Question Tag: Risk

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  • 10 Marks

AA – July 2023 – L2 – Q1b – Audit and Assurance Risk Environment, Audit and Assurance Evidence

Explanation of control weaknesses inherent in Non-Profit Organizations (NFPOs).

b) Understanding the client’s business environment is critical to understanding the client’s business. There is a need for this because the objectives of commercial organizations are different from that of not-for-profit organizations (NFPOs). The inherent control weaknesses for both forms of organizations may not be the same.

Required:
Explain FIVE (5) control weaknesses inherent in NFPOs. (10 marks)

b) Control weaknesses inherent in NFPOs include:

  • Segregation of duties (this may be difficult in a small NFPO with only a few employees).
  • Authorization of spending is often concentrated in one person or few people.
  • Controls over cash disbursement are sometimes absent.
  • Controls over income (donations, cash collections, membership fees, grants) are weak.
  • Use of funds may not always be directly related to the growth or operational purposes of the entity.
  • 15 Marks

AA – May 2018 – L2 – Q2b – Audit and Assurance Risk Environment

Identifies deficiencies in a company's wages system and provides recommendations to prevent misstatements in financial statements.

Third Floor Ltd is a construction company with many contracts being executed concurrently. A large number of workers are on various construction sites. Third Floor Ltd has an internal audit department, and the team is currently reviewing cash wages systems within the company.

The following information is available concerning the wages systems:

  • Workers on each site are controlled by a foreman. The foreman has a record of all employee numbers and can issue temporary numbers for new employees.
  • Any overtime is calculated by the computerised wages system and added to the standard pay.
  • The two staff in the wages department make amendments to the computerised wages system in respect of employee leave, illness, as well as setting up and maintaining all employee records.
  • The computerised wages system calculates deductions from gross pay, such as employee taxes (PAYE), and other statutory deductions.
  • Finally, a list of net cash payments for each employee is produced. Cash is delivered to the wages office by secure courier. The two staff place cash into wages envelopes for each employee along with a handwritten note of gross pay, deductions, and net pay. The envelopes are given to the foreman for distribution to the individual employees.

Required:
Identify and explain FIVE deficiencies in Third Floor Ltd’s system of internal control over the wages system that could lead to misstatements in the financial statements, and, for each deficiency, suggest an internal control to overcome that deficiency. (15 marks)

  1. Deficiency: The foreman has the authority to issue temporary employee numbers, which allows the possibility of creating fictitious employees and misappropriating wages.
    Recommendation: The issuance of new employee numbers should require authorization from a manager and must be supported by formal documentation, such as an employment contract.
  2. Deficiency: The two wages department staff are responsible for both setting up and maintaining employee records, including amendments for leave and illness. This creates the risk of collusion and unauthorized modifications.
    Recommendation: A segregation of duties should be implemented, where one person maintains employee records and another authorizes any amendments. All changes should be reviewed and authorized by a manager.
  3. Deficiency: Handwritten notes of gross pay, deductions, and net pay are included in wage envelopes, which increases the risk of errors in pay calculation and distribution.
    Recommendation: Computer-generated payslips should be produced and included in the wage envelopes to ensure accuracy and consistency between the calculated wages and the actual cash distributed.
  4. Deficiency: The foreman distributes the cash wages to employees, allowing for the possibility of wage misappropriation or failure to return unclaimed wages.
    Recommendation: Another manager should oversee the distribution of wages, and any unclaimed wages should be recorded and returned to the wages department for safekeeping.
  5. Deficiency: There is no check to verify the amount of cash delivered to the wages office by the secure courier, creating the risk of cash shortages.
    Recommendation: The cash delivered should be counted and verified in the presence of two staff members, and both should sign a receipt acknowledging the amount received from the courier.

(Total: 15 marks)

  • 11 Marks

AFM – May 2016 – L3 – Q2a – Discounted cash flow techniques, Valuation and use of free cash flows, Theories of capital structure

Compute NPV for two investment projects using WACC and CAPM, and provide recommendations based on risk analysis.

a) Joebel Limited is a diversified company operating in different industries on the African Continent. The shares of the company are widely traded on the stock exchange and currently have a market price of GH¢3.20 per share. The company’s dividend payment over the last five years is as follows:

Year Dividend Per Share (DPS) (GH¢)
2015 0.35
2014 0.32
2013 0.30
2012 0.29
2011 0.28

The Board of Directors of Joebel Limited is considering two main investment opportunities: one in the Oil and Gas sector and the other in the Hotel and Tourism sector. Both projects have short lives and their associated cash flows are as follows:

Year Oil & Gas (GH¢’000) Hotel & Tourism (GH¢’000)
1 85 180
2 175 195
3 160 150

The investment in Oil and Gas would cost GH¢400,000, while the investment in Hotel and Tourism would cost GH¢405,000. The Management of the Company has identified the industry beta for Oil and Gas as 1.2 and for Hotel and Tourism as 1.6. However, Joebel Limited’s company beta is 1.5. The average return on companies listed on the stock exchange is 25%, and the yield on Treasury bills is 20%.

Required:
i) Compute the Net Present Values (NPV) of both projects using the company’s weighted average cost of capital as the discount rate. (5 marks)
ii) Compute the NPV using a discount rate that takes into account the risk associated with the individual projects. (5 marks)
iii) Advise Management regarding the suitability and acceptability of the projects. (1 mark)

i) Computation of NPV for both projects Using WACC

Oil & Gas Project

Year Cashflow (GH¢’000) Discount Factor @ 17% Present Value (GH¢’000)
0 (400) 1.000 (400)
1 85 0.855 72.68
2 175 0.731 127.93
3 160 0.624 99.84
NPV (99.55)

Hotel & Tourism Project

Year Cashflow (GH¢’000) Discount Factor @ 17% Present Value (GH¢’000)
0 (405) 1.000 (405)
1 180 0.855 153.90
2 195 0.731 142.55
3 150 0.624 93.60
NPV (14.95)

ii) Projects NPV using CAPM

Oil & Gas Project

Year Cashflow (GH¢’000) Discount Factor @ 26% Present Value (GH¢’000)
0 (400) 1.000 (400)
1 85 0.794 67.49
2 175 0.630 110.25
3 160 0.499 79.84
NPV (142.42)

Hotel & Tourism Project

Year Cashflow (GH¢’000) Discount Factor @ 28% Present Value (GH¢’000)
0 (405) 1.000 (405)
1 180 0.781 140.58
2 195 0.610 118.95
3 150 0.477 71.55
NPV (73.92)

iii) Recommendation to Management
Given the high risk inherent in the Oil & Gas project, the Hotel and Tourism project should be selected, as it is more suitable for the company despite its lower NPV.

  • 3 Marks

AT – Nov 2017 – L3 – Q2b – Tax administration in Ghana

Identifying circumstances under which tax revenue is at risk.

Identify THREE circumstances under which tax revenue is said to be at risk. (3 marks)

The circumstances in which tax revenue is said to be at risk include:

  1. Bankruptcy, Winding-up, or Liquidation: When a person becomes bankrupt, is wound up, or goes into liquidation.
  2. Departure from Ghana: When the Commissioner-General believes on reasonable grounds that the person is about to leave Ghana indefinitely.
  3. Cessation of Activity: When the Commissioner-General believes on reasonable grounds that the person is about to cease activity in Ghana.
  4. Tax Law Offenses: When the Commissioner-General believes on reasonable grounds that the person has committed an offense under a tax law.
  5. Failure to Maintain Documentation: When the Commissioner-General considers it appropriate, including but not limited to cases where the person fails to maintain adequate documentation.

(Any 3 points for 3 marks)

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