instead of revenue grant

274
o Agree the value of the grant to relevant documentation such a copy of
the application form sent by Lion Ltd
o Agree receipt of the grant to bank statements
o Review any conditions attached to the grant and for evidence of any non-
compliance.
o Ensure that the accounting treatment is in accordance with IAS 20
Accounting for Government Grants and Disclosure of Government
Assistance.

END OF SOLUTIONS

275
 CA ZAMBIA PROGRAMME EXAMINATION
_____________________________________

CA ADVISORY PROFESIONA IN ACCOUNTANCY

______________________________________

CA 3.4: ADVANCED TAXATION

____________________________

THURSDAY 16 JUNE 2022

____________________________

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

________________________________

INSTRUCTIONS TO CANDIDATES
1. You have fifteen (15) minutes reading and planning time. Use it to study the
examination paper carefully so that you understand what to do in each question. DO
NOT write in your answer booklet during this TIME.
2. This paper is divided into TWO (2) sections:

Section A: ONE Compulsory Question.

Section B: FOUR (4) Optional Questions. Attempt any THREE (3) questions from
Section B.
3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name MUST not appear anywhere on your answer
booklet.
4. Do NOT write in pencil (except for graphs and diagrams).
5. Cell phones are NOT allowed in the examination room.
6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.
9. Graph paper (if required) is provided at the end of the answer booklet.
10. A Taxation table is provided from page 2 to page 6 of the question paper.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

276
 TAXATION TABLE

Income Tax
Standard personal income tax rates
Income band Taxable amount Rate
K1 to K54,000 first K54,000 0%
K54,001 to K57,600 next K3,600 25%
K57,601 to K82,800 next K25,200 30%
Over K82,800 37.5%
Income from farming for individuals
K1 to K54,000 first K54,000 0%
Over K54,000 10%
Company income tax rates
On income from manufacturing and other 30%
On income from farming 10%
On income from mineral processing 30%
On income from mining operations 30%
Income from farming for individuals
K1 to K54,000 first K54,000 0%
Over K54,000 10%

Company Income Tax rates

On income from manufacturing and other 30%
On income from farming 10%
On income of Banks and other Financial 30%
Institutions
On income from mineral processing 30%
On income from mining operations 30%
On income from manufacture of products 15%
made out of copper cathodes
Mineral Royalty
Mineral Royalty on Copper

Range of Norm Price Mineral Royalty Rate

Less than US$4,500 5.5% of norm value
From US$4,500 to less than US$6,000 6.5% of norm value
From US$6,000 to less than US$7,500 7.5% of norm value
From US$7,500 to less than US$9,000 8.5% of norm value
From US$9,000 and above 10% of norm value
Mineral Royalty on other minerals
Type of mineral Mineral Royalty Rate
Base Metals (Other than Copper, Cobalt and Vanadium) 5% of norm value
Cobalt and Vanadium 8% of norm value
Energy and Industrial Minerals 5% of gross value
Gemstones 6% of gross value
Precious Metals 6% of norm value
Capital Allowances

277
 Implements, plant and machinery and commercial vehicles:
Wear and Tear Allowance – Standard wear and tear allowance 25%
Used in manufacturing and leasing 50%
Used in farming and agro-processing 100%
Used in mining operations 20%

Non- commercial vehicles

Wear and Tear Allowance 20%
Industrial Buildings:
Wear and Tear Allowance 5%
Initial Allowance 10%
Investment Allowance 10%

Low Cost Housing (Cost up to K20,000)

Wear and Tear Allowance 10%
Initial Allowance 10%

Commercial Buildings
Wear and Tear Allowance 2%

Farming Allowances
Development Allowance 10%
Farm Works Allowance 100%
Farm Improvement Allowance 100%
Presumptive Taxes
Turnover Tax 4%

Rental Income Tax

Annual Rental Income
K800,000 or below 4%
Above K800,000 12.5%

Presumptive tax for transporters

Seating capacity Tax per annum Tax per quarter

K K
Less than 12 passengers and taxis 1,080 270
From 12 to 17 passengers 2,160 540
From 18 to 21 passengers 4,320 1,080
From 22 to 35 passengers 6,480 1,620
From 36 to 49 passengers 8,640 2,160
From 50 to 63 passengers 10,800 2,700
From 64 passengers and over 12,960 3,240

Property transfer tax

Rate of tax on realised value of land, land and buildings and shares 5%

278
Rate on realised value of intellectual property 5%
Rate of tax on realised value on a transfer or sale of a mining right 10%
Rate of tax on realised value on a mineral processing licence or an interest in
the mineral processing licence; 10%
Value Added Tax
Registration threshold K800,000
Standard Value Added Tax Rate (on VAT exclusive turnover) 16%

Customs and Excise duties on used motor vehicles

Aged 2 to 5 years Aged 5 years and

over
Motor vehicles for the transport of ten or Customs Excise Customs Excise
more persons, including the driver duty duty duty duty
K K K K
Sitting capacity of 10 but not exceeding 14 17,778 22,223 8,889 11,112
persons including the driver
Sitting capacity exceeding 14 but not 38,924 0 13,840 0
exceeding 32 persons
Sitting capacity of 33 but not exceeding 44 86,497 0 19,462 0
persons
Sitting capacity exceeding 44 persons 108,121 0 43,248 0

Aged 2 to 5 years Aged 5 years and

over
Motor cars and other motor vehicles
principally designed for the transport of Customs Excise Customs Excise
persons including station wagons and duty duty duty duty
racing cars
K K K K
Sedans
cylinder capacity not exceeding 1000 cc 12,490 10,824 7,136 6,185
Cylinder capacity exceeding 1000 cc but not 16,058 13,917 8,564 7,422
exceeding 1500 cc
Cylinder capacity exceeding 1500 cc but not 16,545 21,508 8,423 10,950
exceeding 2500 cc
Cylinder capacity exceeding 2500 cc but not 18,049 23,463 10,528 13,687
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 22,561 29,329 12,032 15,642

Hatchbacks
cylinder capacity not exceeding 1000 cc 10,705 9,278 7,136 6,185
Cylinder capacity exceeding 1000 cc but not 14,274 12,371 8,564 7,422
exceeding 1500 cc
Cylinder capacity exceeding 1500 cc but not 15,041 19,553 8,423 10,950
exceeding 2500 cc
Cylinder capacity exceeding 2500 cc but not 16,545 21,508 10,523 13,687
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 19,553 25,419 12,032 15,642
Station wagons
cylinder capacity not exceeding 2500 cc 16,545 21,508 9,024 11,731
Cylinder capacity exceeding 2500 cc but not 18,049 23,463 13,357 17,598

279
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc but not 22,561 29,329 18,049 23,463
exceeding 2500 cc
SUVs
Cylinder capacity not exceeding 2500 cc 21,057 27,374 9,024 11,732
Cylinder capacity exceeding 2500 cc but not 24,065 31,284 13,357 17,598
exceeding 3000 cc
Cylinder capacity exceeding 3000 cc 28,577 37,150 18,049 23,463
Aged 2 to 5 years Aged 5 years and
over
Motor vehicles for the transport of goods
-with compression-ignition internal Customs Excise Customs Excise
combustion piston engine (diesel or semi- duty duty duty duty
diesel):
K K K K
Single cab
GVW exceeding 1.0 tonne but not exceeding 21,926 9,501 8,770 3,801
1.5 tonnes
GVW exceeding 1.5 tonnes but not exceeding 26,311 11,402 15,348 6,651
3.0 tonnes
GVW exceeding 3.0 tonnes but not exceeding 30,697 13,302 17,541 7,601
5.0 tonnes
Double cabs
GVW exceeding 3 tonnes but not exceeding 5 30,697 13,302 24,119 10,452
tonnes
Double cabs GVW exceeding 3.0 tonnes but 33,766 14,632 26,531 11,497
not exceeding 5.0 tonnes, with spark
ignition internal combustion piston
engine
Panel Vans
GVW not exceeding 1.0 tonne 13,353 5,786 7,630 3,061
GVW exceeding 1.0 tonne but not exceeding 15,348 6,651 8,770 3,801
1.5 tonnes
GVW exceeding 1.5 tonnes but not exceeding 17,541 7,601 15,348 6,651
3.0 tonnes
GVW exceeding 3.0 tonnes but not exceeding 21,926 9,501 17,541 7,601
5.0 tonnes
Trucks
GVW up to 2 tonnes 13,907 10,662 6,413 4,916
GVW exceeding 2.0 tonnes but not exceeding 15,453 11,847 7,726 5,923
5.0 tonnes
GVW exceeding 5.0 tonnes but not exceeding 24,724 18,955 9,272 7,108
10.0 tonnes
GVW exceeding 10.0 tonnes but not exceeding 30,905 23,694 11,744 9,004
20.0 tonnes
GVW exceeding 20 tonnes 51,898 0 19,462 0
GVW exceeding 20 tonnes, with spark 37,086 28,432 13,907 10,662
ignition internal combustion piston
engine
Surtax
On all motor vehicles aged more than five (5) years from year of manufacture K2,000

280
 Customs and Excise on New Motor vehicles
Duty rates on:

1. Motor cars and other motor vehicles (including station wagons)

principally designed for the transport of less than ten persons,
including the driver:
Customs Duty:
Percentage of Value for Duty Purposes 30%
Minimum Specific Customs Duty K6,000
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes
Cylinder capacity of 1500 cc and less 20%
Cylinder Capacity of more than 1500 cc 30%
2. Pick-ups and trucks/lorries with gross weight not exceeding 20
tones:
Customs Duty
Percentage of Value for Duty Purposes 15%
Minimum specific Customs Duty K6,000
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes 10%

3. Buses/coaches for the transport of more than ten persons

Customs Duty:
Percentage of Value for Duty Purposes 15%
Minimum Specific Customs Duty K6,000
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes
Seating Capacity of 16 persons and less 25%
Seating Capacity of 16 persons and more 0%
4. Trucks/lorries with gross weight exceeding 20 tonnes
Customs Duty:
Percentage of Value for Duty Purposes 15%
Excise Duty:
Percentage of Value for Duty Purposes for Excise Duty Purposes 0%

281
SECTION A

This Question is compulsory and MUST be attempted

QUESTION ONE (C0MPULSORY)
Background
TMC Mining Corporation Zambia Ltd, is a Zambian resident subsidiary of TMC International,
a foreign based Multinational Mining company. TMC is engaged in mining operations of base
metals and industrial minerals. The group financial statements are prepared in United States
Dollars.
Chief Executive Officer
The Chief Executive Officer of TMC Mining Ltd is Chaze Luhana, who is resident and ordinary
resident in Zambia. Chaze has shareholdings of 5% in both TMC Mining Corporation Zambia
Ltd and TMC International. In the year ended 31 December 2022, Chaze earned gross
emoluments of K840,000. Chaze paid income tax of K289,592 under the Pay As You Earn
system. She also paid NAPSA contributions of K14,662. In addition to the director’s
emoluments, Chaze received net dividends of K40,300 from TMC International and dividends
of K25,500 from TMC Mining Corporation Zambia Ltd. Chaze also holds shares in a Zambian
resident private company, from which she received gross dividends of K30,000 (Withholding
tax had been paid at source).
Chaze holds a fixed deposit account, with a bank in the foreign country in which TMC
International is resident and owns commercial property in the same foreign country that has
been let out to tenants in that country.
In December 2022, fixed deposit interest of K18,600 and rental income of K144,000 were
credited to her Zambian account in respect of the above investments. The dividends were
net of withholding tax at the rate of 38% deducted in the foreign country, whilst the fixed
deposit interest and the rental income were net of withholding tax at the rate of 20%
deducted in the same foreign country. There is no double taxation convention between
Zambian and the foreign country in which TMC International operates. Any double taxation
relief is given by means of unilateral relief.
Financial Results for TMC Mining Corporation
The following summarised statement of profit or loss for the year ended 31 December 2022,
has been extracted from the financial statements of TMC and all amounts are expressed in
Zambian Kwacha.
Note K’ 000
Sales revenue (1) 920,000
Cost of sales (423,000)
Gross profit 497,000
Operating expenses (2) (137,252)
Finance cost (110,000)
Investment income (4) 17,125
Profit before tax 266,873
Income tax expense (5) (51,000)
Profit for the year 215,873

282
Additional information:
Note 1: Sales revenue
This comprises sales of cobalt for the year amounting to K140,000,000 being the norm value
of the mineral for mineral royalty tax purposes, sales of industrial minerals for the year
amounting to K150,000,000 being the gross value of mineral for mineral royalty tax
purposes. The remaining balance of the sales represents the norm value of copper sold
during the year based on London Metal Exchange cash price which ranged from $7,600 to
$8,100 per metric tonne throughout the tax year 2022.
Mineral royalty tax paid by the company during the year which was computed correctly and
paid on the relevant due dates has not been included in the above statement of profit or
loss.

Note 2: Operating expenses

Included in operating expenses are depreciation charges of K8,500,000 amortisation of
intangible assets of K3,500,000, advertising expenses of K241,500, fines for breaching
labour laws of K252,000, salaries and wages of K26,400,000, expenses incurred on the
entertaining the board of directors of K191,000, employees subscriptions to the local fitness
gym of K78,000, operating lease rentals of K850,000 for tipper trucks and K1,200,000
incurred on the construction of a police post in the mine township. The balance represents
miscellaneous allowable operating expenses.
Note 3: Investment income

Investment income represents fair value gains on investment property held by the company.

Note 4: Provisional Income Tax

The figure for the income tax expense in the statement of profit or loss shown above
represents the provisional income tax paid by the company in the tax year 2022.

Note 5: Imported Mining Equipment

At 1 January 2022, the company held the following capital assets which were imported from
foreign suppliers and paid for in US dollars a year ago. The original costs of the assets on
the date of purchase translated into Zambian Kwacha were as shown below:

Asset Cost
Drilling equipment K3,400,000
Mining implements K6,500,000

Note 6: Locally acquired implements, plant and machinery

At 1 January 2022, the company held the following assets which were acquired from local
Zambian suppliers and paid for in Zambian Kwacha:
Asset ITV b/f Original Cost
K
Office equipment 350,000 700,000
Pool cars (2,000cc) 240,000 400,000

283
During the year ended the 31 December 2022, the company constructed a new smelting
plant at a cost of K25,000,000. The company also acquired tipper trucks with a cost of
K12,500,000 under an operating lease agreement paying lease rentals of K850,000 shown in
the statement of profit or loss above.
Note 7: Unrelieved Tax loss brought forward
The company has had the following results from its mining operations in the past two years:
Year ended 31 December 2020 2021
K K
Sales revenue 35,500,000 18,500,000
Tax adjusted Mining profit/(loss) (21,000,000) 8,400,000

Note 8: Indexation formula and other information

The indexation formula for capital allowances and mining losses, where applicable, is given
below:
R2 –R1 
1+
R1
The following Zambian Kwacha per US Dollar (ZMW/US$) average BOZ mid-exchange rates
should be used where applicable:
Accounting Period Average BOZ Mid-Exchange rate
ZMW/ US$
Y/e 31 December 2020 K17.50
Y/e 31 December 2021 K18.00
Y/e 31 December 2022 K18.90

Required:

(a) Show how the loss incurred in the year ending 31 December 2020 will be relieved in
the the tax year 2021 and determine the amount of the loss remaining unrelieved at 31
December 2021. (4 marks)

(b) Compute the following amounts for the tax year 2022:

(i) The capital allowances claimable on the foreign acquired assets.

(4 marks)
(ii) The total capital allowances on locally acquired assets and other qualifying
mining expenditure. (4 marks)

(c) Calculate the final tax adjusted mining profit and the final company income tax
payable by the company for the tax year 2022. (16 marks)

(d) Calculate the income tax payable by Chaze Luhana for the tax year 2022. (12 marks)
[Total: 40 Marks]

284
SECTION B

There are FOUR (4) questions in this section.

Attempt any THREE (3) questions in this section.

QUESTION TWO
The following statement of profit or loss relates to Hezon Bank Plc for the year ended 31
December 2022.
HEZON BANK PLC STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31
DECEMBER 2022
K'000 K'000
Interest income from:
Loans and overdrafts 91,200
Banks and financial institutions 2,250
Securities 3,600
Total interest income 97,050
Interest expense on:
Deposits 30,300
Paid to banks and financial institutions 19,800
Subordinate debt 6,900
Total interest expense (57,000)
Net interest income 40,050
Provision for loan losses (Note 1) (1,965)
Net interest income after provision for loan losses 38,085
Non-interest income:
Management fees (net) 510
Rental income (Note 2) 26,300
Fair value gains (Note 3) 690
Fees from foreign exchange transactions 31,078
Net trading gains (Note 4) 336
Total non-interest income 58,914
Net interest and other income 96,999
Non-interest expenses
Depreciation of property, plant and equipment (note 12,900
5)
Employee costs (note 6) 21,319
General expenses (all allowable) 25,224
Total non-interest expenses (59,443)
Income before taxes 37,556
Taxation (Note 9) (3,825)
Net income after taxation 33,731

285
The following information additional information is available:
(1) Provision for loan losses comprises a decrease in general provision of loan losses
amounting to K150,000, increase in specific provision of loan losses of K1,650,000, loan
losses previously written-off recovered during the year amounting to K285,000 and loan
losses written-off amounting to K750,000.
(2) Rental income was generated from a suite of office buildings constructed by the
bank five (5) years ago at a cost of K80,000,000. The buildings are used by the bank
specifically for commercial letting purposes to earn rental income. The rental income is
received evenly over the year. The amount shown in the statement of profit or loss above is
the net amount after deducting expenses incurred wholly and exclusively in relation to the
letting and was determined as follows:
K’000 K’000
Gross rental income 36,600
Less
Advertising for tenants 80
Insurance of the property 600
Depreciation of the property 4,000
Other property letting expenses 5,620
(10,300)
Net rental income 26,300

(3) Fair value gains arose from equity instruments measured at fair value through profit
or loss, under the relevant International Financial Reporting Standards.
(4) The net trading gains comprise realized foreign exchange gains of K1,035,000 and
unrealized foreign exchange losses of K699,000.
(5) Depreciation of property plant and equipment in the statement of profit above,
relates to assets used to carry on banking operations and does not include
depreciation on the office buildings let out for commercial purposes referred to in
note (2) above.

(6) Employees costs comprised the following:

K,000
Employee’s salaries 14,919
Gratuity expense (Note 7) 1,200
Defined benefit expense (note 8) 5,200
21,319

286
(7) The gratuity expense recognized within employee costs above represents the annual
charge for the current year in respect of gratuity paid to employees on three-year
fixed term contracts which expired on 31 December 2022. The total amount of
gratuity paid on 31 December 2022 in respect of these contract was K3,600,000.
(8) The defined benefit expense reordered within employee cost above, comprises the
current service cost of K4,800,000, and the net interest cost of K400,000. Pension
benefits amounting to K8,400,000 were paid during the year to 31 December 2022.
(9) The figure for taxation in the income statement represents the provisional company
income tax paid by the company in respect of the charge year 2022.
(10) The total withholding tax deducted at source from interest income during the charge
year 2022 amounted to K4,368,000.
(11) At 1 January 2022, the only assets held by the bank qualifying for capital allowances
included office equipment with an income tax value of K1,500,000 (having an
original cost of K6,000,000) and buildings for its branch network with an income tax
value of K19,200,000 (and having an original cost of K24,000,000).

During the year, the company constructed new central administrative buildings at a cost of
K15,000,000 and installed new Automated Teller Machines (ATMs) for its branch network at
a cost of K10,500,000 during the year ended 31 December 2022.

Required:
(a) Advise the directors of Hezon Bank plc of the tax treatment of the rental income
received by the bank in the tax year 2022. (4 marks)

(b) Calculate the company income tax payable by Hezon Bank Plc for the tax year 2022.
(16 marks)
[Total: 20 Marks]
QUESTION THREE

George, who died on 30 November 2022, left the following assets:

K
Shares in Zimbe Plc 620,000
Guest House in Sesheke 2,110,000
Personal Chattels 42,000
Cash 7,800
Prior to the date of death, he received the following income:
K
Salary up to the time of death 110,000
(before deducting PAYE of K28,600)
School children allowance (per month) 4.500
Royalties received 17,000
Dividends from a Zambian non-mining company 30,000
Tax adjusted profit from trading activities 282,900

287
George left a will specifying that his estate was to be split in the ratio 6:4:3:2 amongst his
four (4) children, Peter, John, Able and Norma respectively. George was a divorcee.

The executor has informed the children that income tax will have to be deducted from the
estate before making any distributions to the beneficiaries. However, the children perceive
the income tax on the chargeable estate for deceased persons as too high and unfair. They
argue that their father was tax compliant throughout his life and taxing his estate could be
considered as double taxation. They want the executor to declare low values and hide some
assets.

Required:

(a) Explain the ethical implications of the executor declaring low values and hiding some
assets. (2 marks)

(b) Compute the income tax payable by George for the tax year 2022. (7 marks)

(c) Calculate the tax payable on the estate left by George and the inheritance due to the
four (4) children. (8 marks)

(d) Explain the person who is responsible for payment of taxes in (b) and (c), and state
the date by which an assessment for George must be made. (3 marks)
[Total: 20 Marks]
QUESTION FOUR

Mambwe and Chilambwe are the sole owners of MCB Ltd a Value Added Tax registered
company which imports construction materials from China and Dubai and sells them on the
Zambian market. Mambwe owns 85% of the ordinary shares of MCB Ltd, whilst Chilambwe
owns the remaining 15%. Mambwe is a full-time working director of MCB Ltd, whilst
Chilambwe does not participate in the running of the company either as a director or as an
employee.

Mambwe and Chilambwe are seeking tax advice in relation to the following matters:

(1) Chilambwe wishes to draw an interest free loan of K800,000 to finance the
construction of his own private house. Until the construction of the house is
completed, the company will pay accommodation rentals on behalf of Chilambwe
which are expected to amount to K78,000 in the tax year 2022.

Chilambwe wishes to know whether there will be any tax implications both for
himself individually and the company of drawing this loan and payment of his
accommodation rentals. He further wishes to know whether there will be any tax
implications if the loan once drawn, is subsequently written off by the company in
the future.

(2) Mambwe wishes to draw construction material valued at K180,000 under a credit
facility which will enable him pay for the goods in eighteen months’ time.

288
(3) Both Mambwe and Chilambwe do not have any form of insurance. They are
considering arranging for insurance cover to protect themselves and their families
from any potential loss of income that may occur through ill health or death.

Required:

(a) Provide advice to Chilambwe on each of the following matters:

(i) The tax implications for both himself and the company that will arise from the
provision of the interest free loan of K800,000 and payment of his accommodation
rentals of K78,000. (6 marks)

(ii) The tax implications that will arise if the loan of K800,000 once drawn is
subsequently repaid by Chilambwe either partly on in full at some time in the future.
(2 marks)

(iii) The tax implications that will arise if the company was to write off the whole loan of
K800,000 or part of the loan at some time in the future after it has been drawn by
Chilambwe. (2 marks)

(b) Advise Mambwe of the tax implications for both himself and the company of drawing
goods worth K180,000 under a credit facility. (2 marks)

(c) Describe the nature of each of the following personal financial protection products
and advise Mambwe and Chilambwe of the personal tax implication arising from the
use of each product:

(i) Whole of life insurance (2 marks)

(ii) Term life assurance (2 marks)
(iii) Family income benefit (2 marks)
(iv) Permanent health insurance (2 marks)
[Total: 20 Marks]

QUESTION FIVE

For the purposes of this question, you should assume that today’s date is 20
December 2021

You are employed in Tax practice. You have been provided with the following information
relating to James Chungu, who is seeking tax advice from your firm.

James Chungu has been in business for many years running a retail business as a sole
trader under the name Chungu Enterprises. The annual turnover of the business has always
exceeded K800,000. He has always prepared accounts to 31 December each year. He has
always involved his daughter Chansa, in running the business, as an employee.

289
Chungu wishes to incorporate their business and start running it as a private limited
company, known as JayCo Limited from 1 September 2022. The share capital of the
company will be held by Chungu and Chansa with Chungu holding 95% of the ordinary
share capital and Chansa holding the remaining 5%. Chungu and Chansa will run the
company as full-time working directors, preparing accounts to 31 December each year. All
assets held by the business at 31 August 2022, will all be transferred to JayCo Limited. The
results of the business in the tax year 2022, before and after incorporation are expected to
be as follows:

8-month Period to 31 August 2022

Chungu has estimated the net profit as per accounts before deducting payments to Chungu
and Chansa and any NAPSA contributions for the period from 1 January 2022 to 31 August
2022, to be K1,150,000. All the other expenses that will be incurred and deducted in arriving
at the net profit figure of K1,150,000 are allowable expenses for taxation purposes. Chungu
is entitled to an annual salary of K252,000, and additionally draws a motoring allowance of
K10,000 per month. Chansa’s annual salary is K216,000 and he additionally draws a monthly
motoring allowance of K4,000.

The income tax values of assets held by business qualifying for capital allowances at 1
January 2022, their original costs and their respective expected market values at 31 August
2022, are as follows:
Income Tax Values at Original costs Market values at
1 January 2022 31 August 2022
K K
Shop buildings 540,000 600,000 900,000
Shop fittings 37,500 150,000 25,000
Toyota Fortuner car 368,000 460,000 300,000
Mitsubishi Canter Van 165,000 220,000 190,000

Chungu has always used the Toyota Fortuner Car (which has a cylinder capacity of 2600cc)
60% for private purposes. The Mitsubishi Canter van (1,600cc) is used in the business as a
delivery van, but Chansa has always used the van 30% for private purposes.

4-month Period ended 31 December 2022

The net profit as per accounts for the JayCo Ltd for the four months to 31 December 2022,
are expected to be K780,000. This net profit figure is before any withdrawals of profits by
Chungu and Chansa and NAPSA contributions.

After incorporating their business on 1 September 2022, Chungu and Chansa will maintain
their entitlement to annual salaries of K252,000 and K216,000 respectively. Chungu and
Chansa will additionally continue drawing monthly motoring allowances of K10,000 and
K4,000 respectively. Chungu will continue using the business Toyota Fortuner Car 60% for
private purposes and Chansa will continue using the Mitsubishi Canter delivery van 30% for
private purposes.

290
NAPSA contributions payable should be taken to be 5% of the relevant income per annum
and the earnings ceiling for the purposes of NAPSA contributions should be taken to be
K293,232 per annum.

Required:

Advice Chungu and Chansa on how income generated from the business will be assessed to
income tax in the tax year 2022. Your answer should include:

(a) An explanation of the basis of assessment for the profits which will be generated
from business in the eight (8) months to 31 August 2022, together with a
computation of the final taxable profits for this period. (8 marks)

(b) An explanation of the basis of assessment for the profits which will be generated by
business for the four (4) month period after incorporation, together with a
computation of the final company income tax payable by the company for the tax
year 2022. (8 marks)

(c) A computation of the final income tax payable by Chungu and Chansa in the tax year
2022. (4 marks)
[Total: 20 Marks]

END OF PAPER

291
CA 3.4 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) COMPUTATION OF LOSS RELIEF

2021
K
Tax adjusted Mining profit/(loss) 8,400,000
Loss Relief (W) (4,200,000)
Taxable mining profits 4,200,000

Loss Relief for 2021

[(1+(18.00-17.50) x 21,000,000] 21,600,000
Loss Relief for 2021
(K8,400,000 x 50%) (4,200,000)
Unrelieved loss c/f 17,400,000
The loss to be relieved is restricted to 50% of the taxable profits.
(b) (i) COMPUTATION OF CAPITAL ALLOWANCES ON IMPORTED MINING
IMPLEMENTS,
PLANT AND MACHINERY

Drilling equipment K
Indexed capital allowance
(K3.4m x 20%) = K680,000 x [1 + (18.90 –18.00)/18.00] 714,000
Mining implements
Wear & tear allowance
(K6.5m x 20%) = K1,300,000 [1 + (18.90 -18-00)/18.00] 1,365,000
2,079,000

(ii) COMPUTATION OF CAPITAL ALLOWANCES ON LOCAL IMPLEMENTS, PLANT AND

MACHINERY
K’ 000
Police post
Wear and tear allowance
(K1,200,000 x 20%) 240,000
Office equipment
Wear and tear allowance
(K700,000 x 25%) 175,000
Pool cars
Wear & tear allowance
(K400,000 x 20%) 80,000
Smelting plant
Wear & tear allowance
(K25m x 20%) 5,000,000
5,495,000

292
(c) COMPUTATION OF TAXABLE MINING PROFITS

K’000 K’000
Net profit as per accounts 266,873
Add:
Depreciation 8,500
Amortisation of intangible assets 3,500
Fines for breach of labour laws 252
Construction of police post 1,200
13,452
280,325
Less:
Fair value gains 17,125
Mineral royalty 72,250
Capital allowances (K5,495 +2,079) 7,574
(96,949)
Taxable mining profit before interest adjustment 183,376
Add: Disallowed interest (W2) 18,387
Final taxable mining profit before loss relief 201,763
Less loss relief (W3) (18,270)
Final taxable mining profit 183,493

Company income tax on mining profits

(K183,493 x 30%) 55,048
Provisional income tax (51,000)
Income tax payable 4,048

WORKINGS
(1) COMPUTATION OF MINERAL ROYALTY TAX PAID FOR THE TAX YEAR 2022
K’000
Cobalt
(K140,000,000 x 8%) 11,200
Industrial Minerals
(K150,000,000 x 5%) 7,500
Copper
(K920m-K140m-K150m) x 8.5% 53,550
Total 72,250

(2) COMPUTATION OF DISALLOWED INTEREST

COMPUTATION OF TAXABLE INCOME AND TAX EBITDA

K’000
Taxable profit 183,376
Finance cost 110,000
Depreciation 8,500
Amortisation 3,500

293
 Tax EBITDA 305,376

Finance cost 110,000

Allowable interest
(30% x K305,376) (91,613)
Disallowed interest 18,387

(3) LOSS RELIEF FOR THE TAX YEAR 2022

Loss Relief for 2022
[(1+(18.90-18.00)/18.00) x K17,400] 18,270
Loss Relief for 2022 18,270
Unrelieved loss c/f 0

Profit available for loss relief

(50% x K201,763) 100,882

Therefore, the whole loss will be relieved

(d) CHAZE

PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2022

K K
Gross emoluments 840,000
Foreign income
Dividends
(K40,300 x 100/62) 65,000
Fixed deposit interest
(18,600 x100/80) 23,250
88,250
Taxable income 928,250
Income Tax
On first K82,800 8,460
On excess (K928,250 -K82,800) x 37.5% 317,044
Income tax liability 325,504
PAYE
Less DTR on (289,592)
Dividend income (W1) 22,385
Fixed deposit interest (W2) 4,650
(27,035)
Income tax payable 8,877

WORKINGS
(1) Total amount of Zambian tax charge
Income Tax 325,504
WHT on Zambian dividends (K30,000 x 15%) 4,500
330,004

294
 (2) Total assessable income
Income chargeable to income tax 928,250
Zambian dividends 30,000
958,250

(3) Double taxation relief on the dividends from foreign sources:

This will be the lower of:

(i) The foreign tax paid on the dividends:

K65,000 x 38% = K24,700; and

(ii) The Zambian Tax Charge attributed to the dividends computed as:

𝐾65,000
( ) 𝑥 𝐾330,004
𝐾958,250

=K22,385

DTR will therefore be K22,385 being the lower amount.

(4) Double taxation relief on fixed deposit interest from foreign sources:

This will be the lower of:

(i) The foreign tax paid on the fixed deposit interest:

K23,250 x 20% = K4,650; and

(ii) The Zambian Tax Charge computed as:

𝐾23,250
( ) 𝑥 𝐾330,004
𝐾958,250

=K8,007

DTR will therefore be K4,650 being the lower amount.

295
SOLUTION TWO

(a) Tax treatment of rental income

The rental income will be assessed as a separate source of income from the banking
operations and the amount of the rental included in the statement of profit or loss of the
bank will therefore be deducted when computing the taxable income of the company for the
year.

Rental income received by both individuals and companies, is chargeable to Turnover Tax at
the rate of 4% if the rental income is K800,000 per annum or less. Where the rental income
for an individual or a company exceeds K800,000 per annum, then it is subjected to tax at
the rate of 12.5% per month.

Since the gross annual rental income rental income received by Hezon Bank is above
K800,000, Hezon bank is required to pay rental income tax at the rate of 12.5% of the gross
monthly rental income.

The expenses incurred wholly and exclusively for the purposes which includes advertising for
tenants, insurance of the property, depreciation of the property and other property letting
expenses will all not be allowable from gross rentals, for the purposes of assessing turnover
tax on rental income.

Turnover tax on rental income is paid on a monthly basis on the 14th day following the end
of the month in which the rentals income was received. The amount of the monthly rental
income tax payable by the bank is therefore:

K36,600,000/12 x 12.5% =K381,250

(b) COMPUTATION OF TAXABLE INCOME

K'000 K'000
Income before taxes 37,556
Add
Unrealised forex losses 699
Depreciation 12,900
Defined benefit expense 5,200
Gratuity expense 1,200
19,999
57,555
Less
Management fees 510
Decrease in general provision for losses 150
Rental income 26,300
Fair value gains on equity instruments 690
Gratuity paid 3,600
Pension benefits paid 8,400
Capital allowances (W) 4,905

296
 (44,555)
13,000
Management fees (510 x 100/85) 600
Final taxable income 13,600

Company income tax

(K13,600,000 x 30%) 4,080
less tax already paid:
WHT on interest income (4,368)
WHT on management fees
(K600,000 x 15%) (90)
Provisional income tax (3,825)
Company income tax payable (4,203)

COMPUTATION OF CAPITAL ALLOWANCES

K’000
Office equipment
Wear & tear allowance
(K6,000,000 x 25%) 1,500
Branch network buildings
Wear & tear allowance
(K24,000,000 x 2%) 480
Administration offices
Wear & tear allowance
(K15,000,000 x 2%) 300
Automated Teller Machines
Wear & tear allowance
(K10,500,000 x 25%) 2,625
4,905

297
SOLUTION THREE

(a) Implications of the executor declaring low values and hiding some assets
This will be considered as tax evasion. Tax evasion refers to the use of illegal means to
avoid or reduce tax liabilities.

It is a serious criminal offence and may also qualify as a money laundering activity.

It is important to acknowledge that tax evasion arises when taxes are perceived to be too
high or unfair on taxpayers. However, tax evasion may be punishable by fines and/or
imprisonment.

(b) George
Compute the income tax payable for the tax year 2022

Salary up to the time of death 110,000.00

School children allowance (4.500 X 11) 49.50
Royalties received (17,000 X 100/85) 20,000.00
Business profits 282,900.00
Taxable income 412.849.50

Income tax
First K82,800 8,460
Excess (K412,949.50 – K82,800) x 37.5% 123,806
Income tax liability 132,266
Less tax already paid
PAYE (28,600)
WHT on the royalties (K20,000 X 15%) (3,000)
Income tax payable 100,666

(c) Calculation of tax payable on the estate left by George and the inheritance
due to the four children
K
Shares in Zimbe Plc 620,000
Sesheke Guest House 2,110,000
Personal Chattels 42,000
Cash 7,800
Chargeable estate 2,779,800
Tax payable: K2,779,800 X 30% K833,940

Chargeable estate 2,779,800

Less tax payable (833,940)
Net estate after tax 1,945,860

298
Net estate distribution to the children:
Peter (6/15 X K1,945,860) 778,344
John (4/15 X K1,945,860) 518,896
Able (3/15 X K1,945,860) 389,172
Norma (2/15 X K1,945,860) 259,448
Total 1,945,860

(d) Responsibility for payment of taxes and due date for assessment
The taxes due will be paid by George’s executor as the taxpaying agent. The taxpaying
agent is assessed in their own name on the income of the deceased person and has the
same duties, responsibilities and liabilities as if that income were received by them
beneficially.

An assessment may only be made on a deceased individual in the three (3) years from end
of the charge year in which the individual died. This prevents delays in winding up estates,
because the tax due on the assessment on the deceased individual will be paid from the
assets of the estate.

As a result, the assessment on George must be made by 31 December 2025.

299
SOLUTION FOUR

(a) TAX IMPLICATIONS OF BENEFITS PROVIDED TO Chilambwe:

(i) Provision of interest free loan

Chilambwe holds more than 5% of the ordinary shares of the company, (his shareholding
being 15%) and is therefore an effective share holder of the company. MCB will be deemed
to have made a loan amounting to K800,000 to an effective shareholder.

The company will be required to pay tax equal to the difference between the amount of the
grossed-up equivalent of the loan and the actual amount of the loan. The amount of tax
the company will be required to pay will be:

K800,000 x 37.5/62.5 = K480,000;

There will be no tax implications for Chilambwe

Payment of accommodation rental

Payment of the accommodation rental will also be deemed to be a loan made by MCB Ltd to
an effective shareholder. This is because the definition of a loan to an effective shareholder
under the Income Tax Act includes, the difference between the cost of providing any benefit
or advantage and the amount paid for such benefit or advantage when provided.

The amount of the loan will be taken to be equal to the the cost to MCB Ltd of providing the
benefit to Chilambwe, which is the amount of the rentals paid by the company of K78,000.
The company will be required to pay income tax equal to the difference between the
amount of the grossed-up equivalent of this amount and the actual amount of the loan. The
amount of income tax chargeable on the company will be:

K78,000 x 37.5/62.5 = K46,800

(ii) Tax implications of repayment of the loan

If Chilambwe repays the whole loan, income tax will be refunded to MCB Ltd if the company
makes a repayment claim.

If Chilambwe only repays part of the loan any excess tax relating to the repaid part of the
loan may be refunded to MCB Ltd if it makes a repayment claim.

(iii) Tax implications of the writing off the loan

If the whole loan of K800,000 or part thereof is written off by the MCB Ltd the amount
written off will treated as part of the effective shareholder's taxable income.

300
Any tax relating to the amount written off can be applied to reduce the tax due from
Chilambwe the effective shareholder in respect of the written off loan.

(b) Purchase of construction material on credit

MCB Ltd will be deemed to have made a loan to an effective shareholder of the company
given that Mambwe holds more than 5% of the ordinary shares of the company, (his
shareholding being 85%).

The amount of the loan will be deemed to be equal to the extent of the credit facilities
provided, which is K180,000, as the definition of a loan to an effective shareholder under
the Income Tax Act includes the extent of credit facilities provided to the shareholder.

The company will be required to pay income tax equal to the difference between the
amount of the grossed-up equivalent of this amount and the actual amount of the loan.
The amount of income tax chargeable on the company will be:

K180,000 x 37.5/62.5 = K108,000

There will be no Tax implications for Mambwe.

(c) Personal financial protection products

(i) Whole of life assurance

A whole life assurance policy pays out the sum assured as a lump sum on the death of the
life or lives assured to the grantee whenever the death occurs.

The policy may be written on single or joint lives and on first death or last survivor basis. A
single life insurance policy covers one person only and pays out the chosen amount of cover
if that person dies during the length of the policy.

Joint life insurance policy covers two lives. It means that the person taking out the policy
can be covered along with their spouse under one contract. A joint life cover will insure both
the spouses on the same terms and conditions. This type of policy may be used on a last
survivor basis to provide funds to meet the taxation liability of the deceased's estate.

Tax Implications
The taxation implications are that there is no tax relief on the premiums (the premiums are
not allowable when computing taxable income) for an individual and the policy proceeds are
tax free.

(ii) Term life assurance

Term insurance provides protection for the life (s) assured for a given or specified period of
time known as the policy term. The policy only pays out the lump sum death benefit where
the life/lives assured die within the policy term.

301
The policy can be written on a decreasing sum assured basis and used to redeem a
repayment mortgage or other loan which would otherwise be outstanding on the deceased's
death. Decreasing sum assured basis means that any benefit to paid reduces over time.

Tax Implications
The taxation implications are that there is no tax relief on the premiums (the premiums are
not allowable when computing taxable income) for an individual and the policy proceeds are
tax free.

(iii) Family Income Benefit

Policies run for a set period of time known as "the term. This policy pays out where the
life/lives assured die within the policy term.

The benefits are paid as instalments of capital over the remaining policy term and not
as a lump sum. For example, if a 20-year policy is taken out and the individual dies five
years into this, then the policy will pay out a regular income for the remaining 15 years.
Such a policy might be used where there is a need to keep premiums low or where
budgeting for lump sum proceeds would present a problem

Tax Implications
The taxation implications are that for an individual, there is no tax relief on the premiums
(the premiums are not allowable when computing taxable income) for an individual and the
policy proceeds are tax free.

(iv) Permanent Health Insurance

This provides for income replacement which is payable in the event of the person's inability
to perform own, suited or any occupation or activities of daily living following the expiration
or predetermined deferral period due to illness or disability. 50% -75%

It is usually written to retirement age and payable until retirement or until full or partial
recovery. The premiums and benefits payable can be indexed.
Tax implications:
The premiums do not receive any tax relief when paid personally and the benefits are not
taxable.

302
SOLUTION FIVE

(a) On incorporation the old business ran as sole trader will be deemed to have ceased
trading and new company JayCo deemed to have commenced trading on date of
incorporation.

Chungu will be assessed as sole trader on the income generated by the business in the eight
months which will be classified as business profit, whilst the income he will draw in the last
four months as a director in JayCo Limited after incorporation of the business will be
classified as employment income. This income will be aggregated and then subjected to the
personal income tax rates.

The income earned by Chansa before and after incorporation will be assessed on her as
employment income.

Basis of assessment for profits in the first eight months

Cessation rules will be applied to determine the tax year in which the final taxable profits,
made in the first eight months will be assessed.
Since the last accounting period of operating as a sole trader is less than 12 months, the
profits made in the eight-month period will be assessed in the tax year following the one in
which the profits of the second last accounting period of running the business as sole trader
were assessed, that is the tax year 2022.
Assets qualifying for capital allowances will be deemed to have been disposed of at their
market values and therefore balancing allowances or charges will arise when computing final
taxable profits for the first 8 months

COMPUTATION OF FINAL TAXABLE PROFITS

K
Taxable profit as per question 1,150,000
Add Net Balancing charge (W1) 45,300
1,195,300
Less
Chansa’s salary (K216,000 x 8/12) (144,000)
Chansa’s motoring allowance
(K4,000 x 8) (32,000)
Employer’s NAPSA contributions
(K144,000 +32,000) x 5% (8,800)
1,010,500

WORKINGS
COMPUTATION OF CAPITAL ALLOWANCES
K K
Shop buildings
ITV b/f 540,000
Market value (restricted to cost) (600,000)

Balancing charge (60,000) (60,000)

Shop fittings
ITV b/f 37,500

303
 Market value 25,000
Balancing allowance 12,500 12,500
Toyota fortuner
ITV b/f 368,000
Market value (300,000)
Balancing allowance 68,000 X 40% = 27,200
Mitsubish Van
ITV b/f 165,000
Market value (190,000)

Balancing charge (25,000) (25,000)

(45,300)

(b) Basis of assessment for profits made by JayCo

Commencement rules would be applied in determining the tax year in which the final
taxable profits made by JayCo Limited in the 4 months to 31 December 2022, will be taxed.

Since the first accounting period of trading as a private limited company is made up of less
12 months, the normal rules will apply. Specifically the current year basis of assessment will
apply as the accounting date falls between 1 April and 31 December inclusive. The profits
will be taxed in the tax year 2022.

On incorporation Jayco will be deemed to have purchased the assets qualifying for capital
allowances at their market values from the sole proprietorship and therefore capital
allowances will be computed using the market values of the assets on the date of
incorporation when computing the final taxable profits of JayCo Ltd.

COMPUTATION OF FINAL COMPANY INCOME TAX PAYABLE BY KCB LIMITED

K
Profit as per question 780,000
Personal to holder motor car benefit 30,000
810,000
Less:
Salaries
Chungu’s salary
(K252,000 x 4/12) 84,000
Chansa’s salary
(K216,000 x 4/12) 72,000
(156,000)
Motoring allowances for:
Chungu (K10,000 x 4) 40,000
Chansa (K4,000 x 4) 16,000
(56,000)
Employer’s NAPSA contributions for:
Chungu restricted (K293,292 x 5%) x 4/12) 4,888
Chansa (K72,000 + 16,000) x 5% 4,400
Capital allowances (W) (9,288)

304
 (131,750)
Final taxable profits 456,962

Company income tax K456,962 x 30% 137,089

WORKING COMPUTATION OF CAPITAL ALLOWANCES

K
Shop Buildings
Wear & tear allowance
K900,000 X 2% 18,000
Shop Fittings
Wear and tear allowance
(K25,000 x 25%) 6,250
Toyota Fortuner
Wear and tear allowance
(K300,000 x 20%) 60,000
Mitsubishi Van
Wear and tear allowance
(K190,000 x 25%) 47,500
Total 131,750

(c) PERSONAL INCOME TAX COMPUTATIONS FOR THE TAX YEAR 2022 FOR
Chungu Chansa

K K
Business Profits (a) 1,010,500 -
Employment income
Directors salaries 84,000 216,000
Motoring allowances 40,000 48,000
Total income 1,134,500 264,000

Income Tax
On first K82,800 8,460 8,460
On excess K1,051,700/K181,200 x 37.5% 394,388 67,950
402,848 76,410

END OF SOLUTIONS

305
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA ADVISORY PROFESSIONAL IN ACCOUNTANCY

___________________
CA 3.5: ADVANCED MANAGEMENT ACCOUNTING
___________________

TUESDAY 14 JUNE 2022

___________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO (2) sections:

Section A: One (1) Compulsory scenario question.
Section B: Four (4) Optional scenario Questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

306
SECTION A

This Question is compulsory and must be attempted

QUESTION ONE – (COMPULSORY)

Sangalala Engineering Ltd (SEL), a large divisionalised company, is in the business of

manufacturing medical surgery equipment. The company is being managed by one of its
founders, John Sanga.

Mr Sanga recently attended a major international exhibition on Computer Aided Design

(CAD) in Cape Town, South Africa. He learnt about improvements in product quality and
profitability achieved by companies which have switched to this new technology. In
particular, one exhibitor said the UK competitors use CAD equipment extensively. Mr Sanga
is so worried about his company’s future thathe commissioned a report from the South
African consultant, CAD-CAM Ltd, a vendor of CAD equipment, as to the appropriateness of
utilizing CAD for all his manufacturing operations.

The report, which has recently been prepared, suggests that the following costs and
benefits will accrue to SE Plc as a result of investing in an appropriate CAD system:

 Costs of implementing CAD

(i) Capital equipment costs will be K20 million. The equipment will have an
estimated life of five (5) years, after which time its disposal value will be K5
million.

(ii) Proper use of the equipment will require substantial re-training of current
employees. As result of the necessary changes in the production process, and
the time spent on retraining, SE Plc will lose production (and sales) in its first
two years of implementation. The lost production (and sales) will cost the
company K5 million per annum.
(iii) The annual costs of writing software and maintaining the computer
equipment will be K2 million.

 Benefits of implementing CAD

(i) The use of CAD will enhance the quality of SE Plc’s products. This will lead to
less reworking of products, and a consequent reduction in warranty costs. The
annual cost savings are expected to be K6 million per annum.
(ii) The CAD equipment will use less floor space than the existing machinery. As a
result one existing factory will no longer be needed. It is estimated that the
factory can be let at an annual rental of K1million.
(iii) Better planning and flow of work will result in an immediate reduction in the
existing levels of working capital from K6.5million to K4million.

All investments in SE Plc are required to generate a positive net present value
at a cost of capital of 14% and to show an accounting rate of return in the first
year of at least 12%. You may assume that all cash flows arise at the end of
the year, except for those relating to the equipment and re-training costs, and
the reduction in working capital. It is SE Plc’s intention to capitalize re-training
costs for management accounting purposes especially considering that they are

307
 substantial and also to encourage investment in the CAD. The Zambia Revenue
Authority (ZRA) exempts CAD investment profits from tax payments.

Required:

(a) Determine whether SE Plc should invest in the CAD technology on the basis
of its existing investment criteria. Make any reasonable assumptions you
deem necessary especially the timing of cash flows.
(10marks)

(b) Discuss six (6) possible reasons as to why SE Plc currently requires its long-
term investments to meet both the net present value and the accounting rate
of return criteria. (6 marks)

(c) Discuss the additional factors SE Plc should consider when deciding whether
to switch to the CAD technology. Discuss up to four (4) additional factors.
(your answer should include a discussion of the specific problems that arise in
evaluating investments in advanced manufacturing technologies (such as
CAD)) and an explanation of why the financial appraisal might incorrectly
reject such investments). (7 marks)

(d) SE Plc is considering the use of alternative performance measures apart from
ARR (ROI) to evaluate divisional managers.
Mr Sanga has read an article in a prominent magazine, the Fortune Magazine,
describing the apparent success that many companies had derived from using
the Economic value added (EVA) to motivate and evaluate corporate and
divisional managers. EVA, being a specific type of residual income, has
impressed the CEO as an alternative measure of performance.

Required:

(i) Explain how EVA can be used by SE Plc to measure divisional

performance. (3 marks)

(ii) Discuss three (3) advantages and three(3) disadvantages of the EVA
method. (6 marks)

(e) SE Plc lacks fully developed management information (MIS) system that can
integrate data from various sources and provide information necessary for
management decisions making. This explains why the company is relying on
consultants to provide reports for decision making. The CEO has therefore,
requested for setting up of a MIS. He is not sure of the benefits of the MIS
and what it should do. It should be borne in mind that the company is
divisionalised. There is a Board of Directors, Managers for each of the
divisions and operational Managers.

308
Required:

Explain the benefits of the MIS and how the MIS will be able to assist the
various groups of interested users in SE Plc and the part management
accounting will play in this. (8marks)
[Total:40 Marks]

309
SECTION B

Attempt any THREE (3) questions in this section.

QUESTION TWO
Tanaka Excellence Limited (TEL) was founded in 2007 by TendaiNyamayidega who is the
current Chief Executive Officer of the company. TEL is a small haulage company which has
witnessed steady growth throughout the years. It has expanded from initially owning a
single heavy goods vehicle to an operation of 50 heavy goods vehicles. A quarter of the
current fleet of vehicles was acquired in the last financial year, replacing older units which
were becoming too expensive to maintain. TEL has employed 30 full-time driverswith a
varying number of part-time drivers. The part-time staff work as and when they are
required.
The company’s premises are within an influent residential area. A number of government
officials reside in this area. TEL offers a 24-hour service to its clients. It also runs a garage
where both major and minor motor vehicle repairs are carried out. In most cases these
repairs are accompanied with noise. There have been objections raised by local residents
and administrative officials to the disturbance, and the local newspaper has at various times
reported on this criticism.
Recently, the company started offering training in forklift trucks and has proved to be a
successful diversification as there is a regular stream of customers. This training takes place
mostly in TEL’s own garage facilities.

Last year, the CEO entered negotiations to lease some land in an industrial economic zone,
which would more than satisfactorily accommodate all the vehicles. This land shall be able
to accommodate a repair and maintenance facility which would be adequate for the needs
of the fleet. The CEO has suggested that part of the land could be used for storage of
trailers for local companies. TEL has since taken occupancy of the land following a lease
agreement. The company has erected a large security fence and a small portable cabin
placed on site. Water, sewerage and electricity utility services have been supplied and
negotiations are taking place for the installation of a large diesel tank adequate to service
other vehicles besides those of TEL.

The company’s performance has been ill spoken of by the CEO. Three years ago, itapplied a
policy of paying all invoices immediately on receiving them. As receivables were frequently
taking over and above the credit period allowed, the company suffered a cash flow
shortage, which resulted in a large bank overdraft.
The newly recruited management accountant, Lucy Moyo has introduced some basic
financial accounting procedures into the company. In addition to exercising some control on
the company’s expenditure, Lucy has reduced the receivables’ collection period to about half
its former level.

Payables are now paid when the invoices fall due rather than immediately upon their
receipt. Such control had been lacking prior to the arrival the Management Accountant
atTEL. The Bank Manager has praised the Management Accountant for her efforts and
informed the CEOthat in his opinion the control measures now introduced have saved the
business from liquidation. As a consequence of the improvement in financial control, the
bank is willing to fund additional loans for the development of the new land. In making its
decision, the bank required TEL to supply its statutory financial statements and a cash flow
forecast for the development.

310
The Management Accountant has emphasised on the need to provide information which will
be useful for strategic management purposes. Her own background and experience have
been focused on the provision of accounting service, but she is enthusiastic about the
challenge of obtaining and presenting strategic management accounting information.

The haulage contract work industry is highly competitive.Most of the participants in this
industry operate on a low-margin basis and smaller companies often sub-contract from
large-scale hauliers.

TEL carries haulage for a variety of customers as well as undertaking some sub-contracting.
Much of the haulage work the company carries out is seasonal. Approximately 65% of its
turnover is derived from Kwekwe Limited, a local company that manufactures soft
furnishings such as cushions and pillows.

Following the recent appointment of a new Transport Manager, Kwekwe Ltd has begun to
employ other hauliers besides TEL. Over the last two (2) months, the haulage work TEL has
received from Kwekwe Ltd has reduced by about a third.
Required:

(a) Using the SWOT model assess the strategic position of TEL, separating the internal
and external factors to which the company is exposed.(12 marks)

(b) Advise the CEOon the strategic management accounting information of a financial
and non-financial nature which should be provided to assist future decision making
and cost control. (8 marks)
[Total:20 Marks]

QUESTION THREE

Shoppies Distributors Ltd (SDL) is a business that runs a chain of highstreets stores selling a
wide range of products including household goods countrywide. SDL has always traded
profitably due to targeting the niche market for high value, branded products. The company
usually opens its stores in urban and high street towns. SDL’s revenues and profits have
been static for several years and the directors are under pressure from investors to find
ways of increasing shareholder returns.

The market for household goods is a saturated one with consumers focusing on low cost
quality items. The Sales Director at one of the management meetingstated that SDL could
start selling goods online. None of SDL’s competitors have a significant online presence and
the company itself only has a basic website that lists locations of its stores and contact
details.

The Managing Director was uncertain about this approach as he was aware that SDL had
problems implementing information systems in the past. Most recently, the company
attempted to implement an online inventory system, which would have allowed stores to
check inventory levels in other stores within a short distance following response to a number
of customer requests. However, the system was abandoned due to increasing costs and
problems with the software, which was written in house by SDL’s small Information
Technology (IT) department.

311
The Sales Director feels that the problems with the earlier projects were caused by a lack of
control over the project. SDL Plc has never employed an IT Director and the Sales Director
has therefore recommended that if SDL decides to expand into online retailing, this role will
need to be filled so that IT is considered as a strategic function.

Required:

(a) Distinguish between the different levels of information system strategy with examples in
SDL Plc. (6 marks)

(b) Discuss the problems that SDL Plc could encounter when launching the online stores.
(8 marks)

(c) Discuss the need for IT to be a strategic unit within SDL Plc. (6 marks)
[Total 20 Marks]

QUESTION FOUR

Trade Bosses Ltd (TBL) was founded in 2010. TBL manufactures a variety of products
including food stuffs, beverages and detergents. Recently, the company entered into two
long contracts tomanufacture a variety of own-label sweets for the two (2)
largestsupermarket chains in Zambia. TBL makes several different flavours of the samebasic
product. The company has been using cost leadership as its strategy in order to win
thesupermarkets’ business. It has been noted that the sales of TBL have not been stable in
the past four years. This has been attributed to the state of the general economy and
competitive forces.

The Chief Executive Officer (CEO), Salome Musalale, commonly known as ‘iron lady’ believes
that in order to actualise the strategy it is better to be autocratic. Salome has been worried
with the performance TBL and is in a hurry to turn around the business. The majority of
employees have been at TBL since its establishment and like the straightforward nature of
their work.

TBL has contracted you as a performance expert. The CEOhas asked you to look at the
budgeting process at TBL. Currently, the budget is set at the start of the year and
performance is measuredagainst this. The management discusses the budget assumptions
with the relevant operational managers before being set. These operational managers have
always complained that the budget process is very time-consuming and do not see much
value in the results. In fact a number of them are concerned that they are made to explain
variances that are not their fault.Salome wants to know yourviews on whether this way of
budgeting is appropriate and whether the managers’complaints are justified. She is satisfied
that there is no dysfunctional behaviour at TBL which may lead to budgetary slack or
excessive spending and that all managers are working inthe best interests of the company.
She is also looking forward to introducing beyond budgeting. She wants you to explain what
are the benefits and problems ofbudgeting at TBL before considering replacing it.

Required:

(a) Evaluate the budgeting system at TBL. (8 marks)

(b) Evaluate the proposal to move to a beyond budgeting method of control at TBL,
giving a recommendation on whether to proceed. (12 marks)
[Total 20 Marks]

312
QUESTION FIVE

The AB group, which has a divisional structure, manufactures a range of products. Divisions
A and B are two of its divisions. Division A produces an intermediate product which it sells
on the external market and also to Division B. Division A has a maximum capacity of
4,000kg per quarter. However, at the moment it can only sell 2,000kg on the external
market and 1,200kg to Division B.

In the budget for the year, a transfer price of K400 per kg was agreed in accordance with
the industry market price. But in the second quarter of the year, competitive rivalry caused
the price to drop to K360 per kg. The manager of Division B has argued that the transfer
price should be the same as the market price of K360 and not K400.

Division B makes 200 units of its finished product from every kg of the intermediate product
which it sells on the open market for K4.00 per unit. If the market price was to be reduced
to K3.5 per unit, Division B would sell a further 160,000 units.

The cost structure data is as follows:

Division A Division B
Variable cost per kg K140 K120
Fixed costs per quarter K400,000 K160,000

Required:

(a) Outline and discuss the main objectives of a transfer pricing system. (6 marks)

(b) Compute the projected profit or loss for the second quarter for Divisions A, B and the
AB group based on the transfer prices of K400 per kg and K360 per kg when
operating at:

(i) 80% capacity.

(ii) 100% capacity. The extra capacity will be used to supply Division B.
(10 marks)

(c) Comment on the results obtained in (b) above and the effect of the change on the
transfer prices. (4marks)
[Total: 20 Marks]

END OF PAPER

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315
CA3.5 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) NPV(K’000)

Years : 0 1 2 3 4 5
Capital Equipment (20,000)
Scrap value 5,000
Retraining costs (5,000) (5,000)
Software maintenance (2,000) (2,000) (2,000) (2,000) (2,000)
Annual cost savings 6,000 6,000 6,000 6,000 6,000
Rental income 1,000 1,000 1,000 1,000 1,000
Working capital reduction 2,500
Net Cashflow (22,500) 0 5,000 5,000 5,000 10,000
DF@14% 1.000 0.877 0.769 0.675 0.592 0.519
PV (22,500) 0 3,845 3,375 2,960 5,190
NPV (7,130)

Accounting Rate of Return(ARR)

ARR = Average Profits x 100%

Average investment

= 0 x 100%
27.5m
= 0%
Advice:
The NPV is negative and, therefore, on financial grounds the investment in the CAD should
not be accepted.
The ARR is zero (0%). The investment should be rejected because SE Plc’s policy is to
accept projects with a hurdle rate of 12% in the first year.

The conclusion is that the CAD investment has failed both investment criteria and should be
rejected.

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Workings

W.1: Year 1 incremental profit

K’000
 Annual cost savings 6,000
 Retraining costs(K10m/5years) (2,000)
 Rental income 1,000
 Software development and maintenance (2,000)
 Depreciation (K20m-K5m)/5years (3,000)
Incremental profits 0

W.2: Year 1 Incremental investment

K’000
 Capital investment 20,000
 Capitalised Retraining costs 10,000
 Reduction in working capital (2,500)
27,500

ASSUMPTIONS
- It is assumed that the ARR is calculated on the opening written down value.

- by inference to the question, it is assumed that training costs were incurred at the
beginning of years 1 and 2, i.e, at time zero and time one.

(b) Possible reasons as to why SE Plc currently requires its long-term investments to meet
both the net present value and the accounting rate of return criteria include:

i) The DCF method takes into account the time value of money whereas the ARR
does not. So SE PLc decided to use NPV method alongside the ARR.
ii) One justification for the use of the NPV method is that in perfect capital markets
a positive NPV reflects the increase in the market value of the company( like SE
Plc)from the acceptance of the project.
iii) The DCF method uses cash flows and, therefore, preferred in this case because
shareholders’ dividends are paid in cash. The ARR uses accounting profits which
are affected by accounting conventions and non-cash flows such as depreciation
provisions and provision for irrecoverable debts.
iv) The DCF method is complex and difficult to understand whereas the ARR is less
complex and easier to understand.
v) The positive NPV from a new project shown by the DCF method shows the
maximum amount of dividends that can be distributed without affecting the
wealth of the shareholders. So in this regard the DCF method will be useful.

vi) DCF cash flows (over, say, 15 to 20 years) may be difficult to estimate and
project but figures for the ARR can be easily obtained from past accounting
reports.
vii) An explanation of the impact of market imperfections on the NPV rule. For NPV
to represent the increase in shareholders’ value resulting from acceptance of an

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 investment, it is necessary for investors to be aware of the project’s existence
and also the projected future cash flows.
viii) In imperfect markets shareholders lack information regarding projected future
cash flows. Consequently, they may use short-run reported profits and ROI as
indication of potential future cash flows. In such circumstances changes in
reported profits will affect share prices. Hence SE Plc’s management have
reacted to the CAD investment situation by considering the impact of a project’s
acceptance on the reported ROI/ARR.
ix) In practice there is widespread use of ROI /ARR.
x) Shareholders and financial analysts tend to monitor short-run profits and
ROI/ARR and use these measures as an input that determine their estimates of
future share prices. It is, therefore, not surprising that SE Plc considered the
implications of its investment decision on reported short-run profits and
ROI/ARR.

(c) The additional factors SE Plc should consider when deciding whether to switch to
the CAD technology are as follows:

i) It is claimed that many of the benefits from investing in AMTs are difficult to
quantify and tend not to be included in the analysis (e. g. improved product
quality).
ii) It is also claimed that inflation is incorrectly dealt with and that excessive discount
rates are applied which overcompensate for risk
iii) A further reason that has been cited why companies like SE Plc under invest in
AMTs is that they fail to properly evaluate the relevant alternatives. There is a
danger that the investment will be compared incorrectly against an alternative that
assumes a continuation of the current market share, selling prices and costs – in
other words, the status quo. However, the status quo is unlikely to apply, since
competitors are also likely to invest in the new technology. In this situation the
investment should be compared with the alternative of not investing, based on
assuming a situation of declining cash flow.
iv) SE Plc has not incorporated taxation into the analysis. This is very vital as it is a
future cash outflow.
v) SE Plc has discounted project cash flows at the company’s normal cost of capital of
14%. This rate is only justified if the risk of the project is equivalent to the average
risk of the firm’s existing assets.

(d) (i) How EVA can be used by SE plc to measure divisional performance.

EVA (like RI) gives an absolute measure, rather than a percentage value of performance,
and if EVA is positive it indicates SE plc that is generating a return greater than that required
by the providers of finance. In this case, a return in excess of 14%. In other words, a
positive EVA indicates that an organization is creating wealth for the shareholders.

Consequently, directors of SE plc should be encouraged to either:

 Invest in divisions where the returns from those divisions exceed the cost of capital;
or

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  Close down divisions, or harvest assets, where the return is less than the cost of
capital. In turn, the proceeds from any sales can either be reinvested in other
divisions, or returned to shareholders as dividends.
(d) (ii) Advantages and disadvantages of the EVA method.

The advantages of EVA include the following:

 Real wealth for shareholders. Maximisation of EVA will create real wealth for the
shareholders. Maximising the present value of future cash flows will help
maximize shareholders’ wealth.
 Less distortion by accounting policies. The adjustments within the calculation of
EVA mean that the measure is based on figures that are closer to cash flows than
accounting profits.
 Consistent with NPV. EVA is consistent with the idea of NPV, showing the return
on projects in excess of the cost of financing them. Any projects which would
generate a positive NPV will also increase EVA.
 An absolute value. The EVA measure is an absolute value, which is easily
understood by non – financial managers.
 Treatment of certain costs as investment thereby encouraging expenditure. If
management are assessed using performance measures based on traditional
policies, they may be unwilling to invest in areas such as advertising or research
and development because the costs incurred by those activities will reduce the
current year’s accounting profit. EVA recongnises such costs as investment for
the future and thus they do not immediately reduce the EVA in the year of
expenditure. This will reduce the temptation to short – termism (which may occur
under ROCE or ROI).

The disadvantages of EVA include the following:

 Dependency on historical data. EVA is based on historical accounts, which

may be of limited use as a guide to the future. In practice, the influences of
accounting policies on the starting profit figure may not be completely
negated by the adjustments made to it in the EVA model.

 Number of adjustments needed to measure EVA. Making the necessary

adjustments can be problematic, as sometimes a large number of
adjustments are required to accounting profit in order to calculate NOPAT.

 Comparison of like with like. EVA is an absolute measure, so larger companies

in size may have larger EVA figures than smaller companies, simply because
they are bigger, not because they are performing better. Allowance for
relative size must be made when comparing the relative performance of
companies. In this respect, ROI (which shows a percentage measure) may be
better for comparing performance between companies of different size.
 Difficulty in estimating WACC. Many organisations use models such as the
capital asset pricing model for estimating WACC. However, this is not a
universally accepted method of determining the cost of equity.

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(e)(i) Benefits of the MIS

The objective of management accounting and management accounting systems is to

provide information for managers to use for planning, control and performance
measurement. The focus here is on how information should be used to appraise
divisional performance. The MIS :
 Provides information to those managers who need it
 Helps managers make decisions based on the information provided
 Enables managers to make better decisions due to the fuller information
produced
 Will lead to the saving of costs and improvement in profits
 Hold both quantitative and qualitative information and so provides managers
with all the relevant information they need to make decisions

(e)(ii) How MIS will assist the various groups of interested users in SE plc

The management information system will be reporting to three sets of managers for three
different purposes: strategic planning, management control and operational control.
Therefore the system will provide:

 Directors with information for strategic planning decisions

 Divisonal managers with information for management purposes
 Operations managers with information for operational day – to – day control.

The part management accounting information will play in such system will be to
provide the numerical information and analysis to complement the qualitative
information available from the management information system. Without the
quantitative information, qualitative information will not provide all the information
that will be necessary for a decision. Similarly, quantitative information will need to
be complemented by qualitative so that full details are available on which to base
decisions.

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SOLUTION TWO

(a) Tanaka Excellence Ltd has the following strengths and weaknesses, which can be
considered to be internal.
Strengths
 TEL is an established business with an experienced management team.
 Tendai Nyamayidega, the managing director appears to be a highly motivated
entrepreneur.
 The company acquired a lease on a new site that has quite a lot of potential.
 The company has diversified into forklift truck driver training which reduces
dependence on road haulage for income.
Weaknesses
There is a degree of gearing in the finances of the company. The company must
maintain profitability and have a good cash flow to keep the bank happy.
TEL’s existing site is too small, so it will have to re-locate to the new site that requires
more capital and will disrupt business operations.
TEL currently does not have an effective management accounting system, which
means its managers make decisions without having sufficient information.
The company is too dependent on Kwekwe Ltd, which accounts for 65% of its
business.

TEL also has a number of external opportunities and threats including:

Opportunities
The enlarged premises will enable the company to attract new business and offer new
services e.g. overnight trailer parking and a vehicle repair service.
TEL should be able to establish stronger links with existing customers, which should
help to retain their business.
Threats
The most serious threat facing TEL is the loss of Kwekwe Ltd’s custom. In the last two
months one third of this business has already been lost.
There is a large number of competitors working on low profit margins and this forces
prices down. There appears to be little prospect of TEL being able to increase its
prices.
Local residents are opposing operations from the current site and the company is
receiving bad publicity in the local press.
The company’s management needs to exploit its strengths and opportunities and
eliminate its weaknesses and threats when developing a strategy for the company.
(b) The following strategic management accounting information should be provided to assist
future decision making and cost control:
Non-financial information
Environmental analysis. A good management accounting system will provide information
about the external environment, particularly the future changes that are likely to occur and
the impact on TEL. These can be classified under political, economic, social, technological,
legal and ecological changes (PESTEL). The impact of each change on the company can
then be evaluated.

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Information about competitors can be very useful as it provides a benchmark against which
TEL’s performance can be compared.
Management accounting will provide information to forecast patterns and trends. This will
be very useful when making decisions and setting objectives and targets e.g. market
growth rates.
Management accounting can also provide information to evaluate risk when making business
decisions e.g. using simulation and sensitivity analysis.
Financial information
Investment appraisal
Information can be provided to evaluate each capital investment project undertaken
by TEL. This will be very useful when developing the new site.
Variance analysis
This is a very important management accounting control tool. The expected costs and
revenues will be forecast and actual costs and revenues compared with them.
Variances can then be identified and investigated to find their cause. This will establish
some of TEL’s strengths and weaknesses.
Customer account profitability
Costs incurred by TEL can be related to each customer and the profit generated by
each customer calculated. This will be very important information used by TEL’s
managers to make decisions relating to each customer e.g. Kwekwe Ltd.
Quoting prices
Most of TEL’s customers will be other organisations. They will expect a price to be
agreed before awarding a contract to a supplier. Management accounting can supply
the information for quoting competitive and realistic prices when negotiating with
customers.

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SOLUTION THREE

Part (a)

According to Earl, there are three levels of information systems strategy. These include;

Information systems (IS) strategy

In the scenario, SDL is under pressure to grow its returns to investors. This is an overriding
business objective. IS strategy involves deciding on which systems, broadly, will enable SDL
to achieve this objective. The SD’s suggestion to expand into online retailing is an example
of this.

Information management (IM) strategy

This looks at the roles of management and other members of staff within the overall IS
strategy – in other words, who controls and uses the information systems.
For SDL, it will involve deciding on how existing staff will be used in the new IT system,
such as who will be responsible for inventory data entry. It will also include the recruitment
of an IT director to oversee the process.

Information technology (IT) strategy

This level looks at the practical application of the IS strategy. Given that SDL has decided to
expand into online retail, IT strategy will specify the technological requirements of these
new systems.
For SDL, this may include new hardware, such as computers and servers.
Inventory control and website design software will also be required. This will need to be
written internally or purchased externally.

Part (b)
As with any major project, there will be problems that SDL will face with its proposed move
into online retailing. These may include:

Setup and running costs

Investors in SDL are keen to see an increase in their returns. However, the cost of setting
up and running an online retailing system may be significant.
SDL will need to determine whether the additional profit it can make by reaching new
customers online will exceed these costs. Certainly in the short term the setup costs may
well mean that shareholder returns fall. Any further investment in staff will also increase the
IT costs to the company.

Lack of in–house IT resources

The business currently lacks an IT director to take control of the project. While the company
may be able to hire someone quickly to fill this role, they will lack experience of SDL’s
business by the time the new project is started.
The current IT department is small. They may well lack the time or skills for a project of this
magnitude. This indicates further investment will be required to hire additional staff or to
buy the new systems from external software houses.
It should also be noted that an online retail system would require SDL to have precise
information about its inventory levels. It currently does not have an automated inventory
control system as this was abandoned.

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Lack of customer interest
It is always possible that SDL’s customers will not be interested in purchasing goods online.
They may, for example, wish to try out furniture or physically see it for themselves rather
than buying it online.
It is unclear from the scenario whether the Sales Director has undertaken any market
research. This would be vital before making the decision about beginning online retailing, to
avoid launching an expensive website that fails to attract customers.

Technophobia
Given the lack of IT currently in place at SDL, employees may not see the need for new IT
systems and may resist being retrained.
In addition, the Managing Director has expressed concerns about the launch of a new IT
system, given the problems SDL has faced in the past. A project of this scale will require
management support in order to be successful.

Security concerns
As SDL will be processing transactions through its website, it will need to ensure that
customers are protected from viruses and that their details are protected from hackers.

Part (c)
It is crucial that SDL has information systems represented at the strategic orboard level for
several reasons:

Cost of IT/IS
Setting up an online retail store will involve high levels of expenditure for SDL.
There is the risk of costly mistakes if it is not carefully managed. This is evidenced by the
failure of its inventory control system. Failure of such a major project could have a
significant impact on the company’s financial position.

Competitive advantage
The market SDL operates in is described as saturated. It will be difficult for SDL to increase
its market share unless it finds a way to differentiate itself.
If the website is a success, it will give SDL a competitive advantage over its rivals and as
such it should be part of SDL’s strategic decision–making process.

Stakeholders
Expansion of SDL is of great interest to SDL’s shareholders. As such it is crucial that the
directors monitor its progress.
In addition, customers are currently unable to check the inventory of goods within SDL.
They may be very interested in a system that would enable them to save unnecessary
journeys into SDL’s stores for goods that are not in inventory.

Fast–moving
Technology is a fast moving area and even if becomes a successful first mover in the market
by selling online, competitors are likely to follow SDL into the online market.
As such, SDL’s IT systems will need to be continually monitored and kept up to date to
ensure it remains competitive.

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SOLUTION FOUR

(a) Budgeting system at TBL

 Budgeting is a key control tool for management and of particular importance in
controlling costs in businesses such as TBL which is seeking to be a cost leader.
Budgets help to communicate and coordinate all the management activities within
the company towards a single plan.
 The budget helps to attribute responsibility for performance.
 The participatory nature of the budget process will help to motivate managers to
achieve budget figures which they themselves have helped to set. It is important for
this purpose that the budget is achievable or else it is demotivating.
 Budgets assist the evaluation of performance by identifying variances and then point
to areas for corrective action or future learning.

The following are some of the problems with budgeting at TBL:

 The time-consuming nature of the process which is unusual as the business is
mature and stable and so budget-setting should not be a complex process. The
exasperation of the managers probably results from the fact that they see little
benefit coming from work involved in forecasting.
 The use of standard costs in budgeting could discourage a system of continuous
improvements which would help a cost leader in making efficiency gains. However,
TBL’s senior management may view that it is unlikely that there will be a need to
make such changes on a regular basis and that a review of the costs once a year is
sufficient.

(b) Beyond budgeting

 Going beyond budgeting involves replacing the annual system of a centrally
created budget with a more flexible system of targets.
 Performance measurement changes from monitoring variances from the budget
towards measuring achievement of strategic goals, adding value and
performance against suitable benchmarks.
 The system will use forecasts produced and revised more regularly than the
annual budget by the line managers; it will devolve decision-making.
 The forecasts produced are often more important for cash flow monitoring rather
than cost control.
 The targets are intended to guide rather than constrain the line managers, thus
improving their motivation.
 The approach of going beyond budgeting is considered appropriate in industries
where there are rapid changes in the business environment and where
intangibles such as know-how are key to competitive advantage.
This approach at TBL would appear to be inappropriate for a number of reasons:
 There does not appear to be the need to more regularly revise the budgets.
Indeed, the work generated in going beyond budgeting may increase the
complaints about time-consuming exercises from the operational managers.
 The lower level managers would now need to prepare their own forecasts and
would require training in this. They do not appear to have the appetite for such
development.
 There is no indication that there are rapid changes in TBL’s business and so the
beyond budgeting approach would not appear to yield many benefits.
 There does not appear to be a need for great creativity at TBL; instead the focus
is on cost control and so traditional budgeting will suit this well.

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  The management style of an organisation which should go beyond budgeting is
to allow power to be devolved to lower levels of management and this will not fit
the culture of TBL.

Overall, then, there are insufficient benefits and many barriers to going beyond
budgeting at TBL and it is not recommended.

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SOLUTION FIVE

(a) The objectives of a good transfer pricing system are to :

i) Facilitate divisional autonomy. Divisional managers are able to make

decisions without influence or directives from the head office.
ii) Bring about a fair evaluation of divisional performance. A good
transfer price would enable each division to be evaluated on the basis of
profit.
iii) Motivate divisional managers to make good decisions. A transfer
pricing system removes sub-optimisation or dysfunctional decision making. It
enables divisional managers to make decisions that are in the best interest of
their divisions as well as the organization as a whole, and not just decisions
which benefit their own divisions. This brings about goal congruence.
iv) Record transfers or movements between divisions. The transfer pricing
system enables movements of goods and assets between various divisions
within the organization.
v) Reduce the overall tax burden in intercompany transfers. In
multinational enterprises, transfer pricing enables the overall tax liability for
the group to be minimized. This is done through choosing appropriate
countries in which manufacturing should occur as well as those countries in
which selling should occur. Profits are, therefore, moved around the world
with a view to minimizing the global tax liability.
vi) Encourage a healthy interdivisional competitive spirit.

(b) (i) 80% Capacity At TP of K400 Per Kg

Div A Div B AB
Group
K’000 K’000 K’000 K’000 K’000
External sales 720 240,000xK4 960 1,680
2,000 xK360

Internal sales 480

1,200 x K400
1,200

Variable Costs
 transfer costs 480
 own 448 1,200xK120 144 (592)
Costs(3,200xK140)
 Fixed costs 400 160 (560)
Total Costs (848) (784) (1,152)
Quarterly Profit/Loss 352 176 528

(b) (i)

80% Capacity At TP of K360 Per Kg

Div A Div B AB
Group
K’000 K’000 K’000 K’000 K’000

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External sales 720 240,000xK4 960 1,680
2,000 xK360

Internal sales 432

1,200 x K360
1,152

Variable Costs
 transfer costs 432
 own 448 1,200xK120 144 (592)
Costs(3,200xK140)
 Fixed costs 400 160 (560)
Total Costs (848) (736) (1,152)
Quarterly Profit/Loss 304 224 528

(b) (ii)

100% Capacity At TP of K400 Per Kg

Div A Div B AB
Group
K’000 K’000 K’000 K’000 K’000
External sales 720 400,000xK3.50 1,400 2,120
2,000 xK360

Internal sales 800

2,000 x K400
1,520

Variable Costs
 transfer costs 800
 own 560 2,000xK120 240 (800)
Costs(4,000xK140)
 Fixed costs 400 160 (560)
Total Costs (960) (1,200) (1,360)
Quarterly Profit/Loss 560 200 760

(ii)100% Capacity At TP of K360 Per Kg

Div A Div B AB
Group
K’000 K’000 K’000 K’000 K’000
External sales 720 400,000xK3.50 1,400 2,120
2,000 xK360

Internal sales 720

2,000 x K360
1,440

Variable Costs
 transfer costs 720
 own 560 2,000xK120 240 (800)

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 Costs(4,000xK140)
 Fixed costs 400 160 (560)
Total Costs (960) (1,120) (1,360)
Quarterly Profit/Loss 480 280 760
(2.5 marks)

(c ) At both capacity level cases and at both the K400 and K360 transfer prices(TP),
Division A makes more profits than Division B. In fact, at 100% capacity and at the
K400 TP, Division B only generates K200, 000 compared to K560, 000 made by
Division A.

The change in TP’s from K400 to K360 does not affect the profits made by the AB
group. The group makes the same profits of K528, 000 at 80% capacity even when
the price is reduced to K360 per kg. Similarly, at 100% capacity changing the price
from K400 to K360 still generates profits of K760, 000 at both prices. However, at
100% capacity the group generates extra profits of K232, 000, i.e. K760, 000
less K528,000.

It is observed that Division B’s profit is lower at 100% capacity at both TP’s of K400
and K360. Since the 80% capacity gives Division B manager more profits, he/she would
like to operate at this level whereas the AB group would like to operate at the 100%
capacity level. This will not be good for the company as a whole. There is, therefore,
lack of goal congruence.

END OF SOLUTIONS

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 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA ADVISORY PROFESSIONAL IN ACCOUNTANCY

___________________

CA 3.6: ADVANCED FINANCIAL MANAGEMENT

___________________

FRIDAY 17 JUNE 2022

___________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question.

2. This paper is divided into TWO (2) sections:

Section A: One (1) Compulsory scenario question.
Section B: Four (4) Optional scenario Questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. Formulae, Present Value, Annuity and normal distribution tables are attached at the
end of the question paper.

DO NOT OPEN QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR
SECTION A

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This question is compulsory and must be attempted.

QUESTION ONE – (COMPULSORY)

MAC Plc manufactures materials for road constructions. Recently, the company came up
with a special material called NANA that all the road contractors need to construct roads in
an efficient and effective manner. MAC Plc is the only company able to manufacture such a
material and therefore, there is demand for NANA. Due to the scarcity of NANA, six
companies have contracted MAC Plc to manufacture a tonne of NANA solely for each of
them for the next three (3) years commencing on 1 June, 2022. A special equipment will be
required for the production of NANA costing K9.5 million, and payable immediately. The
expected net realisable value of the equipment after three (3) years is K2 million. The
contract price is payable in two (2) equal instalments with first payable immediately, and the
last one on 31 May 2024.

The following financial information relates to the resources required to produce NANA:

Description Quantity per Labour Current cost per

tonne Hours per tonne/hour(ZMW)
tonne
Materials- AY Grade 1,500 - 1,000
- DB Grade 1,000 - 1,200
Labour- Skilled - 3,100 355
- Unskilled - 5,200 155
Allocated overheads
per skilled labour 150
hour

MAC Plc uses AY and DB grade to manufacture NANA and these materials must be
purchased and paid for annually in advance. Replacement costs of AY and DB are expected
to increase at an annual compound rate of 15 % and 14% respectively.

The skilled labour required for production of NANA is scarce and MAC Plc expects to undergo
a shortage of skilled labour during the year to 31 May 2023. Therefore, acceptance of the
contract would result in a net loss of contribution of K75 per hour from the other works as
the “other work” does not require unskilled labour.

For the year to 31 May 2023 only, the company expects to have 15,000 surplus unskilled
labour hours. The condition of service requires that MAC Plc pays employees half of their

331
normal wages during the layoff period for which there is no work. All wage rates are
expected to increase at an annual compound rate of 14%.

The allocated overhead costs compromise fixed overheads of K120 (including depreciation
on equipment of K50) and variable overheads of K30. Both fixed and variable overheads are
expected to increase by 11% annually. Working capital of K4 million will be required
immediately and is expected to inflate in line with AY grade materials.

MAC Plc has a gearing level of 40% debt. The debt comprise of a 10% debenture with
market price of K1,025 and repayable in four (4) years’ time at a premium of 9%. The
debenture was issued at a par value of K1,000. The return on the market is currently
estimated as 14.6% and the risk-free rate as 7%. MAC Plc has an asset beta of 0.92.
Corporate tax is payable at the rate of 30% per year.

Ignore the effect of taxation on all costs.

Required:

(a) As a Financial Consultant, write a report to the board of directors of MAC Plc advising
them on the minimum price to undertake the contracts to manufacture NANA. All
computations should form part of the appendix to the report. State clearly any
assumptions. (32 marks)

(b) Discuss the reasons firms primarily use derivatives for hedging rather than
speculation and the risks that arise from the use of derivatives. (8 marks)
[Total: 40 Marks]

332
SECTION B

There are FOUR (4) questions in this section.

Attempt any THREE (3) questions in this section.

QUESTION TWO

AMAKA Ltd is a private company that runs an online business platform which earns revenue
by selling its own products, or by collecting a percentage of revenues from third-party
products sold on the platform. The company also earns revenue from online advertising.
About 70% of the revenue is earned from the domestic market and 30% from a regional
foreign market.

The recent global pandemic, COVID-19 has caused global economic recession which has
affected companies. However, AMAKA Ltd has been largely unaffected by the economic
recession and has increased its sales volume and profits each year for the past three (3)
years. The directors think this is because most businesses are doing their business online
due to the pandemic restrictions. Inflation in the country is near zero at the present time
and interest rates are expected to fall. Financial analysts project the future growth to be
modest as the directors and shareholders do not wish to adopt strategies that they think
might involve substantial increase in risks, such as expanding the business to other parts of
the world. However, a group of the smaller shareholders differ with this strategy and would
prefer higher growth even if it involves greater risk.

AMAKA Ltd sourced its finances from both equity (83%) and debt (17%) financial
instruments. The debt is a combination of bonds secured on non-current assets and
unsecured overdraft. The interest rate on the secured bonds is fixed at 15% and
redeemable in six (6) years’ time. The overdraft rate is currently 20% which is lower
compared to the recent historic rate of around 28%. The company intends to secure
additional bonds which will effectively increase the debt to 30%.The current primary
objective of the company is the increase in dividends per year.
Required:
(a) Discuss the refinancing strategies of AMAKA Ltd in the context of the economic
environment given in the scenario and how these might impact on the determination
of corporate objectives. (14 marks)

(b) Evaluate the appropriateness of AMAKA Ltd’s current primary objective. (6 marks)
[Total: 20 Marks]

333
QUESTION THREE

The Zambian Securities market has experienced very little transactions over the past twelve
(12) months. In order to promote trade and activity on the Securities market, tax incentives,
waiver of costs for quoting and listing, and compliance requirements have been reduced.

Dudu Plc is a company listed on the Securities Exchange, with 80 million K1 shares in issue
and a market price of K12 per share. The Directors of Dudu Plc have been observing the
performance of Mac Ltd, a quoted company with 5 million, K10 shares in issue with a market
price of K90 per share. Mac Ltd has increased its market capitalization significantly over the
past three (3) years and this attracted several investors including Dudu Plc. At the recent
board meeting of Dudu Plc, the Directors agreed to make an offer for Mac Ltd of eight (8)
Dudu Plc shares for every one (1) Mac Ltd share. Further, the Directors have ascertained
that K120 million in synergistic benefits could be achieved from the merger. These benefits
were calculated using the net present value technique, with risk incorporated in the model.

Required:

(a) Calculate the gain in wealth to the shareholders of Dudu Plc and Mac Ltd if the bid is
accepted and explain your findings. (7 marks)

(b) Calculate the bid offer terms if all the gains are to accrue to the shareholders of Mac
Ltd and the share price implied. (7 marks)

(c) Explain three (3) differences between a listed company and a quoted company.
(6 marks)
[Total: 20 Marks]

334
QUESTION FOUR
ENG Plc is a manufacturing company which was established in the 1990s.The sole objective
of the company is to increase earnings each year to enable its dividend payment to increase
by 5% annually. The board of directors has convened a special board meeting to review two
investment opportunities and decide on an appropriate minimum expected return to use in
the evaluation of these investments. The board is also reviewing whether to run its treasury
function as either a profit centre or cost centre. The Chief Financial Officer (CFO) has
recommended that each of the two (2) investments being considered in a non-listed
company will be financed by equity 65% and debt 35%. The CFO also strongly believes that
the treasury function should be run as a profit centre. The following information relates to
the two proposed investments:
Description Equity Beta Debt Beta Debt Ratio
Investment A 1.27 0.29 1:4
Investment B 0.97 0 1:7

The market expected return rate of return is 20% and the risk-free rate is 8%. The
corporate tax is 30% per year. Assume the debt that ENG Plc raises to finance the
investments is risk-free.
Required:
(a) Calculate an appropriate minimum expected rate of return to be used in the
evaluation of each of the proposed investments. (10 marks)
(b) Discuss the factors that should be considered by ENG Plc if the profit centre
approach would be used to run the treasury function. (10 marks)
[Total: 20 Marks]

QUESTION FIVE
Kasaka Zambia Ltd is a medium sized business that is currently borrowing
K1 million from the Neo Bank on a floating or variable interest rate basis at the BOZ
Monetary Policy Rate (MPR) plus a 3% margin, which is market determined on a monthly
basis. This makes their monthly interest payment volatile depending on the MPR. To
manage this volatility, the company would like to arrange a fixed interest payment at the
end of the month.

Rupik Bank Ltd has entered into an Interest rate Swap agreement with Kasaka Zambia Ltd,
where the Bank pays the variable rate to Kasaka Zambia Ltd, and Kasaka Zambia Ltd pays
Rupik Bank Ltd a fixed rate of 21% per annum paid monthly.

335
The table below shows the MPR for the last six (6) months:

Month MPR Variable Fixed Rate Fixed Interest Net

(A) (%) Interest (%) (K) Settlement
( B) Amount (K) (D) (Amount) Amount (K)
(C) (E) (F)
1 16 21
2 18 21
3 20 21
4 19 21
5 18 21
6 17 21

Required:
(a) Calculate the variable interest, fixed interest and net settlement amounts under
columns (C), (E) and (F) in the table above. (10 marks)

(b) Explain the effectiveness of the company’s strategy as an interest rate hedge, in
relation to the prevailing Monetary Policy Rate, and interest rates. (6 marks)

(c) Explain four (4) differences between a foreign currency swap and an interest rate
swap. (4 marks)
[Total: 20 Marks]

THE END OF PAPER

336
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338
339
340
341
CA3.6 SUGGESTED SOLUTIONS

SOLUTION ONE

(a)
To: The Board of Directors of MAC Plc

From: Financial Consultant

Subject: Minimum Contract Price

Refer to the subject above.

Following our evaluation of the financial information provided regarding the contracts for
NANA by six companies, we propose a minimum contract price of K101.99 million as per
attached appendix.

Should you have any clarifications, please do not hesitate to contact the undersigned.

Yours Sincerely,

Financial Consultant

APPENDIX

MINIMUM CONTRACT PRICE FOR NANA

Date 01/06/2022 01/06/2023 01/06/2024 01/06/2025
Year 0 1 2 3
K'm K'm K'm K'm

Equipment - 9.50 - - 2.00

- -
Material - 16.20 18.56 21.26 -
- - -
Labour - 13.31 16.68 19.01
- - -
Variable Overhead Costs - 0.62 0.69 0.76
- -
Working Capital - 4.00 0.60 0.69 5.29
- - -
Net Cash Flows - 29.70 33.08 39.32 12.48
Disc@14% 0.877 0.769 0.675 0.592
- -
Present Value - 26.05 - 25.44 26.54 7.39
Total PV of Costs - 85.42

x/2 + 0.675x/2 = 0.8375x

0.8375x=85.42
x=101.99
The minimum price is therefore K101.99 million

342
WORKINGS
1. MATERIAL
Year 2022 2023 2024 2025

Material- AY Grade 1,500 1500 1500 -

No. of tonnes 6 6 6 -

Cost per tonne 1,000 1150 1322.5 -

Cost 9,000,000 10,350,000 11,902,500 -

Year 2022 2023 2024 2025

Material- DB Grade 1,000 1000 1000 -

No. of tonnes 6 6 6 -

Cost per tonne 1,200 1368 1559.52 -

Cost 7,200,000 8,208,000 9,357,120 -

Total Cost 16,200,000 18,558,000 21,259,620 -

2. LABOUR
Year 2022 2023 2024 2025

Skilled hours - 3,100 3,100 3,100

No. of tonnes - 6 6 6

Cost per hour - 404.70 461.36 525.95

Cost - 7,527,420 8,581,259 9,782,.635

Year 2022 2023 2024 2025

Unskilled hours - 5,200 5,200 5,200

No. of tonnes - 6 6 6

Total hours - 31,200 31,200 31,200

Less: Surplus - 15,000 - -

343
 - 16,200 31,200 31,200

Cost per hour - 176.70 201.44 229.64

Sub-Total - 2,862,540 6,284,928 7,164,768

Surplus labour (half rate) - 1,325,250 - -

Cost - 4,187,790 6,284,866 7,164,747

Opportunity cost

Total hours - 18,600 18,600 18,600

cost per hour - 85.50 97.47 111.12

Cost - 1,590,300 1,812,942 2,066,754

Total Labour Cost - 13,305,510 16,632,166 19,017,170

3. VARIABLE OVERHEAD COSTS

Skilled labour hours - 18,600 18,600 18,600

Cost per hour - 33.30 36.96 41.03

Total Cost - 619,380 687,456 763,158

4. WORKING CAPITAL

Cost 4,000,000 4,600,000 5,290,000 6,083,500

- - -
Incremental 4,000,000 - 600,000 690,000 793,500

5. Cost of Capital
Cost of Equity
Ba= Be x Ve/Ve + Vd (1-t)
0.92=Be x
0.6/0.6+0.4(0.7)
Be= 1.35
Ke = 7% + 1.35(14.6%-
7%)
Ke = 17.26%

Cost of Debt
Cashflow dis@10% PV disc@5% PV

344
 - - -
Yr 0 - Market price 1,025 1 (1,025.00) 1 1,025

YR 1 to 4- Interest (1-t) 70 3.17 221.9 3.546 248.22

YR 4- redemption @9% 1,090 0.683 744.47 0.823 897.07

NPV (58.63) 120.29

IRR = 5%+120.29/120.29+58.63 (10%-

5%)
IRR= 8.36%

WACC= (17.26% X 0.6) + (8.36%X0.4)

WACC= 13.7% round off to 14%

(b) Hedging Vs Speculation

Derivative instruments are used either for speculation or for hedging. Derivatives are used
for speculation when they are used on their own and not in conjunction with the underlying
instrument. For example a long position in a futures contract, is a bet that the price of the
underlying will move in a certain direction by a certain date. Similarly the writer of a call
option bets that the price will not move above a certain range over a period of time. In both
cases the derivatives position can result in losses if the price does not move in the
anticipated direction. When derivatives are used for hedging they are always used in
combination with the underlying. The principle of hedging is that any profits or losses in the
cash position will be offset by losses or profits in the derivatives position.

The empirical evidence on the use of derivatives by corporations shows that firms primarily
use derivatives for hedging rather than speculation.

One unresolved issue is why companies need to hedge their risks since investors can
themselves diversify away all risks by including the shares of the company in a portfolio. The
main arguments for using derivatives for hedging are as follows:

i) Hedging reduces the risk imposed on the firm's managers, employees, suppliers and
customers.
ii) Hedging can control the conflict of interest between bondholders and shareholders,
thus reducing the agency costs of debt.
iii) The use of derivatives increases the value of a firm. Modigliani and Miller showed
that firm value and financial policy decisions are unrelated in the absence of market
imperfections. Models have been developed that show that hedging can increase the
value of a firm if capital market imperfections exist. Thus the following additional
justifications have been provided:
iv) Hedging lowers the probability of the firm encountering financial distress which in
turn lowers the expected costs of financial distress and the cost of capital.
v) Hedging encourages investment by the firm. According to agency theory between
shareholders and bondholders, the issuance of bonds which have higher priority than
equity creates incentives for the firm's equity holders to under-invest. Hedging
reduces the incentive to under-invest since hedging reduces uncertainty and the risk
of loss. Because firms with more valuable growth opportunities and higher leverage

345
 are more likely to be affected by the underinvestment problem, these firms are also
more likely to hedge.

Risks from the use of derivatives

1) Valuation (model) risk

The most common risk for OTC derivative users is the risk of mispricing the derivatives
position. Since OTC derivatives do not trade in liquid markets where they can always be
bought or sold at the market price, valuation models need to be used. These models
however are based on assumptions which may not be valid.

For example the Black-Scholes option valuation model assumes that markets have no
frictions that the stock price is log normally distributed, that interest rates are fixed, the
volatility of return is constant and that trading is possible all the time.

However, it is well known that these assumptions are at variance with reality. Interest rates
are not constant and neither is the volatility. Demand and supply may have an impact on
prices and there are certainly frictions in the market.

There are many examples of firms losing money due to valuation errors. For example, in
January 2004, the National Australian Bank reported currency option losses in excess of
$360 million Australian dollars (approximately $280 million in US dollars) that were
attributed to rogue traders and risk management failures and involved incorrect valuations
and misreporting. It is much harder to value more complicated derivatives.

2) Liquidity risk
Exchange-traded derivative products are highly liquid and a transaction can take place at the
market price. The market value of a derivatives contract is thus realized when it is sold. In
the case of OTC derivatives and especially where complex contracts are involved it is not
always possible for these contracts to be sold, and their model-calculated value to be
realised. The reasons for this are:

i) Uncertainty about the valuation model and the risks of the position
ii) In the case of complex contracts, there may be only a small number of
counterparties who both want that particular set of risk characteristics and are
confident that they understand what they are receiving
3) Reporting risk
OTC complex derivative positions especially with long maturities can be manipulated so that
the true value and the true risks of the positions are not revealed. For example, Enron had a
huge portfolio of derivatives, including many contracts with extremely long maturities,
whose risks were not revealed before it collapsed.

346
SOLUTION TWO

(a)

1) Capital structure
The current situation is that AMAKA Ltd has a low gearing level of 17%. The debt is made
up of 15% fixed-rate secured bonds and unsecured overdraft with a rate of 20%. Finance
theory suggests that at least some of the capital structure should include debt. Debt is a
cheaper form of finance than equity, given the tax shield provided by the interest payments
and the lower returns that debt providers tend to expect.

2) Use of fixed-rate debt in current economic climate

In the current economic climate, inflation is near zero and interest rates are expected to fall
and therefore, the use of fixed-rate debt as a form of financing is questionable for some or
all of the following reasons:
(i) AMAKA Ltd is expecting no better than modest growth therefore fixed amounts of
interest will have to be paid out of potentially falling profits. Returns to shareholders
will decrease as a result. This will be in direct contravention of the corporate
objective of increasing dividends.
(ii) When inflation is near zero, the real value of debt does not decrease, hence the
benefits of debt finance are diminished.
(iii) If interest rates fall below the fixed rate attached to the bonds, AMAKA Ltd will be
paying more in interest than is necessary (although it could be argued that this is
one of the risks of taking on fixed-rate debt). This will effectively reduce the funds
available for distribution as dividends, which again fails to meet the objective of
increasing payments to shareholders.

3) Equity as a source of finance

With the corporate objective of increasing dividends each year being threatened by the
pending change in the current debt structure, and AMAKA Ltd may consider the wisdom of
raising additional equity. As profits are at best going to remain static (or actually fall), equity
may be preferable given that there is no legal obligation to pay dividends. However one of
the problems AMAKA Ltd has is that it is not listed on a stock exchange. Private entities tend
to have more problems trying to raise equity – for example, how should shares be valued,
should AMAKA Ltd apply for a public listing and by what means should equity be raised?

4) Foreign currency obligations

Other issues that the AMAKA Ltd might consider are how any foreign currency revenues
might be exposed to exchange rate risk and how to hedge them. The entity may be affected
by fluctuations in exchange rates, particularly if a reasonably long credit period is given. If
AMAKA Ltd is losing money through exchange rate movements, it may wish to consider
hedging instruments such as forward contracts or options.

5) Dividend policy and capital structure decisions

Given the economic conditions, current finance structure and the objective of increasing
dividends, AMAKA Ltd will have to consider which combination of dividend policy and capital
structure will be most beneficial to the shareholders (that is, will maximise the present value
of their cash flows). Can the current fixed-rate bonds be repaid early and replaced with
either lower fixed-rate bonds or variable rate loans? One issue that will have to be
considered here is the possibility of early repayment penalties that must be set against the
potential benefits of paying lower rates of interest.
The issue of return on investment will also have to be considered. If the entity negotiates
lower interest rates, this may reduce its perceived risk, leading to a lower cost of capital and

347
thus lower expected returns to shareholders. A compromise will have to be reached between
the desire for high rates of return and the potential for lower interest payments.

(b)
Maximisation of shareholder wealth is the theoretically ideal corporate objective. However,
most organisations now recognise that having this as their sole objective is unrealistic.
Whilst there is still the philosophy that shareholders’ wealth should be improved as much as
possible, this is usually within the constraints of other objectives, such as legal obligations
relating to the environment, ethical considerations and health and safety issues.

The objective of increasing dividends each year does not necessarily support the
maximisation of shareholder wealth. If there are profitable investments available (e.g.
expansion to other parts of the world) that would increase future wealth, then the entity
should ideally be using its funds to finance such investments. By increasing dividends each
year, the entity is restricting the funds available for profitable investments and thus its
ability to improve shareholder wealth. Most organisations have a target pay-out ratio
(dividends as a percentage of profit available to shareholders) which means that dividends
will move in relation to fluctuations in profit. This makes more sense than a situation where
dividends are increasing whilst profits are actually falling.

348
SOLUTION THREE

Part (a)
Gains to shareholders of Dudu Plcand Mac Ltd;
Current market value for Dudu (80m x K12) = K960 million
Current market value for Mac (5m x K90) = K450 million
Combined total number of shares; 80 million + (5 million x 8) = 120 million
Total combined value is K960 million + K450 million +K120 million = K1,530 million
Gains to shareholders of Dudu Plc; 80/120 x K1,530 = K1,020 – K960 = K60 million
Gains to shareholders of Mac Ltd; 40/120 x K1,530 = K510 –K450 = K60 million
The merger terms offered seem to have taken account that the share price of Dudu
Plc is lower than Mac Ltd’s share price. This means a share in Mac Ltd is worth more
than a share in Dudu Olc. Therefore, the implied value placed on Mac by the share
offer terms of 8 Dudu Plc shares for 1 Mac Ltd share is 8 x K12 = K96 per Mac Ltd
share which in the combined value would be (K96 x 5 million)/40 million share =
K12 per share, which is equal to the share price of Dudu Plc, therefore, the
synergistic benefits are being shared equally.
Part (b)
If all the gains were to accrue to the shareholder of Mac Ltd, then the value of Dudu
Plc implied in the combined value should be K960 million. This further implies that all
the synergistic benefits will accrue to Mac Ltd with a value of K 570 million (K450 +
K120), therefore;
(80/(80+x)) * K1,530 = K960
80 = 50.196 + 0.62745x
X = 47.5 million which represents the number of shares of Mac Ltd in the combined
value. Therefore, Mac Ltd share would be 47.5/5 = 9.5 Dudu Plc shares for every 1
Mac Ltd share
The implied value on Mac shares would be 9.5 x K12 = K114 per Mack Ltd share
representing a premium of about 26.6%.

Part (c)

If a company has 50 shareholders or more, it is deemed a public company and required to

register its shares with the Securities Exchange Commission (SEC) – this is mandatory.
Companies incorporated as public companies, but having less than 50 shareholders may
seek registration with the SEC if they wish. The SEC may if necessary, deem a company
publicly tradeable, and request it to be registered. As per the Act, all registered shares must
trade on a recognised securities exchange. Therefore, registration directs companies to be

349
traded on the Lusaka Securities Exchange (LuSE). And such companies trade on the unlisted
tier of the LuSE referred to as the Quoted Tier or the second tier of the LuSE market.

The LuSE is a self-regulatory organization (SRO) and administers its own set of regulations
termed the Listings Rules. Companies that satisfy the Listing Rules and meet the set criteria
will be admitted to the Official List of the LuSE provided they have secured a registration
with the SEC in the first instance. The Official List constitutes the top tier of the LuSE market
and therefore represents all companies that are formally listed on the LuSE. Consequently,
the LuSE operates a two-tier market structure (i.e. listed and quoted shares) arising from
the fact that the securities market is designed as a central market by the Securities Act.

Therefore, quoting a company on the securities market signifies a strong intention to fully
list that company on that securities market. However, there have been circumstances where
a company directly lists without quoting.

350
SOLUTION FOUR

(a)

INVESTMENT A

Ungear Beta

Ba = 0.27 x 0.8/0.8+0.2 (1-0.3) + 0.29 x 0.2(1-0.3)/0.8+0.2(1-0.3)

Ba = 1.08 +0.04 = 1.12

Re-gear Beta

1.12 = Be x 0.65/0.65 + 0.35(1-0.3)

Be = 1.54

Minimum expected return = 8% + 1.54 (20%-8%) = 26.48%

INVESTMENT B

Ungear Beta

Ba = 0.97 x 0.875/0.875+0.125 (1-0.3)

Ba = 0.88

Re-gear Beta

0.88 = Be x 0.65/0.65 + 0.35(1-0.3)

Be = 1.21

Minimum expected return = 8% + 1.21 (20%-8%) = 22.52%

(b)

If a profit centre approach is being considered, the following issues should be addressed:

i) Competence of staff
Local managers may not have sufficient expertise in the area of treasury management to
carry out speculative treasury operations competently. Mistakes in this specialised field may
be costly. It may only be appropriate to operate a larger centralised treasury as a profit
centre, and additional specialist staff demanding high salaries may need to be recruited.
ii) Controls
Adequate controls must be in place to prevent costly errors and overexposure to risks such
as foreign exchange risks. It is possible to enter into a very large foreign exchange deal over
the telephone.
iii) Information
A treasury team which trades in futures and options or in currencies is competing with other
traders employed by major financial institutions who may have better knowledge of the

351
market because of the large number of customers they deal with. In order to compete
effectively, the team needs to have detailed and up-to-date market information.
iv) Attitudes to risk
The more aggressive approach to risk-taking which is characteristic of treasury professionals
may be difficult to reconcile with the more measured approach to risk which may prevail
within the board of directors. The recognition of treasury operations as profit making
activities may not fit well with the main business operations of the company.
v) Internal charges
If the department is to be a true profit centre, then market prices should be charged for its
services to other departments. It may be difficult to put realistic prices on some services,
such as arrangement of finance or general financial advice.
vi) Performance evaluation
Even with a profit centre approach, it may be difficult to measure the success of a treasury
team for the reason that successful treasury activities sometimes involve avoiding the
incurring of costs, for example when a currency devalues. For example, a treasury team
which hedges a future foreign currency receipt over a period when the domestic currency
undergoes devaluation may avoid a substantial loss for the company.

352
SOLUTION FIVE

(a)

Month MPR Variable Interest Fixed Fixed Interest Net Settlement(K)

(A) (%) Amount (K) Rate Amount (K) (F)
(B) (C) (D) (E) [E – C]
[MPR+3% x [ 21% x K1m]/12
K1m]/12
1 16 15,833 21% 17,500 (1,667)
2 18 17,500 21% 17,500 0
3 20 19,166 21% 17,500 1,666
4 19 18,333 21% 17,500 833
5 18 17,500 21% 17,500 0
6 17 16,667 21% 17,500 (833)

(b) It is an interest rate hedge because the variable rate Kasaka Zambia Ltd will receive will
compensate the variable rate Kasaka Zambia Ltd will pay to Neo Bank, it borrowed variable
from and will be left with only the fixed interest payment to Rupik. Settlement will be on a
net basis. This takes off the uncertainty and volatility in monthly interest payment from
Kasaka Zambia Ltd.
Effectiveness of the hedge depends on the Monetary Policy Rate and interest rate outlook.
Kasaka Zambia Ltd breaks even, when the MPR is at 18%, a loss when an MPR below is
obtaining and achieves a profit, when the MPR rises above 18%. The hedge is therefore
effective in an increasing interest rate environment, since Kasaka Zambia Ltd is a borrower.
(c) A foreign currency swap is an agreement to exchange principal and interest payment in
one currency for equivalent principal and interest payment in another currency. It is
used usually to raise liquidity in one currency by utilizing the surplus liquidity in another
currency without converting the currency to create exchange rate risk.

It can also be done for trading purposes. Each party is borrowing and paying interest on the
currency it is short in liquidity by utilizing the liquidity surplus it has in the other currency.

An interest rate swap is an agreement between two parties to exchange interest payments
on an agreed notional amount in the same currency for a specific maturity. It could be from
floating to fixed or from fixed to floating. One party pays floating rate and receives fixed
rate or vice versa. The floating rate is referenced to a market benchmark like LIBOR and
changes from time to time based on the changes in the benchmark.

END OF SUGGESTED SOLUTIONS

353
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA ADVISORY PROFESSIONAL IN ACCOUNTANCY

___________________

CA 3.7: PUBLIC SECTOR AUDITS AND ASSURANCE

___________________

FRIDAY 17 JUNE 2022

___________________

TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO sections:

Section A: One (1) Compulsory scenario question.
Section B: Four (4) Optional Questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

354
SECTION A

This question is compulsory and must be attempted.

QUESTION ONE

You work for the Supreme Audit Institution (SAI) in your country as a Director in charge of
audits of local authorities around the country.

As part of peer reviews, supported by the International Organization for Supreme Audit
Institutions (INTOSAI), you have been assigned to carry out a review of the operations of
the Supreme Audit Institution (SAI) of Madagascar.

The scope of the assignment requires that you make relevant recommendations for
improvements where the Supreme Audit Institution (SAI) of Madagascar is not compliant
with relevant standards.

A review of the procedures and policies that are used by the Madagascar Supreme Audit
Institution (SAI) and interviews with selected staff revealed the following information:

1. There was a recent report in the public media that some members of staff within the
SAI received bribes from those that they audit so that they drop any serious
observations made. Three (3) members of staff of the SAI have been dismissed for
being found guilty of taking bribes. All the three (3) were members of the Institute of
Accountants of Madagascar.

2. There was general discontent amongst members of the public interviewed that so
many financial scandals are in public domain and yet nothing seems to be done by
Government.

3. The SAI is under the Ministry of Finance and it is generally understaffed. Most of the
SAI staff previously worked as internal auditors in government and they are part of
the audit teams that are assigned to audit the same institutions they worked for
previously. This way the staff need less training before carrying out effective audits.

4. Parliament of the Republic of Madagascar has a parliamentary committee which is

responsible for holding the custodians of public funds accountable on how they do
this. This committee relies upon the annual reports of the Supreme Audit Institution
(SAI).

5. It is common for ministries and government departments to provide lunch to SAI

staff when being audited. There was a case where SAI staff were accommodated at
a hotel by the local council that they were auditing for a period of one (1) month at
no charge to them.

6. Interviews of selected staff in government ministries and the general public revealed
high levels of lack of knowledge of the existence of the Supreme Audit Institution
(SAI). Most people interviewed expressed surprise when told of the existence of the
Supreme Audit Institution (SAI) and its role over the use of public funds.

355
7. There was a case circulating on social media of a staff member of the Supreme Audit
Institution(SAI) involved in a scuffle with a junior member of staff of the entity he
was auditing. This ended up in a fight which went viral on social media.

8. The activities of the Supreme Audit Institution (SAI) have not been subject to
independent scrutiny since inception. Because of the nature of its work, the SAI
activities are not published for public knowledge and scrutiny. The SAI rejected a
request by INTOSAI that its activities should be subject to a peer review by other
INTOSAI members.

9. There was an instance where the private media reported that a senior government
official was involved in corrupt activities and that the SAI discovered this during a
recent audit that it carried out. The audit referred to was in the final stage and the
report had not been released. The media house reported that they were informed by
a reliable source within the SAI.

10. The standard of working papers at the SAI is poor and most of the working papers
reviewed showed that there is no independent review of work that has been
performed. It was difficult to establish the basis for the opinions/conclusions reached
in some cases.

You also performed a quality control review of the working papers of a publicly owned
enterprise. In the section on going concern, you observed that the audit team concluded
that there was material uncertainty regarding the going concern ability of this enterprise.
You did not agree with the opinion reached because an unmodified opinion was issued even
when there was inadequate disclosure in the financial statements concerning the material
uncertainty.

Required:

(a) Identify and explain the extent of adherence to the ethical values contained in ISSAI
30: Code of Ethics by the Supreme Audit Institution (SAI) of the Republic of
Madagascar. (10 marks)

(b) Evaluate the extent of adherence by the Supreme Audit Institution of the Republic of
Madagascar with the principles of value and benefits in accordance with ISSAI 12:
Value and Benefits of SAIs. (10 marks)

(c) (i) Discuss the relevance of performing audit procedures on the going concern

ability of a client company. (4 marks)

(ii) Discuss the audit objectives of performing audit procedures on going

concern.
(6 marks)

(iii) Discuss the impact on the audit report when there exists a material
uncertainty related to going concern of a public sector institution and the use

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 of the going concern basis of preparing financial statements is considered
appropriate. (8 marks)

(iv) Discuss the impact on the audit report when the going concern basis of
preparing financial statements is considered inappropriate. (2 marks)
[Total: 40 Marks]

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SECTION B

There are four (4) questions in this section.

Attempt any three (3) questions.

QUESTION TWO

You have joined the Office of the Auditor General (OAG) as an Audit Manager. Before joining
the OAG, you were an Audit Supervisor at a medium-sized audit firm. Your first assignment
is a performance audit at the Disaster Management and Mitigation Unit (DMMU), which
involves verification of whether its objectives have been met. During the period under
review, the DMMU received massive support from the government, and both local and
foreign donors.

During the pre-audit meeting with the Auditor-General (AG), there was an emphasis not to
confuse performance audit in the public sector and private sector. In addition, one of the
Junior Auditors wanted to know the different approaches to performance auditing normally
used in the public sector.

You have obtained a detailed performance report for the period under review, showing the
budgeted figures, actual figures and the variances. There are no adverse variances. The
figures are accompanied by various charts and commentaries.

The DMMU spent K70 million and one (1) of the comments states that all key performance
indicators (KPIs) were met. However, the information in the public media indicates
otherwise. Some pressure groups are even planning to stage a protest in order to register
their displeasure with the performance of the DMMU.

The key performance indicators (KPIs) include:

1. Ratio of late responses to those on time.

2. Number of complaints compared to previous period.
3. Fuel consumption and cost per delivery compared to budget.

Required:

(a) Compare the key features of performance audit in the public sector and private
sector. (6 marks)

(b) Describe the approaches to performance auditing normally used in the public sector.
(6 marks)

(c) Using the information in the scenario regarding the Disaster Management and
Mitigation Unit (DMMU), advise the audit team on the following:

(i) The suitable approach to take in respect of the performance audit. (4 marks)

(ii) Suggest four (4) audit procedures which should be carried out to verify
whether objectives have been met. (4 marks)
[Total: 20 Marks]
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QUESTION THREE

You work for the Office of the Auditor General (OAG) and you have been assigned to lead a
team of auditors to conduct a compliance audit on the electronic payment system which was
introduced by the Zambia Revenue Authority (ZRA). The main features of the electronic
payment system are as follows:

1. Service Level Agreements (SLAs) have been signed with a number of financial
institutions and telecommunications service providers. However, only a few of them
are able to transfer funds to suppliers of goods and services within twenty four (24)
hours as agreed.
2. Before any payment is initiated, the Budget Controller checks that funds are available
as per budget and ensures that the correct accounting code is used. Any expenditure
which does not conform to any of these requirements is rejected.
3. An Accounts Clerk in the accounts payable section matches the purchase order;
Goods Received Note (GRN) and invoice. Thereafter he/she initiates the electronic
payment using the various Information Technology (IT) platforms.
4. The Finance Director approves the payment and funds are electronically transferred
to the respective financial institution or telecommunications service provider. No
back-ups are kept.
5. The financial institutions and telecommunications service provider send electronic
statements on a monthly basis.
6. The Senior Financial Accountant is unable to perform reconciliations due to limited IT
knowledge.

A retired Senior Auditor was invited to a political discussion which will be aired on the
national television. She has asked for your advice regarding the invitation to speak on
matters relating to the operations of the Office of the Auditor General (OAG).

Required:

(a) Explain, giving relevant examples, what is meant by “Authorities” in a compliance

audit. (3 marks)

(b) Discuss the importance of “Authorities” in the compliance audit of the electronic
payment system for the Zambia Revenue Authority (ZRA). (2 marks)

(c) Explain six (6) deficiencies in the electronic payment system and recommend
measures which can improve the electronic payment system for the Zambia Revenue
Authority (ZRA). (12 marks)

(d) Advise the retired Audit Senior on whether she should accept the invitation.
(3 marks)
[Total: 20 Marks]

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QUESTION FOUR

You are a Senior Auditor in the Office of the Auditor General (OAG). You are currently
planning a forensic audit for one (1) of the biggest councils in Zambia. Parliament approved
a budget for Community Development Funds (CDF) and it is expected that these funds will
play a major role in the economic and social development of the country.

The council in question received Community Development Funds (CDF) totaling K300 million
for all the constituencies within its area. The procurement and accounting processes are
computerized. However, there have been widespread allegations of rampant fraudulent
activities, especially on the social media.

You are aware that there are strict CDF guidelines. However, it alleged that Councilors have
awarded lucrative contracts to their newly incorporated companies. In addition, some Senior
Managers have been accused of demanding 2% of the contract value from foreign
contractors.

A Senior Accountant was recently summoned by the Drug Enforcement Commission (DEC)
to answer questions pertaining to twenty (20) properties suspected to have been built using
proceeds of money laundering. The properties were built by a foreign contractor who was
awarded a major contract to rehabilitate all township roads in the constituencies.

You recently held a meeting with the members of the Audit Committee who informed you
that the financial reports for the CDF for the last quarter were rejected as being misleading.
Most of the figures were unreconciled and the Internal Auditors were tasked to audit the
figures before the next meeting. You are planning to have a meeting with the Internal
Auditors, although one (1) of the Junior Accountants confided in you that there was
pressure from Senior Management to avoid criticism regarding the utilization of CDF. In
addition, K400,000 is reported to have been stolen by cyber criminals mainly because of the
poor Information Technology (IT) controls.

One (1) of the Senior Managers was heard threatening a local contractor that the requested
variation of the contract amount will not be approved if an amount of K60,000 was not paid
to the Chairperson of the Management Procurement Committee (MPC).

Required:

(a) Define fraud and explain three (3) broad types of fraudulent activities.
(10 marks)

(b) Using the information in the scenario, identify and explain three (3) corruption fraud
activities. (3 marks)

(c) Recommend seven (7) procedures that should be performed in the determination of
the alleged bribery. (7 marks)
[Total: 20 Marks]

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QUESTION FIVE

(a) ISSAI 40: Quality control for SAIs sets out principles for establishing and maintaining
a system of quality control in the work carried out by the Supreme Audit Institutions
(SAIs).

Required:

Write brief notes on each of the following elements of quality control:

(i) Leadership responsibilities for quality control within the SAI. (2 marks)

(ii) Acceptance and continuance. (2 marks)

(iii) Human resources. (2 marks)

(b) An induction workshop was recently held for newly elected members of parliament.

The Auditor General (AG) was one of the presenters at this workshop and the
following was an extract from the presentation that he made:

‘Those who are entrusted with the custody and use of public funds are expected to
use the funds in the public interest for the benefit of the general citizenry. The funds
are held in trust for the citizens of the country’.

The Office of the Auditor General (OAG) cannot manage to carry out audits for all
the recipients and custodians of public funds. The Office of the Auditor General
(OAG) has the mandate to choose the audit subjects in the short and long term.

Required:

(i) Discuss the above statement extracted from the presentation by the Auditor
General (AG). (6 marks)

(ii) Explain how the Supreme Audit Institution (SAI) helps achieve transparency
and accountability in the public sector. (4 marks)

(iii) Suggest how the Office of the Auditor General (OAG) decides on the subjects
to audit in the short and long term. (4 marks)
[Total: 20 Marks]

END OF PAPER

361
CA 3.7 SUGGESTED SOLUTIONS

SOLUTION ONE

(a) Adherence to the ethical values by the SAI:

1. Assigning SAI staff who previously worked in other government institutions to
audit the same institutions is not in line with the ethical value of
independence and objectivity. The staff will be familiar with the staff with
whom they worked and unless suitable safeguards are applied, this should
not be allowed.
2. The receiving of bribes by staff of the SAI is an act that shows that they lack
integrity. Staff of the SAI are expected to be honest and straight forward in
all their business dealings. Further, this shows that they have breached the
fundamental principle of professional behavior by bringing the name of
the profession into disrepute.
3. The SAI reports to the Ministry of Finance which means that it lacks the
necessary independence to be objective. Further, a majority of the SAI staff
are former employees of the ministries that they are required to audit thereby
threatening their independence and objectivity because of the familiarity
threat.
4. The accepting of lunch and accommodation, this gives a self-interest threat to
the SAI and they may lose their independence and objectivity. Such offers
should be declined unless they are clearly insignificant. Acceptance is breach
of the fundamental principle of independence and objectivity.
5. Disclosing confidential information such as that implicating a senior
government official is breach of the fundamental principle of
confidentiality. Staff are required to adhere to the principle that
information should not be disclosed without the permission of the employer,
in this case the SAI.
6. The act of the SAI staff member involving a fight for whatever reason is an
act of unprofessional behavior which brings the name of the profession in
disrepute.

(b) Evaluation of adherence with the provisions of ISSAI 12:

1. The fact that the SAI has not had an external evaluation of its activities and it
rejected a request for one by the INTOSAI suggests that it lacks
transparency. This is contrary to one of the principles of ISSAI 12: Value and
benefits of SAIs under the objective of being a role model organization.
2. By not responding to the public concerns about financial scandals in the
public service the SAI is not demonstrating its ongoing relevance. One
of the principles under this heading states that the SAI should demonstrate
its ongoing relevance by being responsive too changing environments and
risks.
3. The fact that most of the members of the public interviewed expressed
ignorance of the existence and role of the SAI shows that the SAI is failing in
demonstrating its ongoing relevance. One principle under this objective states
that the SAI should communicate in such a manner that increases
stakeholders’’ knowledge of the role of the SAI.
4. The fact that there are instances of work not being reviewed shows that the
SAI does not consider quality seriously. This suggests that the SAI is not

362
 being a role model organization and one of the principles under this objective
states that the SAIs should strive for service excellency and quality. This
requires that the SAI should adhere to the provisions of the ISSAO 40:
Quality control for SAIs
5. The rejection of a peer review by other INTOSAI member countries the SAI is
not demonstrating its ongoing relevance. One of the principles under
this objective states that the SAI should collaborate within INTOSAI in order
to promote its role in addressing global issues relating to public sector
auditing, accounting and accountability.

(c) (i) Going concern and public sector audits:

Going concern is the ability of an entity continuing operations in the near
foreseeable future. The relevance of the going concern ability of the company
is important in terms of the basis of preparing financial statements. The
historical basis of preparing financial statements is used on the assumption
that the company is a going concern. In the event that the company is not a
going concern, the financial statements are supposed to be prepared on the
basis of an alternative basis which is a break-up basis.

The ability of a company as a going concern has audit implications on the

audit opinion.
(ii) The objective of the public sector auditor with regards to going
concern:
ISSAI 1570: Going concern gives guidance on the auditor’s responsibilities
and duties of the public sector auditors.

The objective of the procedures that the public service auditor performs with
regards going concern are as follows:

1. The public sector auditor to gather and obtain sufficient appropriate

evidence regarding management’s use of going concern basis of
preparing the financial statements and for the public sector auditor to
conclude on the appropriateness of using this basis.
2. The public sector auditor to conclude whether there exists material
uncertainty with regards the going concern ability of the audited
entity.
3. The public sector auditor to report as appropriate in accordance with
the provisions of ISSAI 1570: Going concern.

(iii) Impact of material uncertainty related to going concern on the audit

report:
The impact on the audit report of there being material uncertainty with
regards to the ability of an entity as a going concern depends on disclosure
and the appropriateness of the use of the going concern basis of preparing
financial statements.

363
 The situation of where the going concern basis of preparing financial
statements is appropriate but there exists a material uncertainty, the impact
on the report is as follows:
1. If there is adequate disclosure of the material uncertainty in the
financial statements.
o An unmodified audit opinion will be issued.
o A separate paragraph will be introduced in the auditor’s report
entitles ‘Material uncertainty related to going concern’ in which
details of the material uncertainty will be given.
2. If there is inadequate disclosure in the financial statements about the
material uncertainty:
o A qualified opinion may be appropriate.
o A basis for qualified opinion paragraph will be introduced in
the auditor’s report.

(iv) Impact on the audit report if basis of preparing accounts

inappropriate:

Where the financial statements are prepared on the going concern basis and
the auditor concludes that this is not appropriate and there exist a material
uncertainty, the auditor will issue an adverse opinion in the audit report.

364
SOLUTION TWO

(a) Comparison of key features of performance audit in the public sector and
private sector

o Statutory requirement – in the public sector, there is a statutory

requirement for performance audits, while in the private sector, there is no
statutory requirement.
o Follow-up responsibility – in the public sector the auditors have
responsibility to follow up the performance audits they make. There should
be a post-audit review to make sure that changes have been made to
improve economy, efficiency and/or effectiveness, in line with
recommendations in the audit report. In the private sector, there is no such
responsibility for auditors. Since performance audit is done at the request of
management, the auditors’ involvement will normally finish with the
submission of the audit report.
o Policy – a performance audit in the public sector will not question the policy
behind the work that is being audited, because this would be encroaching on
political issues. In the private sector, there is no such political constraint, and
performance audit could, in principle, question why a certain area of work is
being performed at all, and for what purpose.

(b) Approaches to performance auditing normally used in the public sector

o A results-oriented approach – deals with questions such as: “What results
have been achieved, and have the requirements or objectives been met?
Findings are usually presented in the form of a deviation from criteria, and
recommendations are aimed at eliminating the deviation. Hence, this
assesses whether the objectives for outcomes or output have been achieved
as intended, or whether programs or services are operating as intended.
o A problem-oriented approach – deals with questions such as: “What is
the problem?” “What are causes of the problem” To what extent can the
government resolve the problem?” The audit begins with a recognition that
there is a problem or deviation. The audit should set out to establish what the
problem is, what its causes are, and what can be done about it. Hence, this
examines and analyses the causes of particular problems or deviations from
criteria.
o A system-oriented approach – is concerned with the functioning of a
system, such as a financial management system or a control system, and
considers whether they are well managed and functioning efficiently and
effectively, or whether improvement can be made. Hence, this examines the
proper functioning of management systems, such as a financial management
system.

365
(c) Advice to the audit team

(i) Suitable approach

There is reported displeasure with the performance of the Disaster
Management and Mitigation Unit (DMMU). However, the performance report
shows that there are no adverse variances. It will therefore be important for
the public sector auditors to give an independent assurance on whether the
DMMU is operating as intended.

Hence, a results-oriented approach may be more suitable.

(ii) Suggested audit procedures which should be carried out to verify

whether objectives have been met

o Ascertain and document the system for monitoring performance and

evaluate the internal controls.
o Discuss with management issues relating to the planned protest by
some pressure groups.
o Review minutes of board meetings for discussions of significant
adverse variances regarding performance.
o Review the performance report and recalculate the variances.
o Agree the budgeted figures to the budget, and actual figures to the
cash book and bank statement, including supporting documents.
o Check the reported fuel consumption and cost per delivery against the
budget and supporting documentation.
o Review the public media reports for specific areas of concern and
discuss the same with those charged with governance.
o Interview selected beneficiaries in order to confirm the responsive
times.
o Talk to employees responsible for recording complaints and review the
completeness of the record.

366
SOLUTION THREE

(a) Authorities
Compliance auditing is an independent assessment of whether a given subject
matter is in compliance with applicable authorities. The criteria are the benchmarks
used to evaluate the subject matter. Authorities may include rules, laws and
regulations, budgetary resolutions, policy, established codes, or general principles
governing sound public-sector financial management and the conduct of public
officials.

(b) Advice to the Junior Auditor regarding the importance of “Authorities” in

the compliance audit of the electronic payment system
Authorities provide suitable criteria in a compliance audit. Criteria are the relevant
laws, regulations and agreements. Without a frame of reference provided by suitable
criteria, any conclusion by the auditors would be open to individual interpretation
and misunderstanding.

(c) Deficiencies in the payment system and recommended measures

Deficiencies Explanations Measures

(1) Breach of Service Level The service providers could Effective monitoring
Agreements (SLA). misuse the funds. mechanism should be put in
place and any breaches
should attract appropriate
levels of penalties.
(2) No checking of the work Errors and even frauds may A separate responsible party
of the Accounts Clerk in the go unnoticed. should have responsibility for
accounts payable section. checking the payments
before approval.
(3) Approval is only done by The Finance Director may at There should be at least two
the Finance Director. times fail to identify frauds (2) signatories for approving
or errors. He could also be payments so that there is
involved in fraudulent some form of internal check.
activities which could be The Commissioner-General
difficult to detect. (CG) should also be a
signatory.
(4) No back-up are kept. Resolution of disputes will be Back-ups should be kept and
unnecessarily difficult. In stored at a remote location.
addition, in case of a
disaster, recovery could
prove to very difficult and
most likely very expensive.
(5) No reconciliations. It is not easy to detect errors The Senior Financial
or even frauds. Accountant should be
replaced with a more
competent person with the
requisite IT knowledge to be
able to perform the
reconciliations.
(6) Electronic statements are The period is too long for Electronic statements must
sent on a monthly basis. any controls to be effective. be sent after a day to

367
 facilitate effective
monitoring.

(d) Advice to the retired Audit Senior

Confidentiality is an important duty for all professional accountants. SAI staff is
required to maintain professional confidentiality after their employment has
terminated, as well as during their employment.

If the retired Senior Auditor was to attend the political discussion, she may be in
breach of the duty of confidentiality by disclosed information which came to her
attention as a result of her professional duties.

Hence, it will be advisable for her not to attend the political discussion.

368
SOLUTION FOUR

(a) Definition of fraud and broad types of fraudulent activity

Fraud is an intentional act by one or more individuals among management, those
charged with governance (management fraud), employees (employee fraud) or third
parties involving the use of deception to obtain an unjust or illegal advantage.

The three (3) broad types of fraudulent activity are:

o Asset misappropriation – this may involve cash theft, fraudulent

disbursements, inventory fraud, misuse of assets etc.
o Corruption fraud – this may involve dishonest or deceitful activity. There
are three (3) types of corruption fraud:
- Bribery – occurs when money, or something else of value, is offered in
return for a favorable decision, such as the award of a major contract.
- Extortion – occurs when money is demanded by force or by threats, in
return for either doing or not doing something. This is much less likely to
occur in the public sector than bribery.
- Conflict of interest fraud – between doing what is ‘proper’ and doing
what is wrong for personal benefit, and chooses to act improperly
(fraudulently)
o Financial statement fraud – this is also known as fraudulent financial
reporting, and it involves a deliberate material misstatement in the financial
statements. As a result of the fraud, there may be a deliberate
understatement of liabilities in the statement of financial position or the
omission of material transactions or balances. The preparers of the financial
statements may expect to be rewarded for the performance of their
organization or may succeed in avoiding criticism from those charged with
governance for poor performance.

(b) Corruption fraud activities

o Some Senior Managers have been accused of demanding 2% of the contract
value from foreign contractors.
o It alleged that Councilors have awarded lucrative contracts to their newly
incorporated companies
o Twenty (20) properties suspected to have been built using proceeds of
money laundering
(c) Recommended procedures to performed in the determination of the alleged
bribery
o Obtain a list of contracts awarded and ask the councilors to indicate themselves
the contracts in which they have interests
o Inspect details at the company registry to verify ownership of companies
awarded contracts
o Interview the staff responsible for awarding contracts and the internal auditors
whether they are aware of contractors owned by councilors and other related
parties
o Review related party disclosures in the financial statements

369
o Summarize the list of companies owned by councilors and agree the list to the
annual returns, financial statements disclosures on related parties and where
necessary confirmations with responsible company officials
o Use data analytics (CAATs) to identify all contracts for companies owned by
councilors and the values involved
o Vouch payments for the identified contracts in the cashbook and trace to ledger
accounts and to bank statements
o Request for Goods Received Notes (GRN) for payments for identified contracts
o Evaluate the strength of evidence obtained and summarize the findings and value
the corruption fraud that may have taken place.

370
SOLUTION FIVE

(a) Brief notes on:

(i) Leadership responsibilities for quality in the SAI:
The ISSSAI requires that there should be leadership responsibility within
the SAI to be responsible for quality control. This should be someone who
is familiar with the provisions of ISSAI 40 Quality control for SAIs.

This responsibility lies with the Auditor-General (AG) who delegates this
to staff under him who are in charge of audits.

(ii) Acceptance and continuation:

This principle requires that the SAI should only accept and continue with
carrying out assignments when it has the competence, resources and
time to carry out the assignment.

The mandate of the SAI is contained in statute and so the SAI cannot
decline or discontinue an assignment even when it may not have the
competences to do so. The SAI could outsource the services from outside
from those with the necessary skills and competences. This is contrary to
the audit of the private sector where the auditor will decline or resign
from the engagement.

(iii) Human resources:

The SAI should have procedures that it employs staff who have the skills
and competences in carrying out public sector audits. It should have
policies to train staff and also for continuous professional development.

The staff should be committed to adhering to ethical principles and to

carry out audits in accordance with the relevant auditing standards.

(b) (i) Discussion of statement by the Auditor General (AG):

The money that is used to run the affairs of the country is from taxes that are
paid by the citizens. This money is supposed to be used in the best interest of
the general citizenry and not the interest of those entrusted to manage the
public funds.

The custodians of public funds hold them in trust and should be held
accountable on how they spend this money. It is for this reason that in a
democracy, the citizens elect members of parliament who represent their
interest on how public funds are spent. The members of parliament through
the budget confer responsibility on the executive on how the funds are to be
spent. The same parliament confers responsibility to the Supreme Audit
Institution to carry out audits of how public funds have been spent and report
back to it. The reports of the Supreme Audit Institution are made public for
the public to know how those entrusted to manage public affairs have
performed their duty.

371
 The general citizenry have the power to change governments if they are not
happy on how affairs are managed including the use of public funds.

(ii) How SAI helps achieve transparency and accountability in the public
sector:
The Supreme Audit Institution helps in holding those entrusted with public
funds accountable for their actions. This is done through various types of
audits that it performs and issues reports of its findings.

The report is published and issued to the Public Accounts Committee (PAC)
comprising elected members of parliament to whom custodians of public
funds appear and are required to explain any observations made. Through
the publication of the report, the public is free to comment on the findings
and this acts as a deterrent in the misuse of public funds.

The Supreme Audit Institutions (SAI) makes recommendations as necessary

and they also follow up to confirm implementation of the recommendations
made in the reports.

(iii) Choice of audit subjects by the OAG:

Because of limited resources available to the OAG, it is not possible it will be
able to audit all the custodians of public funds.

For this reason the Office of the Auditor General (OAG) uses sampling
methods to decide on the subjects and audit topics that it intends to carry
out.
This will be done at the strategic level where the SAI will decide on the
subjects to be audited in the long term say over a period of five (5) years.

Annually arising from the strategic plan the OAG will choose the subjects that
will be audited and in so doing will consider the following:
o The risks applicable to the subject matters.
o Any legal requirements requiring audits to be carried out on specific
topics.

END OF SOLUTIONS

372
 CA ZAMBIA PROGRAMME EXAMINATIONS
___________________

CA ADVISORY PROFESSIONAL IN ACCOUNTANCY

___________________
CA 3.8: PUBLIC SECTOR FINANCIAL MANAGEMENT
___________________

FRIDAY 17 JUNE 2022

___________________
TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS
__________________
INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO (2) sections:

Section A: One (1) Compulsory scenario question.
Section B: Four (4) Optional Questions. Attempt any Three (3) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.

10. Present Value and Annuity tables are attached at the end of this paper.

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE INSTRUCTED BY THE
INVIGILATOR.

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SECTION A

This question is compulsory and must be attempted

QUESTION ONE - (COMPULSORY)

(a) The Department of Forestry has developed an online tool that will assist the
members of the public access products such as Forest Cord Permit, Forest
Concession License, Forestry Produce Conveyance Permit, Forestry Production Permit
and Forestry Tree Felling Permit. The Department has two (2) options open to
them, to test the online tool or abandon it.

If the department tests it with a small number of companies and individuals, the
costs will be K200m and response from payments of licenses could be positive or
negative with probabilities of 0.7 and 0.3. If the response is positive, the department
could either abandon the online tool or roll it out full scale.
If the departments rolls out the online tool full scale, the outcome might be low,
medium or high demand, and the respective net benefits/costs would be K (300m),
K300m or K1500m. These outcomes have probabilities of 0.1, 0.5 and 0.4
respectively.

If the result of testing is negative, the department goes ahead, and rolls out on the
online tool estimated costs would be K700m.

If at any point, the Department abandons the product, there would be a net gain of
K100m from the sale of intellectual property rights and other intangible assets
associated with the online tool. All financial values have been discounted to the
present.

Required:
(i) Using decision trees, evaluate the decisions at each point and advise
management of the Forestry Department whether they should go ahead to
implement the system. (17 marks)
(ii) Explain to management the limitations of making decisions based on the
decision trees. (8 marks)
(iii) Define sensitivity analysis and explain how it is carried out. (4 marks)

(b) In Zambia, the Public Private Partnership Act No. 14 of 2009 aims to promote and
facilitate the implementation of the Public Private Partnerships in particular privately
financed infrastructure projects. Since then Zambia has embarked on a number of PPP

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using different models to deliver capital projects. Each delivery model has a range of
benefits and disadvantages and governments select these models based on the
circumstances to deliver capital projects.
Required:
Outline the merits and demerits of using Public Private Partnership or Private Provision
Model to deliver capital Projects. (11 marks)
[Total: 40 Marks]

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SECTION B

There are FOUR (4) questions in this section. Attempt any THREE (3) questions.

QUESTION TWO

Country A recently went through a General Election which was declared free and fair by the
International Community and the Election Observers drawn from the Local Non-
Governmental Organisations. The General Elections were in December, 2019. The New
Members of Parliament took office in January, 2020. In their first parliamentary session, it
was noted by the Speaker of the National Assembly that Parliamentarians required to be
introduced to the theory of Public Financial Management Cycles with special emphasis on
the budget processes. It was further noted that the Parliamentarians needed to understand
the Public Finance Management Reforms. This motion was introduced by one of the
opposition members of Parliament who recommended a training program to be arranged for
the Members of Parliament. The motion was overwhelmingly supported by all the
Parliamentarians with no divergent views.

A parliamentary Sub-Committee was mandated to ensure that a consultant be engaged to

carry out this particular training program by ensuring that an advertisement is done in the
media; both local and International. This is because the training was considered under
consulting services. The Chairman of this Sub-Committee suggested that the awarding of
consultancy services should follow the normal bidding process.

A Private University was awarded this consultancy upon satisfying the bid requirements as
stipulated in the “Expression of Interest” documents submitted to the tender committee. An
inception report was submitted which clearly stated the technical and financial proposals.
Further, the terms of reference included explaining to the Parliamentarians the issues
associated with Activity Based Budgeting (ABB) framework and the rolling three-year
Medium Term Expenditure Framework (MTEF).
Required:

(a) As the consultant engaged to conduct the training program, prepare notes explaining
to the Parliamentarians:
(i) The Public Financial Management Cycle. (10 marks)
(ii) Activity Based Budgeting and its shortfalls. (5 marks)

(b) Identify the best practices which are necessary to make certain that there is
efficiency and effectiveness in the national budget execution, monitoring and control.
(5 marks)
[Total: 20 Marks]

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QUESTION THREE

Brilliant is a student pursuing a degree in economics at a private University. Upon

completion of her economics degree she plans to enroll for the CA Zambia professional
qualification and later on for a law degree. Her reasons for pursuing economics and later on
pursuing accountancy and law is to have a broad view of political and economic affairs of
the country.

Her ultimate goal is to represent the people of Zambia in the legislature. She has a vision of
a nation with strong and effective public financial management practices.

You are currently pursuing the final papers of the CA Zambia professional qualification and
one of these papers is the Public Sector Financial Management professional paper. As your
former class mate at high school, brilliant calls you to find out more about the public sector
financial management syllabus, the role of the legislature, and the public sector financial
management reforms in Zambia.

Required:

(a) Explain to Brilliant the four (4) functions of the legislature according to Article 63 (2)
of the constitution of Zambia and how these functions are executed. (10 marks)

(b) Explain the key areas addressed by the public financial management reforms of
2018. (10 marks)
[Total: 20 Marks]

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QUESTION FOUR

An African country recently got independence from its colonial masters. In the prior years to
its independence, the Annual Budgets for the country were being prepared by the experts
from the country which had colonized it. This was largely because the country had no
established Government Structures, Ministries and Institutions. There was no effective
accountability of the Government Income received and its utilization in the different sectors
of the economy.

The newly elected Government immediately after it obtained independence embarked on

aggressive polices in order to create Government Structures and Institutions. They sought
the advice of financial experts from the International Monetary Fund (IMF), the World Bank
(WB) and the local Universities based in Country S to help do this. The team suggested that
a “Think Tank” should be established by the country to specifically address the issues raised.

The IMF recommended to the “Think Tank” that the country should establish and follow
effective Public Financial Management (PFM) systems. Further, it was recommended that the
assessment of PFM should be done through the Public Expenditure and Financial
Accountability Framework (PEFA).

Required:

(a) Explain the reasons it is important for the African country to use the Public Financial
Management (PFM) Measurement Frameworks. (6 marks)

(b) Identify the Seven pillars of performance that are critical in achieving the objectives
of PFM as explained in part (a) above. (14 marks)
[Total: 20 Marks]

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QUESTION FIVE

The University of Zambia is a Public University wholly managed and controlled by the
Ministry of Higher Education. The main objective of the University is to provide affordable
quality tertiary education to the public. The University has also financial objectives that are
supposed to be achieved. The University is planning to undertaken the construction of
hostels but it does not have adequate funding. Therefore, the University management
suggested to the Ministry of Higher education that the funding of the hostel construction be
done through Public Private Partnership (PPP). The repayment of capital and interest will be
over a period of 16 years at a floating rate of interest currently 10.5% per year. The
permanent secretary under the Ministry of Higher Education made a comment to the
University management that he wished the treasury management in the public sector could
have been decentralised rather than centralised for easy accessibility of funding.

Required

(a) Discuss the main differences in the business risks involved in the achievement of the
financial objectives of a public institution such as the University and a private sector
institution, and how the risks can be managed. (8 marks)

(b) Explain how the financial risks introduced into the University through the use of PPP
might affect the achievement of its objectives and provide comments on how these
risks might be managed. (6 marks)

(c) Explain the advantages of Centralised Treasury Management. (6 marks)

[Total: 20 Marks]
END OF PAPER

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CA3.8 SUGGESTED SOLUTIONS

SOLUTION ONE
(a) (i) High 0.4 +1500

E Medium 0.5 +300

Low 0.1 -300

0.7 Positive C Abandon +100

B Roll out -700

Test -200 0.3 Negative D

A Abandon +100

+100

Abandon

At point E , Expected Value is as follows:

Net Benefit Probability

Expected Value

High 1,500 0.4

600

Medium 300 0.5

150

Low (300) 0.1

(300)

Expected Value
450

EV at outcome point E is positive, therefore proceed with roll out

At Decision Point C

Roll out , EV = +450 (EV at point E)

Abandon, value +100

The decision would therefore be roll out at EV 450

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At Decision, point D

 Roll out , value = -700

 Abandon , Value =+100
Decision is to abandon, EV at decision point D is +100

At Outcome Point B

Ev = 0.7 x 450 EV at C

+ 0.3 x 100 EV at D

= 315 +30 = K345

Options at decision Point A

 Test = EV at B minus test marketing cost (K345-200) = K145

 Abandon : Value K100
Decision point here is to test and market the online tool , because it has higher
EV

(ii) Explain to management the limitations of using decisions tress to make

decisions.
 The time value of money may not be taken into account
 Decision trees are not very suitable for use in complex situations
 The outcome with the highest EV may have the greatest risks attached
to it so risk appetite needs to be considered
 The probabilities associated with different branches of the tree are likely
to be estimates and possibly unreliable or inaccurate. This is particularly
the case when dealing with uncertainties

(iii) Define sensitivity analysis and how are costs analyzed.

 Sensitivity analysis is used to assess the vulnerability of options to
future uncertainties.
 It is undertaken by changing key benefit and cost variables to
understand how conclusions over a projects worth might change.

(b)

Outline the advantages and disadvantages of using Public Private Partnership or

Private Provision Model to deliver capital Projects.

Advantages
 Provides external finance for the construction of an asset that the public sector
may not be able to provide
 Can improve efficiency and effectiveness by achieving an allocation of risks to
whichever party in the public or private sector is best able to manage
 Encourages innovation in approach by focusing on performance indicators and
output
 Tying of payments to when construction of assets is completed ensures that
private sector is incentivized to deliver on time.
 Whole life costs of assets including ongoing maintenance are explicitly

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 considered in contracts and design thus improving efficiency
 Tying payments to output against performance indicators incentivizes private
sector to meet service levels
 Financial due diligence procedures conducted by those providing finance
reduces risk of problems emerging following signing of contracts.

Disadvantages

 External financing may be more expensive in the long term when compared to
the cost of government borrowing
 Public Sector is paying for the transfer of risk to private sector but ultimate risk
always rests with the public sector if the services provided by the asset are
essential
 “Off Balance Sheet” nature of financing may encourage public sector to use PPP
or private provision model when not value for money
 Long term nature of financing requires long term services that are inflexible
when circumstances change
 Public sector faces significant costs if it is required to change or terminate
contracts , for example it is usually necessary to reimburse private sector for
financing costs and future profits lost
 More complicated than conventional procurement which can increase costs and
timescale to deliver
 Requires a range of commercial, procurement, legal and financial skills that may
not be available within the public sector.

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SOLUTION TWO

(a) Prepare notes explaining to the Parliamentarians:

(1) The Public financial Management Cycle

i. Formulation of the budget
Public service goals for a country are important and essential. Governments endeavor to
ensure that the general populace is provided to its nationals. It is therefore critical that
Formulation of the budget is designed in such a manner that it spells out the policies
relating to implementation of the formulated national budget is clearly defined.

ii. Approval of the budget

The Budget so formulated should eventually be approved by the legislature, which
scrutinizes these Government Plans. In a country like Zambia, the budget is approved by the
National Assembly which appropriates resources for expenditure by the organizations of the
state and the various institutions, provincial administration, local authorities and other
bodies.

In Zambia, the budget is submitted to parliament every October before the commencement
of the fiscal year that begins in January. This allows the parliamentarians to review, debate
and review if necessary prior to subsequent approval.

iii. Budget Execution

In order to ensure that controls are effected and accountability is enhanced, there should
therefore a level of predictability by ensuring that the standard procedures and processes
are followed.

The consultant explained to the parliamentarians that the budget is essentially devolved to
individual Ministries, Provinces and Spending Agencies. These bodies, must act, in
accordance with the financial management regulations and policies, processes, procedures
and systems as developed and set by the Ministry Of Finance (MOF). The responsibility of
monitoring accounting processes and feedback on the budget execution of public funds lays
in the hands of the Ministry of Finance.

iv. Evaluation of the Budget

This is another critical step in the Public Management Cycle. On a yearly basis, the financial
reports are required to be prepared and produced. These should be subject to an
independent scrutiny and this is done by the Auditor’s General’s Office and the National
Audit office. The purpose is to ascertain and determine that the funds that parliament has
appropriated or has been raised by Government and disbursed has been applied for the
purpose for which it was appropriated or raised, was utilized in conformity with the authority
that governs it , and was expended economically, efficiently and effectively in order to
obtain value for money.

The Report from the Auditor’s General is submitted to the National Assembly who then
scrutinizes the public expenditure and monitors the executive’s response to exemptions and
their subsequent responses.

(2) Activity Based Budgeting (ABB) and its shortfalls

The Activity Based Budget (ABB) ensures all the inputs to a specific activity that is to be
carried-out and implemented are identified, quantified and eventually costed. What is
expected therefore is that such activities will be scrutinized in order to quantity and input

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costs so as to be able to allocate the scarce resources so that these activities are
implemented and also to be able to prioritize them.

A number of challenges have been noted in implementing the ABB. In Zambia, it has been
observed that programs and activities specified in the ABBs lacked the strategic element,
with no clear aspects linking to the outputs and outcomes expected from them. It is believed
that instead of the Activity Based Budget, Output Based Budgeting (OBB) improves this
aspect. The OBB requires the identification of outputs and targets, with expenditure which
has been budgeted aligned to the expected outputs.

(b). Identify the best practices which are necessary to make certain that there is
efficiency and effectiveness in the national budget execution, monitoring and
control

Budgets are an important aspects of a country as they act as a guide in the provision of
funds and how these funds should be utilized. The budgets that the country prepares stand
the test of their being reliable and realistic.

There are different aspect which ensure that there is reliability and effective budget
execution, monitoring and control. These factors include the following:

i. Transparent open and competitive procurement arrangement.

ii. There should be integrity and completeness of financial data and information which
should be comprehensive, timely and accurate regarding budget execution.
iii. The procedure for the collection and monitoring of central government revenue,
recording and reporting
iv. Cash management and cash flow forecasts by the Ministry of Finance (MOF) should
be effective and well executed.
v. There should be strong and working internal control mechanisms particularly
regarding salary and non-salary expenditure.

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SOLUTION THREE

(a) The Parliament of Zambia consists of the president and the national assembly.
Parliament enacts legislation through bills passed by the national assembly and
assented to by the president.
Article 63(2) of the constitution states that the national assembly is responsible for
overseeing the performance of executive functions by:
(1) Ensuring equity in the distribution of national resources among the people of
Zambia.
(2) Appropriating funds for expenditure by state organs, state institutions, provincial
administration, local authorities and other bodies.
(3) Scrutinizing public expenditure, including defense, constitutional and special
expenditure.
(4) Approving public debt before it is contracted.

(5) These functions are executed through various departmental committees which
monitor policy implementation of the executive, and general purpose committees
including the estimates and public accounts committees which have responsibility
for examining bills and scrutinizing government budgets and expenditure. A
government assurances committee monitors the executive’s response to
recommendations arising from audit reports.
(b)
1. The public finance management act of 2018 was meant to address financial
irregularities in the central government and the local government systems.
2. The act among other things upgraded the office of the Accountant General and
Controller of Internal Audit to Permanent Secretary Level in order to strengthen the
execution of the public finance management mandate.
3. The act is also embedded with provisions that facilitate the effective operation of the
Single Treasury Account and The Integrated Financial Management Information
System (IFMIS).
4. It also provides a platform for further regulation of electronic financial transactions
within the framework of public financial management, in line with the government’s
e-Government policy. In effect this will enhance public service delivery by reducing
operational costs, improving resource allocation and promoting efficiency in
management of public resources.
5 The act also clearly outlines fiduciary duties for controlling officers in Ministries,
Provinces and Spending Agencies and for boards of state owned enterprises and
statutory corporations. Board members of state owned enterprises and statutory
corporations under the act are individually and severally accountable for their
decisions.

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SOLUTION FOUR

(a) Explain the reasons it is important for the African country to use the Public
Financial Management measurement Frameworks

This framework was developed in order to measure performance in the Public

Finance Management (PFM) System. There are essentially three expected and
desirable fiscal and budgetary outcomes and these are as follows;

i. The Aggregate fiscal discipline demands that there is effective control of the
total budget and the management of fiscal risks.
ii. Strategic and long-term allocation of resources which involves planning and
executing the budget in line with government priorities aimed at ensuring
that policy objectives are fulfilled.
iii. Efficient service delivery demands that using budgeted revenues in achieving
the best levels of public services within the available resources.

(b) Identify and Describe the Seven pillars of performance that are critical in
achieving the Objectives of PFM as expounded under part (a) above.

PEFA has identified seven pillars of performance that are necessary in the achieving
of the objectives. These pillars are also considered as the main elements of the PFM
system.

The pillars are as follows;

i. Budget reliability- It is noted that the budget is realistic and is implemented

as intended. It is measured by comparing actual revenues with expenditures
and determining the variances which can either be negative or positive and
corrective action taken which can also include vehement if necessary.
ii. Transparency of public finances- Information and records of on PFM is
comprehensive, consistent, and easily accessible to users. This is achieved by
comprehensively clarifying and classifying of the budget in order to achieve
transparency of all government revenue and expenditure including
intergovernmental transfers, published information on service delivery
performance and ready access to fiscal and budget documents.
iii. Management of Assets and liabilities- Effective and efficient management of
assets and liabilities facilitates and provides assurances that public
expenditure provide value for money, the recording and management of
assets, identification of fiscal risks, and debts and guarantees are prudently
planned, approved and monitored.
iv. Policy-based fiscal strategy and budgeting- The budget and fiscal strategy are
prepared with due consideration to government fiscal policies, strategic plans,
and adequate macroeconomic and fiscal projections.
v. Predictability and control in budget execution-The implementation of the
budget is confined in a system of effective standards, processes, and internal
controls, ensuring that the resources are obtained and disbursed in
accordance to the original purpose.
vi. Accounting and reporting- Reliable and accurate records are maintained, and
information is extracted and made available at the appropriate time for
decision making, management and reporting requirements.

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vii. External Security and audit- Public finances are independently reviewed by
the Auditor’s General Office other oversight institutions and the exceptions
noted or recorded are followed-up to enhance executive performance.

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SOLUTION FIVE

(a) There is a difference between the Private and Public sectors in terms of the
management of risk. Private sector organisations generally have to compete for
customers and ensure that they charge a price which covers cost, generates a
profit, but is nevertheless competitive with other suppliers. The main risk they face
is a loss of customer demand.
Public sector services are often provided free of charge to the user, or at minimal
cost to the user. The health sector has the problem of managing capacity to meet
demand and this can lead to prioritisation and effectively rationing, with waiting lists
as a consequence. Other areas of the public sector may need to have contingency
plans for sudden changes in state funding, which will impact upon financial viability.
The public sector may thus face risks of both excess demand and reduced funding
because of demand changes or changes in political priorities.

Managing risk in the private sector may therefore entail:

 meeting the needs of customers and of stakeholders
 undertaking market research to get a better understanding of customers and
markets
 taking steps to assess and manage risks via insurance, hedging of foreign
exchange and interest rate risks.
Managing risks in the public sector may therefore entail:

 monitoring of economy, efficiency and effectiveness and value for money

 using internal markets to purchase services and establish ‘fair’ transfer prices
 using private sector funds where appropriate to give longer term investment
horizons.

(b) The PPP would limit the longer term fiscal flexibility because the government,
through the University would be required to make contractual payments to the
private sector partner (s), with such payments extending into the longer term.
Because such payments will be contractual, University of Zambia must ensure that
they are made even if their payment would hinder the achievement of University
objectives.

The risks arising should be reduced by ensuring that the government sets overall
limits on PPP which should not be exceeded. The proposed PPP should therefore
ensure that the overall limit on PPP already in place will not be exceeded.

(iv) The advantages of centralised treasury management include:

(i) Centralised liquidity management- cash is consolidated which avoids having a
mix of cash surpluses and overdrafts in different local bank accounts. This
facilitates bulk cash flows, enabling lower bank charges.
(ii) Consolidated view of cash requirements across the public sector- enables
central view of expected borrowing requirements, and enables borrowing to
be arranged in bulk which can provide for lower interest rates;
(iii) Larger volumes of cash are available to invest- this provides better short-term
investment opportunities.

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(iv) Skilled and experienced staff- a centralised specialised function enables the
employment of experts who have knowledge of borrowing and investment
opportunities and the use of techniques such as hedging;
(v) Better control- centralisation can enable the exercise of better control through
the use of standardised procedures and risk monitoring.

END OF SOLUTIONS

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