Question
Santo Ltd CEO voluntarily returned more than Ksh 3 million in bonuses and stock awards after an regulator investigation found Santo Ltd had misstated earnings
Santo Ltd CEO voluntarily returned more than Ksh 3 million in bonuses and stock awards after an regulator investigation found Santo Ltd had misstated earnings from its key product. Former CFO also returned over KSh 0.7 million received during the years in which earnings were misrepresented. The regulator investigation didn't take issue with either CEO or CFO individually, or require them to return the money. But it did find that three accounting and sales executives were at fault, each of whom were forced to pay a penalties. Santo didn't admit any wrongdoing, but it has been ordered to pay an Ksh 80 million fine. The agency found that Santo failed to account for the operating costs of a rebate program that ran from 2016 to 2019. The program was intended to help boost sales that were being hurt by competition from cheaper, generic products. The program seemed to help sales get back on track, but that's because Santo wasn't taking into account how much the program cost. This type of conduct, which fails to recognize expenses associated with rebates for a flagship product in the period in which they occurred, is the latest page from a well-worn playbook of accounting misstatements. The company has also been ordered to hire a compliance consultant to ensure future financial reporting is accurate. Required a) Discuss the accounting principles that were violate in the accounting practices (6 marks) b) Outline the criteria that must be met before recognising revenue from sale of goods (5 marks) c) Explain the term materiality in the context of the above case clearly explaining the circumstances in which a small item (low value) can be termed to be material (5 marks) d) Briefly explain the agency theory and legitimacy theory using the above case (4 marks) QUESTION TWO Platz Ltd received a specialised industrial machine as a donation (free of charge) on 1 st March 2021. The machine will be used to produce intermediate product so as to enhance the quality of product for sale to external customers. Required a) Using the asset recognition criteria, explain whether or not the machine should be incorporate in the accounting records (6 marks) b) Discuss the basis of measurement that the management may consider (8 marks) c) Outline the factors that the management should consider in choice of accounting policy (4 marks) d) Using the above case explain the entity theory of accounting (2 marks) QUESTION THREE TLC limited operates a management bonus scheme based on company performance and market price of shares in the stock market. In the recent past the company have paid massive bonus raising alarm on the part of the various stakeholders. Required a) In the context of the above statement explain the following accounting theories i) Institutional accounting theory (2 marks) ii) Behavioural accounting theory (2 marks) iii) Ethical accounting theory (2 marks) b) Briefly explain the key principles of ethical behaviour that guide an accountant in the process of preparing financial statements (4 marks
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