IIA Diploma
P2 Financial Risks and Controls
Sample multiple choice questions
Multiple Choice Questions (MCQs) are a well-established tool in educational testing.
MCQs are particularly useful for assessing students' knowledge of important facts or
simple procedures. The MCQ format enables this kind of ground to be covered
quickly and comprehensively.
P2 Financial Risks and Controls is a modern, risk-based paper, but it does rest on a
bedrock of basic finance audit knowledge. The MCQs enable this basic knowledge to
be tested. Just 20% of the P2 exam is MCQs, with the remaining 80% being in
traditional essay format.
It is rare that a student can pass P2 without having put up a reasonable performance
in the MCQs. This is because the MCQ section is not entirely separate from the rest
of P2 - the body of knowledge is the same throughout.
This document provides examples of the types of MCQs that appear in Part A of the
exam paper. The sample is not exhaustive and does not cover the whole syllabus.
There are 18 sample questions given in this document; in the exam paper itself there
are 20 questions.
Students might find it helpful to view the MCQs as a speed test. If students are
managing their time according to the marks on offer, they will have 38 minutes to
answer the 20 MCQs. Many questions may include calculations, which are in
themselves quite straightforward. The skill required is to know where to use each
figure/formula/calculation. Students should not simply memorise calculations but
regularly practise the steps in calculations - a break even point, or an accounting
ratio, perhaps.
Tuition providers should have built up a good bank of practice MCQs that mirror the
questions seen. Students should spend time working on these practice questions
with their tutors; the more effort that is put in, the quicker and more instinctive
answering these MCQs becomes.
Chartered Institute of Internal Auditors, March 2013
1/14
Question 1
Company X buys goods on credit from one of its suppliers, company Y, How
should this transaction be recorded in the books of company X?
A
B
C
D
Question 2
Account credited
Purchases
Inventory
Company Y
Company Y
Within the statement of financial position, according to the International
Accounting Standards, retained earnings are classified as:
A
B
C
D
Question 3
Account debited
Company Y
Company Y
Purchases
Inventory
Non-current assets
Current assets
Equity
Current liabilities
Consider the following balances from a company’s financial statements:
Borrowings
Cash
Equipment
Inventory
Retained earnings
Trade receivables
£000
30
10
30
10
50
12
What is the figure for current assets?
A
B
C
D
£82,000
£32,000
£30,000
£20,000
Chartered Institute of Internal Auditors, March 2013
2/14
Question 4
The following is an extract of balances from a company’s accounts:
Borrowings
Cash
Inventory
Property, plant and equipment
Retained earnings
Revenue reserves
Tax liabilities
Trade payables
Trade receivables
£
3,200
1,300
2,500
9,200
1,600
4,300
?
3,800
3,000
What figure for tax liabilities would balance the statement of financial
position?
A
B
C
D
Question 5
Internal and external audit are similar in that:
A
B
C
D
Question 6
both services can be provided by in-house and external providers
both provide independent assurance
both report to shareholders
neither are statutorily required in the UK
What aspect of financial reporting does accounting standard IAS 7 relate
to?
A
B
C
D
Question 7
£14,900
£11,700
£3,100
£500
Statement of cash flows
Statement of changes in equity
Statement of comprehensive income
Statement of financial position
At 31 December, a company’s trade receivables totalled £60,000 and the
allowance for doubtful receivables was £2,000. The company decided to
adjust its allowance for doubtful receivables to five per cent based on
previous experience.
What figure should be included in the statement of comprehensive income
for doubtful receivables for 31 December?
A
B
C
D
£5,000
£3,000
£2,900
£1,000
Chartered Institute of Internal Auditors, March 2013
3/14
Question 8
A company has just purchased furniture for £12,000. The furniture has an
estimated useful life of four years; and the estimated residual value is
£1,000. The company uses the straight-line method of depreciation.
What would be the accumulated depreciation figure in the company’s
accounts at the end of the second year?
A
B
C
D
Question 9
£2,750
£3,000
£4,000
£5,500
A small publishing company has the following information about its
inventory of a particular publication:
Number of items in stock
Selling price per item
Selling costs per item
Materials and print costs per item
150
£35
£11
£12
At what figure should the inventory be valued in the year end financial
statements?
A
B
C
D
Question 10
£1,650
£1,800
£3,450
£3,600
A manufacturer of designer shoes has the following management
accounting information:
Sales price
Materials
Labour
Factory overheads
Total sales
£120 per pair
£4 million per annum
£3 million per annum
£1.5 million per annum
100,000 pairs per annum
What is the contribution of each pair of shoes?
A £35
B £50
C £70
D £85
Chartered Institute of Internal Auditors, March 2013
4/14
Question 11
A company is planning to build new housing but is facing a shortfall in its
projected income and will need to borrow. It wishes to keep its interest
costs to a minimum by taking the borrowing at the latest possible time.
The company’s bank balance was £70,000 on 1 July. Its monthly income is
£90,000 per month and outgoings £60,000 per month. Additional outgoings
of £80,000 per month will be incurred from August to pay for building work.
When will the company need to borrow?
A
B
C
D
Question 12
August
September
October
November
The following information relates to one day’s sales of ten products from a
clothing range of a market trader:
Product 1
6
Product 6
12
Product 2
10
Product 7
5
Product 3
6
Product 8
12
Product 4
5
Product 9
15
Product 5
20
Product 10
12
What are the median and mode averages for the sales of the ten products?
A
B
C
D
Question 13
Median
10
10.3
11
12
Mode
3
12
12
12
Sales in Y2 were £30,000 more than they were in Y1. This represented a
20% increase on Y1. What was the level of sales for Y2?
A
B
C
D
£90,000
£120,000
£150,000
£180,000
Chartered Institute of Internal Auditors, March 2013
5/14
Question 14
The following is an extract from a company’s statement of financial position:
£
Assets
Non-current assets
15,000
Inventory
3,000
Trade receivables
2,500
Cash
500
Total assets
21,000
Equity and liabilities
Retained earnings
Share capital
Share premium
Trade payables
Other payables
Taxation
Total equity and liabilities
8,500
10,000
1,000
1,200
200
100
21,000
What are the current and acid test ratios?
Current
4:1
2:1
0.48:1
0.24:1
A
B
C
D
Question 15
Acid
2:1
4:1
0.24:1
0.48:1
The following is an extract from the financial statements of a company:
Cash
Current liabilities
Equity and non-current liabilities
Profit before interest and tax
Revenue
Trade receivables
£000
10
350
500
240
800
100
What is the return on capital employed for the company?
A
B
C
D
160%
94%
48%
28%
Chartered Institute of Internal Auditors, March 2013
6/14
Question 16
A sweet manufacturer is considering moving into the ice cream market.
Start up costs will be £500,000. Running costs will be £150,000 per
annum. Income will be £300,000 per annum.
Time period
Year 1
Year 2
Year 3
Present value of £1, discounted at 10%
0.91
0.83
0.75
If the cost of capital is assumed to be 10% per annum, what will the Net
Present Value be after 3 years? (Figures shown in brackets indicate a net
present cost or negative value.)
A
B
C
D
Question 17
£373,500
£(112,500)
£(37,500)
£(126,500)
The following are some of the assets held on a company’s statement of
financial position at the end the year:
Motor car net book value £10,000 (original cost £10,000, depreciation
policy 20% straight line, residual value £0)
Machinery net book value £25,000 (depreciation policy 10% reducing
balance)
Land net book value £80,000 (depreciation policy 15% reducing balance)
What would the total depreciation be in Year 2?
A
B
C
D
Question 18
£16,500
£14,700
£14,450
£14,050
The following headings are taken from a statement of cash flows:
1. Taxation
2. Returns from investment and servicing of finance
3. Net cash inflow from operating activities
4. Management of liquid resources
5. Equity dividends
6. Financing
7. Increase/Decrease in cash over the period
8. Capital expenditure and financial investment.
In what order do these headings appear in the statement of cash flows?
A
B
C
D
3, 2, 8, 1, 5, 4, 6, 7
3, 2, 5, 1, 8, 4, 6, 7
7, 3, 2, 1, 8, 5, 4, 6
3, 2, 1, 8, 5, 4, 6, 7
Chartered Institute of Internal Auditors, March 2013
7/14
SOLUTIONS TO QUESTIONS
Question 1
Answer
C
Feedback
Purchases is the account that is used to record the goods for resale bought
during the accounting period. It is like an expense account and is therefore
debited, the business having gained the goods. The credit is posted to
company Y because they are owed money ie they are the creditor.
See section 2.4 of the learning text (2nd edn)
Syllabus
2.4
Question 2
Answer
C
Feedback
Equity is capital owed by the company to its owners (such as shareholders),
and thus profit (retained earnings) is classified as equity. Current assets are
cash and cash equivalents; assets held for collection, sale, or consumption
within the company's normal operating cycle; or assets held for trading within
the next 12 months. All other assets are non-current. Current liabilities are
those to be settled within the organisation's normal operating cycle or due
within 12 months, or those held for trading, or those for which the entity does
not have an unconditional right to defer payment beyond 12 months. Other
liabilities are non-current.
See section 8.3.1 of the learning text (2nd edn)
Syllabus
4.4 and 5.1
Question 3
Answer
B
Feedback
The current assets from the items provided are cash, inventory and trade
receivables. The sum of these three items is £32,000. Borrowings is a
liability, equipment is a non-current asset, and retained earnings is equity.
The other options are wrong for the following reasons:
A: The figure is based on the incorrect addition of retained earnings.
C: The figure is based on incorrect treatment of equipment as a current
asset.
D: The figure is based on the failure of including trade receivables as a
current asset.
See section 8.6.1 of the learning text (2nd edn)
Syllabus
4.4
Chartered Institute of Internal Auditors, March 2013
8/14
Question 4
Answer
C
Feedback
The elements that make up assets, the ‘top half’ of the statement of
financial position, are cash, inventory, property, plant and equipment, and
trade receivables. The total sum for assets is £16,000. The elements that
make up equity and liabilities, the ‘bottom half’ of the statement, are
borrowings, retained earnings, revenue reserves, trade payables and tax
liabilities. The total for equity and liabilities from the available figures is
£12,900 (that is, borrowings plus retained earnings plus revenue reserves
plus trade payables). For the statement to balance, tax liabilities must be
£3,100 (that is £16,000 minus £12,900).
The other options are wrong for the following reasons:
A:
The figure is based on the incorrect treatment of revenue
reserves and retained earnings as assets.
B:
The figure is based on the incorrect treatment of revenue
reserves as an asset.
D:
The figure is based on the incorrect treatment of cash as
equity in the statement of financial position.
See section 8.6.1 of the learning text (2nd edn)
Syllabus
4.4
Question 5
Answer
B
Feedback
Internal and external audit are similar in that they both provide independent
assurance. However, whilst internal audit can be in-house, external audit
has to be an external service. Internal audit provides assurance to the
board, and thus may be regarded as reporting to the board. External audit
reports to shareholders (or members, in the case of a membership
organisation). Whilst external audit is statutory requirement in the UK,
internal audit is not.
See section 10.3.5 of the learning text (2nd edn)
Syllabus
4.9
Chartered Institute of Internal Auditors, March 2013
9/14
Question 6
Answer
A
Feedback
IAS 7 sets out the requirements of statements of cash flows. The
requirements for the other statements are set out in IAS 1. However, the
requirements for particular items within each statement may be addressed
by other standards.
See section 12.3.2 of the learning text (2nd edn)
Syllabus
5.1
Question 7
Answer
D
Feedback
The allowance for doubtful receivables (or doubtful debts) for 31 December
can be calculated as:
(5% of £60,000) minus £2,000. This equals £1,000.
The other options are wrong for the following reasons:
A: The £2,000 provision has been incorrectly added rather than subtracted.
B: This figure does not take account of the £2,000 provision.
C: This figure is based on deducting five per cent from £2,000.
See section 11.3 of the learning text (2nd edn)
Syllabus
5.5
Question 8
Answer
D
Feedback
The formula for the straight-line method is:
(Purchase value of asset minus estimated residual value)/Estimated useful
life.
Thus, the figure for depreciation can be calculated as:
(£12,000 minus £1,000)/4, which comes to £2,750.
The depreciation figure in each year is £2,750. However, the accumulated
depreciation is £5,500.
See section 11.5.4 of the learning text (2nd edn)
Syllabus
5.6
Chartered Institute of Internal Auditors, March 2013
10/14
Question 9
Answer
B
Feedback
Inventory should be valued at lower of cost and net realisable value.
Cost: £12 x 150 = £1,800
Net realisable value:( £35 minus £11) x 150 = £3,600.
Cost is lower, and thus should be the figure recorded in the financial
statements.
See section 11.6 of the learning text (2nd edn)
Syllabus
5.7
Question 10
Answer
B
Feedback
The formula for contribution is sales value minus variable costs. The
variable costs that are provided are materials and labour, which total £7
million. To calculate the variable cost for each item, you divide this figure
by the number of shoes sold in the year, thus £7 million/100,000, which
works out as £70. Deducting this figure from the sales price will give you
the contribution: £120 minus £70 = £50.
See section 17.2 of the learning text
Syllabus
6.3 and 6.6
Question 11
Answer
C
Feedback
A cash budget illustrates the forecast position:
July
Aug
Sept
£
£
£
Inflows
90,000 90,000 90,000
Outflows
60,000 60,000 60,000
Building work
80,000 80,000
Net inflows/(outflows) 30,000 (50,000) (50,000)
Opening balance
70,000 100,000 50,000
Closing balance
100,000 50,000
NIL
Oct
£
90,000
60,000
80,000
(50,000)
NIL
(50,000)
The other months are incorrect for the following reasons:
A:
A considerable surplus is held by the company in August.
B:
The company is able to finance the building work from retained
cash.
D:
The company would have a significant overdraft by this time if it
had not borrowed in October.
See section 18.7 of the learning text (2nd edn)
Syllabus
6.10
Chartered Institute of Internal Auditors, March 2013
11/14
Question 12
Answer
C
Feedback
The median is the middle value of a set of numbers arranged in ascending
order. If there is an even number of values, as is the case in this question,
the median is the average value of the two middle numbers. The mode is
the most frequent value from a given set of numbers.
The values in ascending order are: 5, 5, 6, 6, 10, 12, 12, 12, 15 and 20.
Thus, the median can be calculated as (10+12)/2, which comes to 11.
And the value that occurs most frequently is 12. Thus, this is the mode.
See section 14.5.2 of the learning text
Syllabus
7.3
Question 13
Answer
D
Feedback
The Y1 sales figure can be calculated as £30,000/20%, which comes to
£150,000. Year 2 sales are £150,000 plus £30,000, which is £180,000.
See section 14.5.1 of the learning text (2nd edn)
Syllabus
7.3
Question 14
Answer
A
Feedback
The current ratio is current assets : current liabilities. The items that make
up current assets are inventory, trade receivables and cash; and the items
that make up current liabilities are trade payables, other payables and
taxation. Thus:
current assets:current liabilities is £6,000:£1,500, giving a ratio of 4:1.
The acid test ratio excludes inventory, and thus, the figures are
£3,000:£1,500 giving a ratio of 2:1.
The other options are wrong for the following reasons:
B: Current ratio and acid test ratio have been confused.
C: Share capital and premiums have been incorrectly classified as current
liabilities.
D: Share capital and premiums have been incorrectly classified as current
liabilities; and current ratio and acid test ratio have been confused.
See section 13.4.1 of the learning text (2nd edn)
Syllabus
7.5
Chartered Institute of Internal Auditors, March 2013
12/14
Question 15
Answer
C
Feedback
The formula for calculating the return on capital employed is:
(Profit before interest, tax and dividends)/(Equity and long-term loans etc) x
100.
Thus, the calculation is: 240,000/500,000 x 100, which equals 48%
The other options are wrong for the following reasons:
A: The figure is based on dividing revenue (rather than profit before interest
and tax) by equity and non-current liabilities.
B: The figure is based on dividing revenue by equity and total liabilities.
D: The figure is based on dividing profit before interest and tax by equity and
total liabilities.
See section 13.3.1 of the learning text (2nd edn)
Syllabus
7.5
Question 16
Answer
D
Feedback
The start up costs are considered as Year 0, with discount rate 1.0.
Year
Net income
Discount rate
Result
Year 0
(£500,000)
1.0
(£500,000)
The net income per annum is then calculated as the income per annum less
the running costs per annum. These income figures are then discounted at
each of Year 1, Year 2 and Year 3.
Year
Net income
Discount rate
Result
Year 1
£150,000
0.91
£136,500
Year 2
£150,000
0.83
£124,500
Year 3
£150,000
0.75
£112,500
Finally, the outcomes are summed.
Total
(£500,000)
£136,500
£124,500
£112,500
(£126,500)
The other options are wrong for the following reasons:
A: Start up costs incorrectly considered as £500,000 credit.
B: Is simply the Year 3 net value alone.
C: Is not closely related to the discount calculations.
See section 19.2 of the learning text (2nd edn)
Syllabus
7.9
Chartered Institute of Internal Auditors, March 2013
13/14
Question 17
Answer
C
Feedback
The total depreciation is the sum of each of the component’s depreciation
amounts.
The car depreciates through 20% straight line policy ie 20% of £10,000 each
year. So Year 2 depreciation for the car is £2,000.
The machinery depreciates through 10% reducing balance policy. So Year 1
reduced balance value from 10% depreciation is £25,000 – (£25,000 x
10%)=£22,500 and so Year 2 depreciation for the machinery is (£22,500 x
10%) = £2,250.
The land depreciates through 15% reducing balance policy. So Year 1
reduced balance value from 15% depreciation is £80,000 – (£80,000 x 15%)
= £68,000 and so Year 2 depreciation for the land is (£68,000 x 15%) =
£10,200.
Total depreciation is £2,000 + £2,250 + £10,200 = £14,450.
The other options are wrong for the following reasons:
A: Depreciation has been calculated on a straight line basis for all assets.
B: Machinery depreciation has been calculated on a straight line basis.
D: Depreciation has been calculated on a reducing balance basis for all
assets.
See section 11.5 of the learning text (2nd edn)
Syllabus
5.6
Question 18
Answer
D
Feedback
D is the correct sequence.
The other options are wrong for the following reasons:
A: 1 and 8 have been reversed.
B: 1, 5 and 8 have been transposed.
D: 7 is at the beginning rather than the end.
See section 9.3 of the learning text (2nd edn)
Syllabus
4.7
Chartered Institute of Internal Auditors, March 2013
14/14