The Institute of Chartered Accountants of Pakistan

Examiner’s Comments

FINAL EXAMINATIONS WINTER 2004

Introduction

The Examiners’ Comments are being reproduced to assist the candidates in knowing what is expected of them and where they have fallen short of those expectations.

In order to fully appreciate the Examiners’ Comments, the candidates must have in their view the level of achievement necessary for a pass standing in the examination. The examination determines whether the candidates have achieved the minimum desirable level of a professional competence which the Institute looks for and the ability to apply CA entry level knowledge to theories, principles and practices to situations and problems likely to be encountered in professional practice. Accordingly, candidates should demonstrate their ability to:

apply knowledge as required by the prescribed syllabus
identify, define and rank problems and issues, when not specially directed to them by the questions.
solve problems in an analytical integrative manner, exercise judgment in developing and evaluating alternatives and proposing practical solutions and
communicate effectively with users and respond to users needs

The institute attempts to measure, to the extent possible, in written examinations the maturity of the candidates judgment and their ability to make useful recommendations to clients, supported by analysis of the type and quality expected of Chartered Accountants in Practice.

ADVANCED ACCOUNTING AND FINANCIAL REPORTING

General:

Students’ performance was average except for question 5 where only a handful were able to obtain passing marks.

Q.1

It was a simple group accounts consolidation question of a parent company and a foreign subsidiary. For a proper and complete answer, students should have stated their assumption as to whether they regarded the subsidiary as a foreign entity or an integral foreign operation and should have translated various items accordingly.
Q.2

The following mistakes were generally made:
Q.3

The students were required to ascertain whether certain given transactions constituted related parties transactions and was well answered by students.
Q.4

Generally, the students’ performance is poor in questions where they are required to analyze and interpret the data and give their views. In this question the students should have suggested the line of investigation about high debtors, low stock turnover etc. i.e. whether debtors included doubtful debts, stocks included obsolete/deteriorating items or were they simply high. Many failed to pinpoint company’s strength of low gearing and high fixed assets turnover. Most students failed to give other specific factors which the bank manager should consider before approving/rejecting the loan.
Q.5

This was the worst attempted question. Students gave poor treatment to this 20 mark question. Main shortcomings in their approach were as follows:
1. Most of them valued shares only on assets basis and ignored earnings yield basis.
2. Not many students had any idea of super profits required to calculate goodwill. An assumed normal profit percentage figure was to be deducted before arriving at super profits.
3. Valuing shares on net assets basis required separate treatment of investment, exclusion of goodwill as given in X’s books.
4. Students using liability side approach to calculate net assets wrongly excluded deferred tax liability.
Q.6

This question requiring explanation of certain concepts covered in International Accounting Standards were answered well by majority of the students.

Q.7

Part (a) requiring explanation of various terms and concepts contained in IAS 39 was well answered by majority of the candidates. However, in part (b) very few students knew that IAS-39 was not applicable to banks and financial institutions in Pakistan.

ADVANCED AUDITING

Q.1

This question simply required the candidates to prepare extracts of audit planning memorandum, identifying and explaining the audit risks resulting from the use of e-business, especially with reference to the list given in the question. Most candidates did not understand the requirement and gave general risks associated with the items listed in the question and not the risks associated with e-business specifically.
Q.2

(a)

Incomplete answers were given. Some candidates just repeated the situation given in question without giving their opinion on the situations. Some candidates evaluated the situations properly but failed to consider the impact of these situations on the audit opinion.
(b)

Candidates were not able to draft proper qualifications in respect of situations given in the question. However, they knew about the basic contents of the qualification.
Q.3

This question required the candidates to identify the audit risks resulting from the scenario given and then to list the components of financial statements which would be affected for each of the risks identified. But all of the candidates listed the risks separately and gave a separate list of components of financial statements affected. The same mistake was made for Part (c). Candidates just gave a list of audit steps without linking them with each audit risk identified by them.
Q.4

Candidates were required to give their comments on the two audit issues identified and also the audit evidences that they would expect to find. Most candidates only gave the audit evidences without giving their comments on the issues. Some candidates even answered both the parts of the question together although they related to two totally different situations.
Q.5
This was a very straightforward question. The candidates were required to list down the procedures that may be performed in an engagement to review financial statements in the context of investments in stock market. Majority of the candidates failed to understand the requirement of the question and listed the audit procedures required to carry out the statutory audit of financial statements instead of a review of financial statements. Those candidates who understood the question, gained good marks.
Q.6

(a)

Candidates were required to evaluate the cases given in this part of the question and describe the audit procedures to be performed. Majority of the candidates presented general entries or adjusting entries instead of the procedures to be performed to resolve the queries.

(b)

Alternative procedures were required in this part in case no responses were received against second request for the balance confirmation. These included: · Examining subsequent cash receipts· Inspecting shipping documents or other client documentation· Checking correspondence with customers· Contacting reputable credit agency to verify existence of customersOnly few candidates answered this part correctly. Majority of the candidates just wrote about the subsequent position of account receivables.
Q.7

In this question candidates, were asked to give the answer with reference to the requirements of ISA-560 “Subsequent Events”. Most of the candidates did not mention the fact that if management does not take the necessary action, then the auditor will inform those persons ultimately responsible for the entity that action will be taken to prevent reliance on the auditors report and that the action taken by the auditor will depend on the legal opinion obtained by him.
Q.8

In this question the candidates were required to describe the requirements of ISA-240 with regard to the following: (a) Professional skepticism(b) Planning discussions.(c) Inquiries of management in respect of Fraud.
(a) Majority of the candidates just wrote the definition of professional skepticism instead of reasons as to why professional skepticism is required specially in context of Fraud and Error.
(b) Generally, candidates wrote that discussions are required with the management of the company instead of those with the audit team.
(c) Generally answers for this part were properly given and candidates gained maximum marks.
Q.9

A situation was given in the question and candidates were required to evaluate this situation in the light of requirements of Companies Ordinance, 1984 and IAS-27 and decide whether the treatment adopted by the client in the situation was correct. Some candidates evaluated the situation properly and gave correct answers. Some wrote correct requirements of the Companies Ordinance 1984 and IAS-27 but did not give the appropriate opinion.

ADVANCED TAXATION

Q.1

This question although not well answered, was well attempted. Candidates did not give complete answers and thereby could not secure good marks. The following mistakes were made by them while answering the question.(i) Advance tax is payable on latest assessed tax basis and the old basis of tax to turnover ratio is now no more applicable after the amendment through Finance Act 2004. (ii) Tax assessed in latest tax year and not the latest assessment order was relevant. Therefore the tax liability shown in the return of income for the tax year 2003 was relevant and the assessment order for the assessment year 2002-2003 which was received after the filing of return of tax year 2003 was not to be considered. (iii) Option for filing own estimate was not properly considered and applied by many candidates. Many candidates applied the test point of 80% invariably i.e. where payment is made on the latest tax year, whereas such limit is applicable only in case of own estimate scenario. (iv) Many students did not mention that option can only be exercised before payment of first installment.(v) The new dates of advance tax payments were not known to many candidates. (vi) Computation of additional tax was not made strictly in accordance with the basis given in the Ordinance. (vii) It was not mentioned by any of the candidates that: - Option for own estimate once exercised is applicable for whole year. - Return filing for tax year 2004 would change the quarterly advance tax computation if own estimate is not filed. (viii) The exclusion of PTR Tax, capital gain and House property income from advance tax mechanism was not properly understood by some of the candidates.
Q.2

The candidates attempted this question comparatively well by showing the knowledge of this new concept. Most of them were aware of the overall theory of SPV, allowability of expense and withholding tax implication of securitization of assets. However, some did not focus on the part of withholding tax on payment of financial cost to SPV and payment by SPV to originator at the time of securitization of assets.
Q.3

Very few candidates could understand the fundamentals of this question which was based on the following key points: - Cost of investment and disposal value was to be determined based on Rupee value of investment and no consideration was to be given to loss in Pound Sterling terms. - Distribution of dividend chargeable to tax at lower rate was subject to recharacterisation of transaction as part of capital gain by the Commissioner of Income Tax.
Q.4

This was the most important question of the paper carrying 1/4th of the total marks. The general performance in this practical question was not up to mark. The following points were observed:-- Computation of total income which involved proration of income and common expenses was generally answered well except for computation of unadjustable rent while computing ‘Income from property’. - While preparing wealth statement, candidates were supposed to prepare cash book and movement in business capital in the light of various transactions made. However, many candidates could not conceive the idea of preparing these two statements, which was fundamental to reconcile wealth for the year. Many assets also changed their nature during the year whilst not changing the quantum of wealth. This aspect was also missing in the answer scripts. - Wealth Reconciliation statement was rarely seen to be prepared by the candidates and therefore no candidate could work out unexplained investment.
Q.5

This detailed question on ‘Thin Capitalization’ was also not answered in the correct perspective. Mostly the candidates scored some marks while computing interest on different loans, which was nothing, more than an arithmetic exercise. Associate B was considered generally by candidates under the “Thin capitalization restrictions” whereas the fact was that Associate B was taxable at normal rates and therefore interest payable to Associate B was allowable without any limit. The equity for the purpose of applying 3:1 ratio was also not correctly computed by reducing the amount owed by another associate from the net equity. Interest on loans was also erroneously calculated on the highest amount without looking at the movement of funds during the year. This reflects lack of in-depth knowledge expected at this stage.
Q.6

The chargeability of sales tax on courier services was generally answered well but not many candidates could explain the domain of Provinces to charge and collect such sales tax. Sales Tax Act only provides the mechanism to charge and collect such sales tax.
Q.7

In this question candidates were supposed to identify the goods on which input tax is not allowable under section 8. The candidates however, mostly explained the requirements of section 7 and 73 of the Act, which was not necessary.
Q.8

This question had five parts. The concept of “time of supply” under hire purchase agreement was answered correctly but the conceptual aspect of how it constituted ‘supply’ as per the definition in the Act was not discussed. The tax exemption to importer under a turnkey contract was also not properly understood. Other parts of the question were generally answered well.
Q.9

This question was focused on the time limitation for recovery of taxes, which was not understood by the candidates. Many candidates gave the maximum time within which a sales tax audit can be conducted or started.
Q.10

The response to this question was rather poor. Candidates had absolutely no knowledge of the Act although it was a straight and simple question.

BUSINESS FINANCE DECISIONS

Generally candidates performed better in this attempt as compared to previous ones. For a number of attempts Business Finance Decisions is commonly perceived as difficult paper. Therefore, candidates are now perhaps putting more efforts to this particular paper. It was seen that majority of the candidates possessed the basic knowledge of the concepts asked. However, the presentation of majority of the answer scripts were extremely sub standard and shoddy, which is not expected from students of final modules. The students must realize the importance of this practical subject in order to not only pass the examination but also excel in practical life, which is becoming more and more demanding for professionals.It was noticed that those who had started with easy questions could do better in difficult questions as well, as the rule of ‘lower the anxiety higher the quality’ played its role. Question wise comments are as under:

Q.1

Performance on part (a) was unexpectedly average. This part simply required calculation of debt rate of four companies keeping in view the credit ratings, difference between each category and the premium over risk free rate. It was surprising to note how one could actually think of a lower credit rated company to have lower debt rate applicability, as imagined by some candidates.
Definition portion of Part (b) was answered properly by majority, as very common concept of alpha was tested theoretically. Except for few, nobody could describe the factors responsible for existence of alpha value, which include imperfect market efficiency, differences in expectations and preferences etc.
In Part (c) students were unable to identify that the Beta value given in the question was for the assets and not the equity. Further, students did not give regard to the fact that in the absence of information to the contrary, when applicable debt rate (Kd) is greater than risk free rate (Rf), there exist a Beta for debt that need to be accounted for while calculating equity beta. Question expressly stated that the decision should only be based to exploit the current in-equilibrium of the market (presence of alpha), but no one used shorter-term consideration (that is “Expected Rate/Required Rate”) as decision criteria.
Q.2

In Part (a) most of the students could not work out the cash flow properly and made very basic mistakes. Majority was ignorant of the concept and working of the APV, which required (i) Discounting of cash flow at required rate of return on equity (ii) Discounting of interest saving at normal debt rate (iii) Finding tax saving and discounting the same at normal debt rate (iv) determining issue cost of equity.In Part (b) students failed to calculate new share price after right issue. First students should have calculated the number of right shares to be offered by dividing the ‘amount of right issue’ with ‘right price’. Thereafter new share price after right issue was to be calculated by dividing sum of ‘old market capitalization’, ‘cash raised through right issue’ and ‘APV of the project’ with ‘total number of shares after right issue’.
Q.3

Students generally showed a good performance in both parts of this simple question. However, all students were unable to appreciate that financing cost is incurred on net recoverable amount i.e. the gross value less bad debts. In part (b) majority was unable to identify the areas where cost will decrease on account of 10% drop in credit sales, for example, decrease in financial cost on credit sales.
Q.4

Generally, while making recommendations the students were able to reach the conclusion that company’s shares were over valued. Most of the students missed two important points i.e. (a) in the given case growth in EPS was much volatile and it was probable that the company might not be able to sustain a constant and uniform growth in dividend (b) estimates of share value based upon the ‘dividend growth model’ are therefore themselves suspect and the analyst was probably not justified in suggesting that the share was over valued based upon only this evidence.
Q.5
The knowledge of agency conflict (shareholders versus managers) was tested, which is an inherent problem of corporate structure where managers normally hold very small percentage of the equity. There exists a risk of loss of shareholders’ interest due to unobserved actions of managers in their own interest. The students were able to identify the types of conflict that may exist, such as conflict on efficiency of utilization of retained earning, on cost of retained earning, on capital appreciation etc. However, very few of them knew as to what actions may be taken by the affected shareholders in various situations.
Q.6

There were simple calculations to be made on the basis of prudential regulations applicable to banks. Some made provisions against mark up, which was not correct, as mark up is credited to ‘suspense account’ and needs no provisioning at any stage.
Q.7

Aimed to test basic knowledge of treasury risks and instruments used to hedge exposures, which are becoming more and more important to effectively manage various risks. Majority performed well but they are supposed to have specific awareness of the subject rather than shallow understanding. Current expansion/ introduction of capital, treasury and commodity market in the country demands much more expertise than asked in this particular question. The students are advised to study latest literature on the subject in order to keep themselves up to date about new developments on the subject.

BUSINESS MANAGEMENT

The overall performance of students in the paper was not satisfactory. It was generally seen that certain concepts were vague in the students’ minds, which restricted them from giving appropriate answers to quite a few questions. Moreover, lack of reading and selective studies also resulted in poor passing percentage. A question wise analysis is as follows:

Q.1

(a) In this part definition of the term ‘value chain’ was required. Around 30% of the students altogether skipped the answer to this part. Those who attempted the question gave general answers, which did not clearly define the term. Very few students gave proper explanation where they mentioned the primary and secondary activities and also gave diagrammatic representation.

(b) Generally, the question was well answered, as far as Corporate Social Responsibility was concerned. However, most candidates were not able to describe Non-financial Objectives (other than CSR-related ones) satisfactorily.
(c) In this section students discussed the ethical issues arising from the given situation (International Cigarette Company advertising their project of saving the environment by planting trees). The examiner was mainly interested in evaluating the arguments the student gave in support of his opinion, rather than the opinion itself. Some answers contained expression of extreme positions without any counter-balancing arguments. Some gave equivocal opinions where it was hard to understand what stance the candidate had on the controversy. Majority of the answers were poorly composed.
Q.2

The question required the candidates to demonstrate an understanding of the Ansoff Matrix/Market Matrix, and of application of the same in the given case. Most students could describe the theory, but failed in stretching that understanding to the case situation. This showed that candidates learned management theories without understanding the underlying concepts.
Q.3

(a) This question was attempted very poorly. The candidates had very scant understanding of the different personality types and their suited learning styles. In this question most students were able to discuss learning styles suitable for theorists and activists mostly due to the suggestive headings. A vast majority did not understand personality types of reflectors and pragmatists and lost marks in this part.
(b) This was a simple question that was generally handled well. Some candidates did confuse types of interviews with recruitment tests.
Q.4

This question required answers to the following:· How does a company that is positioning itself on high quality product assess its relative quality as perceived by its customer? The simple answer to this question was ‘feedback from the customers/users of the product’. Some students mentioned customer surveys, questionnaires and research etc. However, quite a few students were unable to understand the question and discussed how companies can increase quality and reduce prices thereby earning meager margins, to be able to position their product highly in the customers’ minds which once again is a concept not understood properly by students. · Second thing asked in this question was what measures a company can take to gain competitive advantage when customers are not willing to pay a premium for increased quality. The 3 most important points to be discussed in this section were Focus, Cost Leadership and Differentiation. This section was very poorly attempted and sheer lack of understanding of these strategies was seen. Students have a poor knowledge of what is competitive advantage and how there’s fierce competition existing in the market with many players fighting to get an edge over each other. A good understanding of this would help students give suggestions about how to combat competition and gain a larger market share using aforementioned strategies. · Examples were altogether omitted in most papers.
Q.5

Many pitfalls could have been identified but the students failed to identify even five of them. Students discussed what measures to undertake while undergoing strategic planning, which was a total drift from the required answer. Those who did approach the question correctly, gave very general answers and skipped important points like · input from managers from all related department is not taken · strategic plans are often made just to fulfill regulatory requirements and · failure to create a collaborative climate supportive of change” etc.

Q.6

(a)

Most candidates thought Political Risk was merely related to political riots, law and order situations, and instable governments. Only a few could list the manifestations of Political Risk in actual business / economic situations, such as - restricting imports using tariff and non-tariff barriers - restricting remittance of profits etc.Many students hence ended up giving wrong examples.
(b)

Students gave very general answers and did not place under appropriate heads the policy measures that the Govt. of Pakistan can exercise to achieve the objectives mentioned in the question. Although the automotive industry is a hot topic of discussion these days but students answers did not suffice the required.
Q.7

The aim of the Investors in People standard is to promote excellence in the field of human resource development by linking the training & development of people to the goals and targets of the organization. Generally candidates had no understanding of the concept of Investors in People Standard and related this question to Total Quality Management drive in a business organization. TQM or total quality management was defined by some, however, no relation was drawn to how human resource should be utilized as an asset to achieve TQM altogether in an organization. This once again showed lack of reading and poor association of theoretical concepts with real life business management.
Q.8

Simple question. It was generally handled well, except that many candidates did not have an accurate understanding of how Indirect and Direct Exporting differ from each other.
Q.9

This question seems to have been widely misunderstood. Majority of the students mixed the Product Development Process with Product Life Cycle using the Boston Matrix, which made them loose precious marks. Since the basic concept of Product Development Process was mixed up, so its related factors hindering the process were also not correctly answered by most of the students.
Q.10

On an average, students defined benchmarking properly, however, they skipped the steps involved in this exercise. Answers to types of benchmarking once again were not up to the mark. Very vague and general definitions were given due to insufficient preparation.

CORPORATE LAW

Overall performance of the candidates was below average. They lacked in depth knowledge of the various aspects of the syllabus, which was not expected from the students appearing for the final examinations.· Most of the students did not read the requirements of the related question and wasted time in reproducing lengthy and non relevant answers which did not justify the marks allotted to the question.· It is suggested that the complete syllabus should be covered by the students along with the latest trends and developments in the corporate environment including the changes introduced by the SECP to regulate and strengthen the corporate culture in the country

Q.1
(a)

Three options could have been discussed i.e. (a) Right issue (b) Bonus issue (c) Merger with other institutions. Most of the students concentrated on Right Issue only.

(b) Since this part was based on the area covered at the intermediate level, students performed well and most of them were able to mention correctly that relevant portion of table A will apply in such case and that such regulation can now be included by passing special resolutions.
Q.2 (a)

This question needed some application skills. Very few students wrote about the provisions of section 263 and 290 of the Companies Ordinance, 1984 relating to oppression of minority share holders and conducting of investigation by the SECP on application by members holding a prescribed percentage of shares.
(b) This questions was well attempted by the students.
(c) Most of the students were able to answer correctly in line with Section 450 & 451 of the Companies Ordinance 1984.
Q.3 (a)

It was surprising to note that a vast majority of the students did not know the basic distinguishing feature between the activities of a bank and NBFC i.e. Banks can accept deposits and open chequing accounts for customers. Candidates were able to list the business activities carried out by NBFC’s as referred to in Section 282A. However they were unable to satisfactorily give the licensing requirements for an investment bank wishing to enter into leasing and housing finance business, as mentioned in Section 282 (c).

(b) A fairly well attempted question. Students had a clear understanding of the Companies Buy-back of Shares Rules, 1999 and answered the question in its right perspective. Few students only explained the detailed procedure for buy back of shares but could not explain that the given situation was a financing arrangement and does not constitute buy-back of shares.
Q.4 (a)

This question involved application of theoretical knowledge into a practical scenario leading to a decision making phase. Almost 90% of the students attempted the question but hardly 5% managed to score passing marks. The primary reason being the selection of inappropriate corporate structure leading to explanation of wrong establishment steps and therefore, loss of marks.
(b) Students got confused by the tricky question and wrote detailed differences between provisions relating to increase and reduction of share capital of a company limited by guarantee having a share capital as compared to a company limited by shares, whereas in law there is no difference between the two given situations.
Q.5 (a)
This part of the question was amongst the easiest of the questions. All the students attempted it and managed to secure good marks. Layout and contents of the notice were explained reasonably well showing good knowledge of the topic.
(b)
This was a brain storming exercise and required practical application of the law. The students generally knew that no loan may be given for purchase of shares, whereas loan may be given for purchase of house subject to approval by SECP.
Q.6 (a)
An easy question covering the topic of the day and was replied well by the students. They explained the composition, duties and responsibilities of the audit committee and managed to secure above average marks for this part of the question.
(b)
This part of the question required practical applicability of legal knowledge. Not many students were able to accurately apply the knowledge of book closure requirements. Only a handful of the students identified the basic mistake that minimum seven days were required for book closure and the dates instead of October 26th to31st should have been Oct.25th to 31st. They were able to state the requirements but not accurately apply the same to determine the correct book closure dates.
(c)
The students were not aware of all three examples where shares could be issued to non-residents without SBP approval. Majority of the students were not able to give more than one correct example.

INFORMATION TECHNOLOGY MANAGEMENT, AUDIT AND CONTROL

General:
The overall performance of the students in this subject was satisfactory. But it cannot be termed up to the mark as most of the students got the benefit of two very high scoring questions i.e. Q.3 and Q.10. Candidates appearing in this paper as a part of Module F performed a little bit better than those appearing in Module E. This is an indication that generally they are not well prepared for this paper in their first attempt. Apparently the reason for the same is the general perception that it is not a core subject. However, since the practical application of IT is still growing in the field of accountancy and audit with an enormous pace, this perception cannot be termed as correct. Another overall observation was the generality of answers. In most of the questions it was often observed that the answer was based on logics, common sense and general perception and not based on the knowledge of the subject.Students need to pay more attention to all the requirements of the questions, and need to structure their answers in a more presentable manner. It is also strongly recommended that students follow the instructions given in the answer sheet before attempting the questions, and they should tick mark on the cover page to indicate that a particular question has been attempted.Question-wise comments are as under:

Q.1

This was a very practical question covering modern day and upcoming areas. It required students to have elementary knowledge of e-commerce related payment mechanisms. While most students correctly defined credit cards and identified them as an example of the B2C model, very few correctly defined electronic cheques and the associated mechanism, target market, etc. Similarly many students incorrectly recommended electronic cheques as the mode of payment to be selected by Pak Greetings Limited. Those who correctly identified credit cards as the mode of payment did not give any reason for their recommendations, lost marks on that account.
Q.2

This question clearly required students to demonstrate how aware they were of the developments taking place with regard to e-government which also includes an important aspect of the B2G/C2G model of E-commerce. Students failed to adequate define/identify the two main objectives of E-government, i.e. improve service delivery to citizens and improve the internal efficiency of government operations, and the several related minor objectives. The second requirement of the question on how service delivery could be improved was very poorly attempted. Few students identified improvement measures such as automating routine functions; reducing time and effort on search, retrieval and dissemination of information within the government; creating synergies between government functions by deploying IT enabled applications/systems; and providing IT training to enhance skills of government employees.
Q.3

Identifying risks and giving recommendations are standard components of any audit report, and this question tested the students with practical scenarios. While most students scored heavily on this question by providing the correct answers, many demonstrated that they were not aware of “performance and capacity management”. This concept purely relates to ensuring availability of adequate computing capacity/power to meet the required performance/operational needs of the system, but many students defined this as performance of personnel and lost marks. Some students failed to define the risks and recommendations separately as required by the question, and consequently ignored one of the two.
Q.4

This was one of the easier questions and related to a current topic of interest, but students answered it quite poorly. The State Bank has recently issued a guideline requiring all Banks to establish Business Continuity Plans (BCP) and have them audited by external/third-party auditors. While a BCP covers nearly twenty different aspects, students failed to provide even the eight required by the examiner. Several even confused it with the IT Plan and incorrectly provided the recommendations from IFAC Guideline on IT Plans. Many others gave elaborate plans for market analysis and development and did not speak of the organization planning to survive disasters and similar incidents.
Q.5

Firewalls were the focus of this simple question, but sadly few students demonstrated the required level of knowledge. It was surprising to note that hardly anyone mentioned the fact that they operate according to defined security rules and policies. Several students mentioned the benefits but failed to correctly identify the risks due to the inherent limitations of firewalls. The examiner was shocked to find some students stating that these were fireproof walls built to protect an organization and its resources from fire. Not surprisingly, few students scored well in this question.
Q.6

The IT Steering Committee was the subject of this question. Being one of the most important intermediaries and link between operational management and the IT function, it evidently received adequate attention from most students who were able to answer this question well and received good marks. A few, however, confused it with the Project Team while some others attributed operational/hands-on activities to it instead of monitoring and decision-making, and consequently missed out on some easy marks.
Q.7

This question addressed Software Development Life Cycle (SDLC), and queried students on some of the documents developed during the project. Many students correctly defined the requirement and database specifications, but often confused technical specifications with functional specifications. Few could correctly explain that functional specifications translate business requirements, identified and documented in the requirement specification, into technical terms. Students were expected to view these documents in sequence so as to clearly establish the linkage between them, especially in the context of the SDLC. The question also specifically required the contents of these documents to be defined, but this aspect was ignored in most of the answers.
Q.8

This easy question on the benefits and threats of end-user computing was generally well answered. Some students presented a single benefit or threat in different ways instead of giving different specific benefits and threats.
Q.9

This was the most poorly attempted question. In part (a) students could not distinguish between Black Box, testing which is conducted by reconciling input transactions processed by an application with output results, and White Box testing, i.e. testing an application’s internal logic directly. For the second part, it was surprising to note that final level students were unable to identify and explain tests of controls which include tests for authenticity, accuracy, completeness, redundancy, access, audit trail, and rounding errors. Of course, these tests related to computerized applications and controls. Students would do well to study up on this important area which is of great importance for an IT auditor.
Q.10

The importance of the IFAC guidelines cannot be emphasized enough, especially for accountants. This question tested the specific guidance issued by IFAC with regard to key principles in developing an IT Plan, and most of the students demonstrated that they had learnt this well. For questions that ask for specific individual points such as this one, students would do well to structure/present their answers better by identifying the point with a suitable heading and then explaining it adequately instead of just dumping the information together. Examiners have been consistently testing this knowledge and students would do well to study the guidelines well.

MANAGEMENT ACCOUNTING

Question-wise comments are given hereunder:

Q.1

The main difference that normal losses are viewed as part of cost of good production whereas abnormal losses are treated as period cost was well explained by most students.

Whereas benefits of JIT stock management were correctly identified but few students could only give examples for cases where JIT is not appropriate for example in Hospitals or other cases where stock-outs may result in excessive costs.
Q.2

The question was well attempted and some secured full marks. The most common mistake was that hours were not allocated correctly between B and C (70) hours and between A and D (170) hours.
Q.3

This question required calculation of standard cost per unit of a product by working back from actual costs and variances. It seems that students had not practiced solving such problems. Nonetheless, even with no practice, the question could have been solved after some concentration. However only 18% secured pass marks.
Q.4

A question on cash operating cycle; most students secured full marks. A common mistake noted was in the use and calculation of averages (opening and closing debtors, stocks etc.) which should have been avoided and full year figures should have been used.
Q.5

This was an easy question but many students could not secure pass marks. Some of them used trial and error approach while others used algebraic method to arrive at breakeven production level whereas simple arithmetic calculation was needed.
Q.6

It was a simple question capable of being solved in different ways. Common mistake was that all items were not considered as many candidates ignored cost of capital.
Q.7

Majority made the common mistake of not taking the auditors fee, machinery rentals and other expenses as additional cost, in case of delay. As these expenses were incurred monthly, they would have increased in case of delay.

Q.8

Almost 50% of the candidates were unable to workout the float. It required simple calculations which can be learned by consulting any good book and a little practice. However critical path was well defined.

SPECIFIED PAPER OF ADVANCED ACCOUNTING & FINANCIAL REPORTING; MANAGEMENT ACCOUNTING; BUSINESS FINANCE DECISIONS

General:
The paper was very easy considering the level of examinees. Question-wise comments are as under:

Q.1

Most of the students could not perform well in this question as they seemed to lack the ability to comprehensively analyze the issues involved or to present their answer in a logical manner. In most of the cases they emphasized on only one of the many issues that should have been discussed.The issues that could have been faced by the new management related to the following:· Very high gearing ratio and consequent problems that may be faced in future such as falling cash flows due to falling profits.· Quantum of credit to be obtained out of the two available options and merits and demerits relating to each of them.· Suggesting ways and means of tackling above issues.The students were generally able to discuss a few out of the many points that should be included in the report of each of the above.
Q.2 (a)

The criteria of acceptance or rejection of a project on the basis of its Net Present Value appeared to be clear in the minds of students. Almost every student secured good marks in this question.
(b) Sensitivity test of a project is done by finding out the level of each uncertain item (like in this case product life, sale volume and material price) where NPV of the project achieves its break even. The results of these tests are very important in decision making. Except for few no one could properly attempt this part.
Q.3

This was a simple question on Investment Property. The mistakes generally committed by the candidates were as
follows:· Other direct cost were not made part of the value of property· Interest was capitalized· The property was not increased by the fair value as of the closing date.
Q.4

A very simple question of consolidation attempted well by every student with the exception that few adopted line-by-line basis of consolidation, which was not asked.
Q.5

Almost every student was able to calculate the missing figures of the Balance Sheet, but the presentation of Balance Sheet was unexpectedly poor considering the level of students as they are practically involved in preparing complex financial statements.
Q.6

It appeared that the students are well versed with critical path analysis and faced no difficulty in securing full marks.
Q.7

It was a simple question based on differential costing concept. Surprisingly, some candidates made mistakes in calculating increase in fixed cost as a result of switching to the new process. Overall performance in this question was good.