Series: MAR 2024

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Has Case Study
  • 7 Marks

SCS – MAR 2024 – L3 – Q1b – Environment analysis

Describe and explain the four broad roles of NEDs identified in the Higgs Guidance (2003).

Prestige’s Board acknowledges that by adopting and implementing the highest standards of
corporate governance, this sets the standards and values for the entire Company. The
Company seeks to comply with best practice in all areas of corporate governance and
continues to review the Company’s procedures to maintain proper control and
accountability.
Required

There are nine members on Prestige’s Board of Directors. They include the Chairman, Chief Executive, three executive directors, and four non-executive directors (NEDs). Describe and explain four broad roles for NEDs identified in the document published in the UK in 2003, known as the Higgs Guidance.

  1. Strategy Role:
    • NEDs are responsible for contributing to the development of the company’s strategy. By providing an independent perspective, they help the board in shaping and reviewing the strategic direction and long-term plans of the company. NEDs must ensure that strategic decisions are in the best interest of the shareholders and other stakeholders.
  2. Monitoring and Control Role:
    • NEDs are tasked with monitoring the performance of the executive management and ensuring that the company is being run efficiently and in accordance with approved policies and standards. This includes overseeing financial performance, internal controls, and risk management procedures. NEDs play a critical role in holding executive directors accountable for their decisions and actions.
  3. Risk Management Role:
    • NEDs help to identify key risks facing the business and ensure that appropriate measures are in place to manage those risks. Their independent status allows them to challenge executive decisions and ensure that all significant risks are addressed before the board makes any major decisions.
  4. Corporate Governance Role:
    • NEDs ensure that the company adheres to high standards of corporate governance, including compliance with legal and regulatory requirements. They are responsible for ensuring that the board operates transparently and that the interests of minority shareholders and other stakeholders are protected. This role also includes ensuring that the company follows ethical practices and maintains a strong corporate culture.

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  • 7 Marks

SCS – MAR 2024 – L3 – Q1b – Environment analysis

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Describe and explain the four broad roles of NEDs identified in the Higgs Guidance (2003).

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

Prestige’s Board acknowledges that by adopting and implementing the highest standards of
corporate governance, this sets the standards and values for the entire Company. The
Company seeks to comply with best practice in all areas of corporate governance and
continues to review the Company’s procedures to maintain proper control and
accountability.
Required

There are nine members on Prestige’s Board of Directors. They include the Chairman, Chief Executive, three executive directors, and four non-executive directors (NEDs). Describe and explain four broad roles for NEDs identified in the document published in the UK in 2003, known as the Higgs Guidance.

  1. Strategy Role:
    • NEDs are responsible for contributing to the development of the company’s strategy. By providing an independent perspective, they help the board in shaping and reviewing the strategic direction and long-term plans of the company. NEDs must ensure that strategic decisions are in the best interest of the shareholders and other stakeholders.
  2. Monitoring and Control Role:
    • NEDs are tasked with monitoring the performance of the executive management and ensuring that the company is being run efficiently and in accordance with approved policies and standards. This includes overseeing financial performance, internal controls, and risk management procedures. NEDs play a critical role in holding executive directors accountable for their decisions and actions.
  3. Risk Management Role:
    • NEDs help to identify key risks facing the business and ensure that appropriate measures are in place to manage those risks. Their independent status allows them to challenge executive decisions and ensure that all significant risks are addressed before the board makes any major decisions.
  4. Corporate Governance Role:
    • NEDs ensure that the company adheres to high standards of corporate governance, including compliance with legal and regulatory requirements. They are responsible for ensuring that the board operates transparently and that the interests of minority shareholders and other stakeholders are protected. This role also includes ensuring that the company follows ethical practices and maintains a strong corporate culture.

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  • 5 Marks

SCS – MAR 2024 – L3 – Q6b – Strategy, stakeholders, and mission

Explain how Principles V and VI of the OECD Principles of Corporate Governance could be applied at Prestige.

Prestige’s Board acknowledges that by adopting and implementing the highest standards of
corporate governance, this sets the standards and values for the entire Company. The
Company seeks to comply with best practice in all areas of corporate governance and
continues to review the Company’s procedures to maintain proper control and
accountability.
Required

Describe and explain how Principles V and VI of the OECD Principles of Corporate Governance – 2015 Edition, could be applied at Prestige to ensure good corporate governance practices.

  1. Principle V – Disclosure and Transparency:
    • This principle emphasizes the importance of full and accurate disclosure of all material matters related to the company, including financial statements, ownership, and governance structures. At Prestige, applying this principle would involve ensuring that financial reports are transparent, timely, and comply with relevant regulations. Prestige would need to disclose key information such as conflicts of interest, related-party transactions, and executive compensation. Proper application of this principle would build trust among stakeholders and provide them with the information necessary to assess the company’s performance and governance.
  2. Principle VI – Responsibilities of the Board:
    • Principle VI highlights the need for the board to be accountable to the company and its shareholders and to act in the best interests of the company. At Prestige, this would involve the board taking responsibility for overseeing the company’s strategic direction, risk management, and overall governance framework. The board must act with due diligence, ensuring that it has appropriate internal controls and that all directors, both executive and non-executive, are held accountable for their actions. The board should also foster an ethical corporate culture and ensure that the company complies with both local and international legal and regulatory requirements.

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  • 5 Marks

SCS – MAR 2024 – L3 – Q6b – Strategy, stakeholders, and mission

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Explain how Principles V and VI of the OECD Principles of Corporate Governance could be applied at Prestige.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

Prestige’s Board acknowledges that by adopting and implementing the highest standards of
corporate governance, this sets the standards and values for the entire Company. The
Company seeks to comply with best practice in all areas of corporate governance and
continues to review the Company’s procedures to maintain proper control and
accountability.
Required

Describe and explain how Principles V and VI of the OECD Principles of Corporate Governance – 2015 Edition, could be applied at Prestige to ensure good corporate governance practices.

  1. Principle V – Disclosure and Transparency:
    • This principle emphasizes the importance of full and accurate disclosure of all material matters related to the company, including financial statements, ownership, and governance structures. At Prestige, applying this principle would involve ensuring that financial reports are transparent, timely, and comply with relevant regulations. Prestige would need to disclose key information such as conflicts of interest, related-party transactions, and executive compensation. Proper application of this principle would build trust among stakeholders and provide them with the information necessary to assess the company’s performance and governance.
  2. Principle VI – Responsibilities of the Board:
    • Principle VI highlights the need for the board to be accountable to the company and its shareholders and to act in the best interests of the company. At Prestige, this would involve the board taking responsibility for overseeing the company’s strategic direction, risk management, and overall governance framework. The board must act with due diligence, ensuring that it has appropriate internal controls and that all directors, both executive and non-executive, are held accountable for their actions. The board should also foster an ethical corporate culture and ensure that the company complies with both local and international legal and regulatory requirements.

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  • 8 Marks

SCS – MAR 2024 – L3 – Q6a – Strategy, stakeholders, and mission

Describe and explain 5 key issues in corporate governance for Prestige.

Prestige’s Board acknowledges that by adopting and implementing the highest standards of corporate governance, this sets the standards and values for the entire Company. The Company seeks to comply with best practices in all areas of corporate governance and continues to review its procedures to maintain proper control and accountability.

Required:
Describe and explain five key issues in corporate governance that would establish how well or badly Prestige is governed.

  1. Board Structure and Independence:
    • A key issue is the composition of the board, ensuring that there is an appropriate mix of executive and non-executive directors (NEDs). The presence of independent NEDs is crucial in providing an objective perspective and balancing the power of the executive directors. At Prestige, the board’s structure, including the number of independent NEDs, will determine the board’s effectiveness.
  2. Accountability and Transparency:
    • Good corporate governance requires transparent decision-making and accountability to shareholders and stakeholders. Prestige must ensure that financial reports, internal controls, and risk management procedures are robust and disclosed accurately. The transparency of the board’s actions and its decisions, especially in areas like remuneration and major investments, will be a measure of good governance.
  3. Risk Management:
    • Effective corporate governance includes identifying, assessing, and mitigating risks. Prestige must have strong systems in place to manage operational, financial, and reputational risks. Failure to do so can harm the company’s performance and stakeholder confidence.
  4. Ethical Leadership and Corporate Social Responsibility (CSR):
    • The board should lead by example in promoting an ethical culture throughout the company. Prestige’s commitment to CSR, environmental sustainability, and ethical decision-making will influence how it is perceived by stakeholders. Poor ethical standards or failure to meet CSR obligations can damage the company’s reputation.
  5. Compliance with Regulations and Laws:
    • Ensuring compliance with local and international regulations is essential for good corporate governance. Prestige must ensure that it adheres to corporate governance codes, listing rules, and legal obligations. Failure to comply with relevant laws could result in legal penalties and damage to the company’s reputation.

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  • 8 Marks

SCS – MAR 2024 – L3 – Q6a – Strategy, stakeholders, and mission

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Describe and explain 5 key issues in corporate governance for Prestige.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

Prestige’s Board acknowledges that by adopting and implementing the highest standards of corporate governance, this sets the standards and values for the entire Company. The Company seeks to comply with best practices in all areas of corporate governance and continues to review its procedures to maintain proper control and accountability.

Required:
Describe and explain five key issues in corporate governance that would establish how well or badly Prestige is governed.

  1. Board Structure and Independence:
    • A key issue is the composition of the board, ensuring that there is an appropriate mix of executive and non-executive directors (NEDs). The presence of independent NEDs is crucial in providing an objective perspective and balancing the power of the executive directors. At Prestige, the board’s structure, including the number of independent NEDs, will determine the board’s effectiveness.
  2. Accountability and Transparency:
    • Good corporate governance requires transparent decision-making and accountability to shareholders and stakeholders. Prestige must ensure that financial reports, internal controls, and risk management procedures are robust and disclosed accurately. The transparency of the board’s actions and its decisions, especially in areas like remuneration and major investments, will be a measure of good governance.
  3. Risk Management:
    • Effective corporate governance includes identifying, assessing, and mitigating risks. Prestige must have strong systems in place to manage operational, financial, and reputational risks. Failure to do so can harm the company’s performance and stakeholder confidence.
  4. Ethical Leadership and Corporate Social Responsibility (CSR):
    • The board should lead by example in promoting an ethical culture throughout the company. Prestige’s commitment to CSR, environmental sustainability, and ethical decision-making will influence how it is perceived by stakeholders. Poor ethical standards or failure to meet CSR obligations can damage the company’s reputation.
  5. Compliance with Regulations and Laws:
    • Ensuring compliance with local and international regulations is essential for good corporate governance. Prestige must ensure that it adheres to corporate governance codes, listing rules, and legal obligations. Failure to comply with relevant laws could result in legal penalties and damage to the company’s reputation.

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  • 5 Marks

SCS – MAR 2024 – L3 – Q5c – International financial management

Evaluate the factors restricting foreign investment despite potential good returns.

With reference to Option Three, evaluate the factors that restrict foreign investment despite the perceived potential for good returns. 

  1. Political Instability:
    • Countries with a history of political instability or where there is a risk of sudden government changes or social unrest can deter foreign investors, even if potential returns are high. The risk of expropriation or policy shifts is a significant concern.
  2. Weak Rule of Law:
    • In some regions, the enforcement of legal contracts and property rights can be weak or inconsistent. This makes it difficult for foreign investors to have confidence that their investments will be protected, thus limiting their willingness to enter the market.
  3. Regulatory Barriers:
    • Excessive regulation, complex bureaucratic processes, or restrictions on foreign ownership can act as a deterrent to investment. Some countries impose barriers such as high tariffs, restrictive labor laws, or industry-specific regulations that make it difficult for foreign companies to operate profitably.
  4. Currency and Exchange Rate Risk:
    • Volatile exchange rates can lead to unpredictable returns for foreign investors. If a country’s currency depreciates significantly, it could erode the value of profits made in that country when converted back to the investor’s home currency.
  5. Competition from Local and Other Foreign Firms:
    • Intense competition from local companies or other foreign investors, particularly those from emerging economies like China and India, can reduce the attractiveness of foreign direct investment. These competitors may have better local knowledge, lower cost structures, or favorable relationships with government officials, making it hard for new entrants to compete.

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  • 5 Marks

SCS – MAR 2024 – L3 – Q5c – International financial management

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Evaluate the factors restricting foreign investment despite potential good returns.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

With reference to Option Three, evaluate the factors that restrict foreign investment despite the perceived potential for good returns. 

  1. Political Instability:
    • Countries with a history of political instability or where there is a risk of sudden government changes or social unrest can deter foreign investors, even if potential returns are high. The risk of expropriation or policy shifts is a significant concern.
  2. Weak Rule of Law:
    • In some regions, the enforcement of legal contracts and property rights can be weak or inconsistent. This makes it difficult for foreign investors to have confidence that their investments will be protected, thus limiting their willingness to enter the market.
  3. Regulatory Barriers:
    • Excessive regulation, complex bureaucratic processes, or restrictions on foreign ownership can act as a deterrent to investment. Some countries impose barriers such as high tariffs, restrictive labor laws, or industry-specific regulations that make it difficult for foreign companies to operate profitably.
  4. Currency and Exchange Rate Risk:
    • Volatile exchange rates can lead to unpredictable returns for foreign investors. If a country’s currency depreciates significantly, it could erode the value of profits made in that country when converted back to the investor’s home currency.
  5. Competition from Local and Other Foreign Firms:
    • Intense competition from local companies or other foreign investors, particularly those from emerging economies like China and India, can reduce the attractiveness of foreign direct investment. These competitors may have better local knowledge, lower cost structures, or favorable relationships with government officials, making it hard for new entrants to compete.

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  • 5 Marks

SCS – MAR 2024 – L3 – Q5b – Financial management

Calculate the effective rate of borrowing for three months and explain the advantages of convertible bonds.

With reference to Option Two:

i) What would be its effective rate of borrowing for the three months if US dollar LIBOR is 4.50% at the start of the notional interest period for the FRA? (2 marks)
ii) What are the advantages of Convertible Bonds? (3 marks)

ii) Advantages of Convertible Bonds:

  1. Lower Interest Rates: Convertible bonds typically offer lower interest rates than traditional bonds because investors are compensated by the option to convert the bonds into shares if the company’s stock performs well.
  2. Deferred Dilution: While convertible bonds offer the potential for equity conversion, dilution of ownership only occurs when the bonds are converted, allowing the company to defer issuing more shares and the impact on earnings per share.
  3. Attractive to Investors: Investors find convertible bonds appealing because they offer the stability of bond payments with the potential upside of converting into equity if the company’s stock price rises.
  4. Access to Capital: For companies like Prestige, convertible bonds can provide access to capital without immediately diluting shareholder equity and may be a more cost-effective option than issuing straight equity.

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  • 5 Marks

SCS – MAR 2024 – L3 – Q5b – Financial management

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Calculate the effective rate of borrowing for three months and explain the advantages of convertible bonds.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

With reference to Option Two:

i) What would be its effective rate of borrowing for the three months if US dollar LIBOR is 4.50% at the start of the notional interest period for the FRA? (2 marks)
ii) What are the advantages of Convertible Bonds? (3 marks)

ii) Advantages of Convertible Bonds:

  1. Lower Interest Rates: Convertible bonds typically offer lower interest rates than traditional bonds because investors are compensated by the option to convert the bonds into shares if the company’s stock performs well.
  2. Deferred Dilution: While convertible bonds offer the potential for equity conversion, dilution of ownership only occurs when the bonds are converted, allowing the company to defer issuing more shares and the impact on earnings per share.
  3. Attractive to Investors: Investors find convertible bonds appealing because they offer the stability of bond payments with the potential upside of converting into equity if the company’s stock price rises.
  4. Access to Capital: For companies like Prestige, convertible bonds can provide access to capital without immediately diluting shareholder equity and may be a more cost-effective option than issuing straight equity.

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  • 10 Marks

SCS – MAR 2024 – L3 – Q5a – Financial management

Calculate various financial ratios including ROCE, EPS, DPS, and TSR based on given financial data.

With reference to the information in Option One available to Prestige as presented by Professor Joseph Laing, a business consultant, calculate the following:

i) Return on Capital Employed (ROCE) (1 mark)
ii) Earnings Per Share (EPS) (1 mark)
iii) Dividend Per Share (DPS) (2 marks)
iv) Total Shareholders Return (TSR) (2 marks)
v) Explain the difference between ROCE and Accounting Rate of Return, their essential features, and relationship (4 marks)

v) Difference between ROCE and Accounting Rate of Return (ARR):

  • ROCE is a measure of the return on capital employed in the business, calculated by dividing the profit before interest and tax (PBIT) by the average capital employed. It reflects the overall efficiency of the company in generating profits from its available capital.
  • ARR, on the other hand, measures the accounting profit from a specific capital project, usually before interest and tax, as a percentage of the capital invested in that project.
  • The key difference lies in their scope: while ROCE assesses the return from the entire business or company, ARR focuses on specific capital projects. Both are used to evaluate the efficiency of capital usage, but ARR is project-specific, whereas ROCE is company-wide.

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  • 10 Marks

SCS – MAR 2024 – L3 – Q5a – Financial management

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Calculate various financial ratios including ROCE, EPS, DPS, and TSR based on given financial data.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

With reference to the information in Option One available to Prestige as presented by Professor Joseph Laing, a business consultant, calculate the following:

i) Return on Capital Employed (ROCE) (1 mark)
ii) Earnings Per Share (EPS) (1 mark)
iii) Dividend Per Share (DPS) (2 marks)
iv) Total Shareholders Return (TSR) (2 marks)
v) Explain the difference between ROCE and Accounting Rate of Return, their essential features, and relationship (4 marks)

v) Difference between ROCE and Accounting Rate of Return (ARR):

  • ROCE is a measure of the return on capital employed in the business, calculated by dividing the profit before interest and tax (PBIT) by the average capital employed. It reflects the overall efficiency of the company in generating profits from its available capital.
  • ARR, on the other hand, measures the accounting profit from a specific capital project, usually before interest and tax, as a percentage of the capital invested in that project.
  • The key difference lies in their scope: while ROCE assesses the return from the entire business or company, ARR focuses on specific capital projects. Both are used to evaluate the efficiency of capital usage, but ARR is project-specific, whereas ROCE is company-wide.

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  • 12 Marks

SCS – MAR 2024 – L3 – Q4b – Strategy implementation

Advise on an appropriate HR strategy to harmonize the organizational structure for effective delivery at Prestige.

Each company acquired or merged by Prestige was allowed to maintain its human resource structure.

Required:
Analyze and advise on an appropriate HR strategy Prestige should adopt to harmonize the organizational structure for effective delivery of the company’s objectives.

  1. Strategic Workforce Planning:
    • Prestige should develop a workforce plan to address the complexities introduced by mergers and acquisitions. This plan should estimate the required number of employees, their skills, and potential future needs based on the company’s objectives, particularly in innovation and technology adoption.
  2. HR Consistency with Corporate Strategy:
    • The HR strategy should align with both the corporate and divisional strategies to ensure that the required number and type of employees are available at the right time to support business operations across regions.
  3. Assessment of Current Workforce:
    • Prestige should conduct an audit of its current workforce, assessing skills, experience, and attrition rates. This would help in identifying gaps and surpluses that need to be addressed through recruitment, training, or redundancy.
  4. Recruitment and Training:
    • The strategy should focus on recruiting the necessary talent to fill gaps, while also implementing training and development programs to upskill existing employees. This will help align employee capabilities with the company’s strategic needs, especially in areas such as IT, finance, and project management.
  5. Performance Management:
    • Implementing a robust performance appraisal system would enable Prestige to monitor the development of employees’ skills and performance, ensuring that key objectives are met. This would also identify areas where employees may require additional training or support.
  6. Promotion and Career Development:
    • Providing clear promotion paths and career development opportunities would encourage employee retention and foster motivation within the workforce, helping Prestige maintain a skilled and experienced team.
  7. Handling Redundancies:
    • Where there are surplus employees due to structural changes, Prestige should have a clear policy for managing redundancies in a way that minimizes disruption while ensuring fairness and compliance with labor laws.
  8. Labor Relations and Employee Welfare:
    • Ensuring good labor relations through clear communication and employee engagement initiatives will help reduce resistance to change. Compensation, health and safety, and employee well-being should be central to the HR strategy to foster a positive workplace environment.
  9. Technological Impact on HR:
    • Prestige should anticipate and manage the impact of technological changes on its workforce, particularly in relation to automation, digital skills, and remote working capabilities.

Factors to Consider:

  • Population trends and labor market conditions.
  • Changes in government policies affecting employment.
  • The availability of specific skills within the workforce.
  • Competition for talent from other businesses.
  • Trends in outsourcing and subcontracting.

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  • 12 Marks

SCS – MAR 2024 – L3 – Q4b – Strategy implementation

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Advise on an appropriate HR strategy to harmonize the organizational structure for effective delivery at Prestige.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

Each company acquired or merged by Prestige was allowed to maintain its human resource structure.

Required:
Analyze and advise on an appropriate HR strategy Prestige should adopt to harmonize the organizational structure for effective delivery of the company’s objectives.

  1. Strategic Workforce Planning:
    • Prestige should develop a workforce plan to address the complexities introduced by mergers and acquisitions. This plan should estimate the required number of employees, their skills, and potential future needs based on the company’s objectives, particularly in innovation and technology adoption.
  2. HR Consistency with Corporate Strategy:
    • The HR strategy should align with both the corporate and divisional strategies to ensure that the required number and type of employees are available at the right time to support business operations across regions.
  3. Assessment of Current Workforce:
    • Prestige should conduct an audit of its current workforce, assessing skills, experience, and attrition rates. This would help in identifying gaps and surpluses that need to be addressed through recruitment, training, or redundancy.
  4. Recruitment and Training:
    • The strategy should focus on recruiting the necessary talent to fill gaps, while also implementing training and development programs to upskill existing employees. This will help align employee capabilities with the company’s strategic needs, especially in areas such as IT, finance, and project management.
  5. Performance Management:
    • Implementing a robust performance appraisal system would enable Prestige to monitor the development of employees’ skills and performance, ensuring that key objectives are met. This would also identify areas where employees may require additional training or support.
  6. Promotion and Career Development:
    • Providing clear promotion paths and career development opportunities would encourage employee retention and foster motivation within the workforce, helping Prestige maintain a skilled and experienced team.
  7. Handling Redundancies:
    • Where there are surplus employees due to structural changes, Prestige should have a clear policy for managing redundancies in a way that minimizes disruption while ensuring fairness and compliance with labor laws.
  8. Labor Relations and Employee Welfare:
    • Ensuring good labor relations through clear communication and employee engagement initiatives will help reduce resistance to change. Compensation, health and safety, and employee well-being should be central to the HR strategy to foster a positive workplace environment.
  9. Technological Impact on HR:
    • Prestige should anticipate and manage the impact of technological changes on its workforce, particularly in relation to automation, digital skills, and remote working capabilities.

Factors to Consider:

  • Population trends and labor market conditions.
  • Changes in government policies affecting employment.
  • The availability of specific skills within the workforce.
  • Competition for talent from other businesses.
  • Trends in outsourcing and subcontracting.

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  • 8 Marks

SCS – MAR 2024 – L3 – Q4a – Strategy implementation

Explain how Prestige could leverage ICT using the four broad stages of e-business development to compete.

Prestige’s Board has shifted from their long-standing reluctance to venture into foreign markets to seriously consider the possibility of expansion overseas. An important implication of this decision is that as the size of the market increases, competition becomes international. The main rivals are no longer local suppliers to a domestic market.

Required:
Using the four broad stages of development to a full e-business model, explain how Prestige could leverage ICT to compete.

  1. Web Presence:
    • Prestige could set up a website to display its property listings and services. The website can serve as a platform to provide detailed information about the houses for sale, available property types, and contact details. This would enhance visibility and reach beyond local markets.
  2. E-Commerce:
    • Prestige can integrate e-commerce capabilities on its website, allowing potential buyers to make inquiries, schedule viewings, or even complete purchases online. They can also use e-commerce platforms to manage orders and payments from suppliers and partners.
  3. Integrated E-Commerce:
    • Prestige could utilize ICT to gather and analyze customer data to understand their preferences and buying behavior. By establishing two-way communication channels, the company could use customer feedback to improve its product offerings and tailor marketing strategies, boosting customer satisfaction.
  4. E-Business:
    • ICT can drive Prestige’s business strategy by making e-business a fundamental part of its operations. E-business can enhance efficiency in sales, marketing, procurement, and customer service, aligning business operations with digital transformation to gain a competitive edge in the global market.

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  • 8 Marks

SCS – MAR 2024 – L3 – Q4a – Strategy implementation

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Explain how Prestige could leverage ICT using the four broad stages of e-business development to compete.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

Prestige’s Board has shifted from their long-standing reluctance to venture into foreign markets to seriously consider the possibility of expansion overseas. An important implication of this decision is that as the size of the market increases, competition becomes international. The main rivals are no longer local suppliers to a domestic market.

Required:
Using the four broad stages of development to a full e-business model, explain how Prestige could leverage ICT to compete.

  1. Web Presence:
    • Prestige could set up a website to display its property listings and services. The website can serve as a platform to provide detailed information about the houses for sale, available property types, and contact details. This would enhance visibility and reach beyond local markets.
  2. E-Commerce:
    • Prestige can integrate e-commerce capabilities on its website, allowing potential buyers to make inquiries, schedule viewings, or even complete purchases online. They can also use e-commerce platforms to manage orders and payments from suppliers and partners.
  3. Integrated E-Commerce:
    • Prestige could utilize ICT to gather and analyze customer data to understand their preferences and buying behavior. By establishing two-way communication channels, the company could use customer feedback to improve its product offerings and tailor marketing strategies, boosting customer satisfaction.
  4. E-Business:
    • ICT can drive Prestige’s business strategy by making e-business a fundamental part of its operations. E-business can enhance efficiency in sales, marketing, procurement, and customer service, aligning business operations with digital transformation to gain a competitive edge in the global market.

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SCS – MAR 2024 – L3 – Q3 – Functional strategies

Explain the potential benefits of resource sharing through common IT systems at Prestige.

When five years ago the present regional divisional structure of Greater Accra, Ashanti, and Eastern was formalized, an attempt was made to ensure that common systems and ways of working were adopted across each of the three regions. However, due to the pressures on the Company, this was never fully implemented.

Required:
Explain the potential benefits of resource sharing (configuring an organization’s computing system in such a way that the information and resources within it can be accessed, and remotely accessed, across multiple administrative domains) to Prestige if they adopt common IT systems.

  1. Ease of Access: A common IT system allows staff to access systems, software, and files from any location with an internet connection. This supports collaborative working across regions.
  2. Accuracy: Having a single source of data ensures accuracy by eliminating multiple similar versions scattered across the organization. This provides reliable information to all divisions.
  3. Cost Savings: Resource sharing avoids duplication of work across divisions. Generating similar data for similar purposes can be costly, so producing data once and sharing it reduces inefficiencies and costs for Prestige.
  4. Facilitates Remote Working: IT resource sharing enables remote working, increasing flexibility. Employees can work from any location, enhancing motivation and potentially creating cost savings by allowing work from home.
  5. Transparency: Resource sharing promotes transparency across the organization by making information easily accessible to all relevant parties. This can improve decision-making and operational efficiency.

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  • 10 Marks

SCS – MAR 2024 – L3 – Q3 – Functional strategies

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Explain the potential benefits of resource sharing through common IT systems at Prestige.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

When five years ago the present regional divisional structure of Greater Accra, Ashanti, and Eastern was formalized, an attempt was made to ensure that common systems and ways of working were adopted across each of the three regions. However, due to the pressures on the Company, this was never fully implemented.

Required:
Explain the potential benefits of resource sharing (configuring an organization’s computing system in such a way that the information and resources within it can be accessed, and remotely accessed, across multiple administrative domains) to Prestige if they adopt common IT systems.

  1. Ease of Access: A common IT system allows staff to access systems, software, and files from any location with an internet connection. This supports collaborative working across regions.
  2. Accuracy: Having a single source of data ensures accuracy by eliminating multiple similar versions scattered across the organization. This provides reliable information to all divisions.
  3. Cost Savings: Resource sharing avoids duplication of work across divisions. Generating similar data for similar purposes can be costly, so producing data once and sharing it reduces inefficiencies and costs for Prestige.
  4. Facilitates Remote Working: IT resource sharing enables remote working, increasing flexibility. Employees can work from any location, enhancing motivation and potentially creating cost savings by allowing work from home.
  5. Transparency: Resource sharing promotes transparency across the organization by making information easily accessible to all relevant parties. This can improve decision-making and operational efficiency.

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  • 10 Marks

SCS – MAR 2024 – L3 – Q2 – Competitive advantage

Apply and appraise Porter’s three strategies for sustaining competitive advantage for Prestige Designers Ltd.

A strategic clock can be used to consider different business strategies for gaining competitive advantage, based on providing a combination of price and perceived benefits. Porter has suggested three strategies for sustaining competitive advantage over rival firms and their products or services. They are a cost leadership strategy, a differentiation strategy, and a focus strategy.

Required:
Apply and appraise how effective the suggested three strategies for sustaining competitive advantage over rival firms would be useful to Prestige. (10 marks)

  1. Cost Leadership Strategy:
    • Prestige must compete effectively on price by offering its housing stock at a lower price than rivals.
    • The company should have excellent cost control systems and continually plan for further reductions in costs to remain the cost leader in the market.
    • Prestige, being a large company, can benefit from economies of scale compared to smaller competitors.
    • To achieve reasonable profit margins, Prestige must sell large volumes of homes at a lower profit margin per unit.
  2. Differentiation Strategy:
    • Prestige’s products must be distinct from those of its competitors in a way that customers can recognize, potentially leveraging the “Vintage” brand which focuses on low-cost housing for young buyers.
    • The company could innovate and incorporate modern methods of construction (MMC) and sustainability-related methods to differentiate its products.
    • Customers might be willing to pay more for homes with unique features and higher perceived value.
    • Prestige should invest in delivering superior value to customers, even if that means higher upfront costs.
  3. Focus Strategy:
    • Prestige could focus on segmented consumer markets by selecting specific segments, such as the middle-class or younger first-time home buyers, as the primary market for their products.
    • The company could concentrate on serving a particular type of customer or region, allowing it to tailor its offerings to the unique demands of that segment.

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  • 10 Marks

SCS – MAR 2024 – L3 – Q2 – Competitive advantage

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Apply and appraise Porter’s three strategies for sustaining competitive advantage for Prestige Designers Ltd.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

A strategic clock can be used to consider different business strategies for gaining competitive advantage, based on providing a combination of price and perceived benefits. Porter has suggested three strategies for sustaining competitive advantage over rival firms and their products or services. They are a cost leadership strategy, a differentiation strategy, and a focus strategy.

Required:
Apply and appraise how effective the suggested three strategies for sustaining competitive advantage over rival firms would be useful to Prestige. (10 marks)

  1. Cost Leadership Strategy:
    • Prestige must compete effectively on price by offering its housing stock at a lower price than rivals.
    • The company should have excellent cost control systems and continually plan for further reductions in costs to remain the cost leader in the market.
    • Prestige, being a large company, can benefit from economies of scale compared to smaller competitors.
    • To achieve reasonable profit margins, Prestige must sell large volumes of homes at a lower profit margin per unit.
  2. Differentiation Strategy:
    • Prestige’s products must be distinct from those of its competitors in a way that customers can recognize, potentially leveraging the “Vintage” brand which focuses on low-cost housing for young buyers.
    • The company could innovate and incorporate modern methods of construction (MMC) and sustainability-related methods to differentiate its products.
    • Customers might be willing to pay more for homes with unique features and higher perceived value.
    • Prestige should invest in delivering superior value to customers, even if that means higher upfront costs.
  3. Focus Strategy:
    • Prestige could focus on segmented consumer markets by selecting specific segments, such as the middle-class or younger first-time home buyers, as the primary market for their products.
    • The company could concentrate on serving a particular type of customer or region, allowing it to tailor its offerings to the unique demands of that segment.

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SCS – MAR 2024 – L3 – Q1b – Environment analysis

Identify key issues facing the Building and Construction industry in Ghana and West Africa using PESTLE.

Prestige Designers Ltd, like other house builders, is facing difficult times. There has been a sharp decline in the number of homes over the past 6-8 years, and independent reports suggest that the numbers will fall even further in 2023.

Required: Using the PESTLE analysis, identify the key issues facing the Building and Construction industry in Ghana as well as that of the West African country. (10 marks)

PEST Analysis of the Building and Construction Industry in Ghana:

  • Political: Urbanization restructuring; sustainable development agenda.
  • Economic: Low economic growth, constrained investment and mortgage finance, depressed housing market, high unemployment, rising energy prices, weak global economy.
  • Social: Falling living standards, hard-pressed younger generation, strong demand for homeownership, environmental concerns.
  • Technological: Developments in modern methods of construction (MMC), prototype sustainable homes.
  • Legal & Environmental: Environmental laws, activities of environmentalists.

PEST Analysis of the Building and Construction Industry in the West African Country:

  • Political: Stable democracy, reformation of corporate governance, anti-corruption policies.
  • Economic: High economic growth, stable exchange rate, buoyant housing market.
  • Social: Growing middle class, urban migration, Western influence on housing design.
  • Technological: Well-developed internet, mobile, radio, TV, improvement in building materials.
  • Legal: Weak rule of law, possible corruption.

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  • 10 Marks

SCS – MAR 2024 – L3 – Q1b – Environment analysis

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Identify key issues facing the Building and Construction industry in Ghana and West Africa using PESTLE.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

Prestige Designers Ltd, like other house builders, is facing difficult times. There has been a sharp decline in the number of homes over the past 6-8 years, and independent reports suggest that the numbers will fall even further in 2023.

Required: Using the PESTLE analysis, identify the key issues facing the Building and Construction industry in Ghana as well as that of the West African country. (10 marks)

PEST Analysis of the Building and Construction Industry in Ghana:

  • Political: Urbanization restructuring; sustainable development agenda.
  • Economic: Low economic growth, constrained investment and mortgage finance, depressed housing market, high unemployment, rising energy prices, weak global economy.
  • Social: Falling living standards, hard-pressed younger generation, strong demand for homeownership, environmental concerns.
  • Technological: Developments in modern methods of construction (MMC), prototype sustainable homes.
  • Legal & Environmental: Environmental laws, activities of environmentalists.

PEST Analysis of the Building and Construction Industry in the West African Country:

  • Political: Stable democracy, reformation of corporate governance, anti-corruption policies.
  • Economic: High economic growth, stable exchange rate, buoyant housing market.
  • Social: Growing middle class, urban migration, Western influence on housing design.
  • Technological: Well-developed internet, mobile, radio, TV, improvement in building materials.
  • Legal: Weak rule of law, possible corruption.

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SCS – MAR 2024 – L3 – Q1a – Strategy, stakeholders, and mission

Analyze the three levels of strategy being pursued by Prestige Designers Ltd.

Johnson, Scholes, and Whittington identified three levels of strategy, namely corporate strategy, business strategy, and functional strategy. These strategies should be consistent with each other.

Required: In the light of the statements above, analyze the three levels of strategy being pursued by Prestige Designers Ltd. (10 marks)

Corporate Strategy:

  1. House-building operation is the core business of the Group.
  2. Builds houses using traditional designs comparable with its major competitors in almost all aspects of quality and service.
  3. Build on existing skills and competences, while maintaining firm cost control and continuing to produce quality homes that customers want to buy.

Business Strategy/Competitive Strategy:

  1. Prestige’s primary objective is to remain one of the leading real estate house builders, building homes ranging from low-cost starter homes to large premium family homes.
  2. The adoption of MMC has put Prestige’s business in danger.
  3. The current and likely future economic situation and other problems associated with real estate in the country are making the decision not to move to neighboring countries unwise.
  4. Building sustainable homes.
  5. Urbanization redevelopment.

Functional Strategy:

  1. The organizational structure of Prestige grew through a series of acquisitions and mergers.
  2. This would have implications for Prestige if the structure were to be rationalized.
  3. Centralizing the functions and updating the IT systems could lead to potential staff redundancy and displacement costs, which will cost GH¢75 million and take two years to be fully effective.

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  • 10 Marks

SCS – MAR 2024 – L3 – Q1a – Strategy, stakeholders, and mission

This Question Has a Case Study: 
SCS – Mar 2024 – L3 – “REAL ESTATE”

Analyze the three levels of strategy being pursued by Prestige Designers Ltd.

  • SCS – Mar 2024 – L3 – “REAL ESTATE”

Johnson, Scholes, and Whittington identified three levels of strategy, namely corporate strategy, business strategy, and functional strategy. These strategies should be consistent with each other.

Required: In the light of the statements above, analyze the three levels of strategy being pursued by Prestige Designers Ltd. (10 marks)

Corporate Strategy:

  1. House-building operation is the core business of the Group.
  2. Builds houses using traditional designs comparable with its major competitors in almost all aspects of quality and service.
  3. Build on existing skills and competences, while maintaining firm cost control and continuing to produce quality homes that customers want to buy.

Business Strategy/Competitive Strategy:

  1. Prestige’s primary objective is to remain one of the leading real estate house builders, building homes ranging from low-cost starter homes to large premium family homes.
  2. The adoption of MMC has put Prestige’s business in danger.
  3. The current and likely future economic situation and other problems associated with real estate in the country are making the decision not to move to neighboring countries unwise.
  4. Building sustainable homes.
  5. Urbanization redevelopment.

Functional Strategy:

  1. The organizational structure of Prestige grew through a series of acquisitions and mergers.
  2. This would have implications for Prestige if the structure were to be rationalized.
  3. Centralizing the functions and updating the IT systems could lead to potential staff redundancy and displacement costs, which will cost GH¢75 million and take two years to be fully effective.

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  • 10 Marks

AA – Mar 2024 – L2 – Q5b – Internal Audit and Its Relationship with External Audit

Recommend internal control procedures for cheque payments and petty cash systems for Automaga Ltd.

Automaga Ltd has recently acquired the controlling interest in Alkars Ltd, who are importers of car spare parts. In reviewing the organisational structure of Alkars Ltd, Automaga Ltd noticed a weakness in the procedures for the signing of cheques and the operation of the petty cash system. Automaga Ltd engaged you as the company’s auditor and requested that you review the controls over cheque payments and petty cash. Cheques are drawn almost every week and the petty cash account normally has a working balance of about GH¢600, and GH¢1,200 is expended from the fund each month.

Required:
Prepare a letter to Automaga Ltd highlighting your recommendations for good internal control procedures for:
i) Cheque payments. (5 marks)
ii) Petty cash. (5 marks)

To: Automaga Ltd
Date: 1st March, 2024
Subject: Internal Control Recommendations for Cheque Payments and Petty Cash

Dear [Client],

As requested, I have reviewed the internal control systems in place for cheque payments and the petty cash system of Alkars Ltd. Below are my recommendations to improve these controls:

i) Cheque payments:

  1. Dual signatures: All cheques should require the signatures of at least two authorized individuals to ensure proper oversight.
  2. Cheque authorization: Cheques should only be issued based on proper authorization of invoices or other supporting documents.
  3. Segregation of duties: The individuals approving invoices should be different from those signing the cheques to reduce the risk of fraud or errors.
  4. Cheque security: Unused cheques should be kept securely, and access should be limited to authorized personnel.
  5. Periodic review: A log of issued cheques should be maintained, and all cheques (including voided and canceled cheques) should be accounted for and reviewed periodically by senior management.
    (5 points @ 1 mark each = 5 marks)

ii) Petty cash:

  1. Imprest system: The petty cash fund should operate under an imprest system, where the fund is maintained at a fixed amount and replenished based on properly authorized vouchers.
  2. Authorization of payments: Petty cash payments should only be made upon presentation of duly authorized petty cash vouchers.
  3. Segregation of duties: The person responsible for petty cash should not be responsible for approving petty cash expenditures or performing periodic reconciliations.
  4. Surprise counts: Management should conduct unannounced petty cash counts to verify the cash balance and detect any discrepancies.
  5. Limit on petty cash disbursements: The company should set a reasonable limit on the maximum amount that can be paid from petty cash to ensure large payments are processed through regular payment channels.
    (5 points @ 1 mark each = 5 marks)

Yours sincerely,
[Your Name]
[Your Title]

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  • 10 Marks

AA – Mar 2024 – L2 – Q5b – Internal Audit and Its Relationship with External Audit

Recommend internal control procedures for cheque payments and petty cash systems for Automaga Ltd.

Automaga Ltd has recently acquired the controlling interest in Alkars Ltd, who are importers of car spare parts. In reviewing the organisational structure of Alkars Ltd, Automaga Ltd noticed a weakness in the procedures for the signing of cheques and the operation of the petty cash system. Automaga Ltd engaged you as the company’s auditor and requested that you review the controls over cheque payments and petty cash. Cheques are drawn almost every week and the petty cash account normally has a working balance of about GH¢600, and GH¢1,200 is expended from the fund each month.

Required:
Prepare a letter to Automaga Ltd highlighting your recommendations for good internal control procedures for:
i) Cheque payments. (5 marks)
ii) Petty cash. (5 marks)

To: Automaga Ltd
Date: 1st March, 2024
Subject: Internal Control Recommendations for Cheque Payments and Petty Cash

Dear [Client],

As requested, I have reviewed the internal control systems in place for cheque payments and the petty cash system of Alkars Ltd. Below are my recommendations to improve these controls:

i) Cheque payments:

  1. Dual signatures: All cheques should require the signatures of at least two authorized individuals to ensure proper oversight.
  2. Cheque authorization: Cheques should only be issued based on proper authorization of invoices or other supporting documents.
  3. Segregation of duties: The individuals approving invoices should be different from those signing the cheques to reduce the risk of fraud or errors.
  4. Cheque security: Unused cheques should be kept securely, and access should be limited to authorized personnel.
  5. Periodic review: A log of issued cheques should be maintained, and all cheques (including voided and canceled cheques) should be accounted for and reviewed periodically by senior management.
    (5 points @ 1 mark each = 5 marks)

ii) Petty cash:

  1. Imprest system: The petty cash fund should operate under an imprest system, where the fund is maintained at a fixed amount and replenished based on properly authorized vouchers.
  2. Authorization of payments: Petty cash payments should only be made upon presentation of duly authorized petty cash vouchers.
  3. Segregation of duties: The person responsible for petty cash should not be responsible for approving petty cash expenditures or performing periodic reconciliations.
  4. Surprise counts: Management should conduct unannounced petty cash counts to verify the cash balance and detect any discrepancies.
  5. Limit on petty cash disbursements: The company should set a reasonable limit on the maximum amount that can be paid from petty cash to ensure large payments are processed through regular payment channels.
    (5 points @ 1 mark each = 5 marks)

Yours sincerely,
[Your Name]
[Your Title]

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AA – Mar 2024 – L2 – Q5a – Completion Procedures and Reporting

Identify subsequent events and recommend auditor actions based on two scenarios for Benkum Ltd.

Atiko Audit firm is the external auditor of Benkum Ltd, a company operating in the oil and gas sector. Benkum Ltd is listed on the Ghana Stock Exchange. On completing the audit for the year ended 31 December 2022, the following issues were brought to the attention of the senior partner:

  1. On 25 February 2023, Benkum agreed with the workers’ union to increase the pay of all its employees by 10%, backdated to 1 July 2022. No provision for this has been made in the financial statements.
  2. One of the company’s oil tankers shipwrecked at Cape Three Points on the western side of Ghana. There is a risk of serious oil spillage which could have a significant effect on the future of the company. Further information will not be available until after the auditor’s report has been signed.

Required:
i) State TWO (2) types of the event identified by ISA 560: Subsequent Events in relation to the scenario above. (2 marks)
ii) What further action should Atiko Audit firm take concerning each of the above issues? (8 marks)

 

i) Two types of events identified by ISA 560:

  1. Adjusting events: These are events that provide evidence of conditions that existed at the end of the reporting period.
  2. Non-adjusting events: These are events that are indicative of conditions that arose after the reporting period.

ii) Actions required by Atiko Audit firm:

  1. Pay increase issue (Adjusting event):
    • Type: This is an adjusting event because the conditions for the pay increase existed at the reporting date (1 July 2022).
    • Action:
      • Review the agreement with the workers’ union to confirm the 10% pay increase.
      • Recalculate the amount to be accrued as of 31 December 2022.
      • Ensure that Benkum Ltd adjusts the financial statements to include the liability for the backdated pay increase in the statement of financial position and the corresponding expense in the income statement.
      • If Benkum Ltd fails to adjust the financial statements, issue a qualified opinion due to disagreement.
  2. Shipwreck issue (Non-adjusting event):
    • Type: This is a non-adjusting event as it indicates conditions arising after the reporting period.
    • Action:
      • Recommend that Benkum Ltd disclose the nature of the event and the potential financial effect (e.g., cleanup costs, liabilities for environmental damage) in the notes to the financial statements.
      • If Benkum Ltd fails to make adequate disclosure, issue a qualified opinion due to inadequate disclosure.
      • If material uncertainty exists regarding the company’s ability to continue as a going concern, consider adding an emphasis of matter paragraph to the audit report.

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  • 10 Marks

AA – Mar 2024 – L2 – Q5a – Completion Procedures and Reporting

Identify subsequent events and recommend auditor actions based on two scenarios for Benkum Ltd.

Atiko Audit firm is the external auditor of Benkum Ltd, a company operating in the oil and gas sector. Benkum Ltd is listed on the Ghana Stock Exchange. On completing the audit for the year ended 31 December 2022, the following issues were brought to the attention of the senior partner:

  1. On 25 February 2023, Benkum agreed with the workers’ union to increase the pay of all its employees by 10%, backdated to 1 July 2022. No provision for this has been made in the financial statements.
  2. One of the company’s oil tankers shipwrecked at Cape Three Points on the western side of Ghana. There is a risk of serious oil spillage which could have a significant effect on the future of the company. Further information will not be available until after the auditor’s report has been signed.

Required:
i) State TWO (2) types of the event identified by ISA 560: Subsequent Events in relation to the scenario above. (2 marks)
ii) What further action should Atiko Audit firm take concerning each of the above issues? (8 marks)

 

i) Two types of events identified by ISA 560:

  1. Adjusting events: These are events that provide evidence of conditions that existed at the end of the reporting period.
  2. Non-adjusting events: These are events that are indicative of conditions that arose after the reporting period.

ii) Actions required by Atiko Audit firm:

  1. Pay increase issue (Adjusting event):
    • Type: This is an adjusting event because the conditions for the pay increase existed at the reporting date (1 July 2022).
    • Action:
      • Review the agreement with the workers’ union to confirm the 10% pay increase.
      • Recalculate the amount to be accrued as of 31 December 2022.
      • Ensure that Benkum Ltd adjusts the financial statements to include the liability for the backdated pay increase in the statement of financial position and the corresponding expense in the income statement.
      • If Benkum Ltd fails to adjust the financial statements, issue a qualified opinion due to disagreement.
  2. Shipwreck issue (Non-adjusting event):
    • Type: This is a non-adjusting event as it indicates conditions arising after the reporting period.
    • Action:
      • Recommend that Benkum Ltd disclose the nature of the event and the potential financial effect (e.g., cleanup costs, liabilities for environmental damage) in the notes to the financial statements.
      • If Benkum Ltd fails to make adequate disclosure, issue a qualified opinion due to inadequate disclosure.
      • If material uncertainty exists regarding the company’s ability to continue as a going concern, consider adding an emphasis of matter paragraph to the audit report.

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  • 10 Marks

AA – Mar 2024 – L2 – Q4b – Internal Audit and Its Relationship with External Audit

Explain the differences between internal and external auditors in fraud prevention, detection, and reporting responsibilities.

There are similarities and differences between the responsibilities of internal and external auditors. Both internal and external auditors have responsibilities relating to the prevention, detection, and reporting of fraud, for example, but their responsibilities are not the same.

Required:
In reference to the statement above, explain the difference between the responsibilities of internal auditors and external auditors in relation to:
i) Prevention and detection of fraud. (5 marks)
ii) Reporting of fraud. (5 marks)

i) Difference in prevention and detection of fraud:

  • Internal auditors:
    • They are actively involved in the prevention of fraud by evaluating and improving the effectiveness of internal controls. Internal auditors often conduct tests specifically designed to detect fraud or irregularities as part of their internal control reviews.
    • Internal auditors are more likely to be involved in both preventing and detecting fraud through routine monitoring and risk assessments.
  • External auditors:
    • External auditors are not primarily responsible for preventing fraud. However, ISA 240 requires that external auditors assess the risk of material misstatements due to fraud and design audit procedures to detect fraud if it exists. Their role is more focused on detection rather than prevention.
    • The external auditor’s responsibility for fraud detection is limited to obtaining reasonable assurance that the financial statements are free from material misstatements caused by fraud.

(5 marks = 2.5 marks each)

ii) Difference in reporting of fraud:

  • Internal auditors:
    • Internal auditors report fraud directly to senior management or the audit committee, as they are part of the organization’s governance structure. They provide ongoing reports and make recommendations to improve controls and mitigate risks of fraud.
  • External auditors:
    • External auditors must report suspected or detected fraud to those charged with governance (e.g., the board of directors or audit committee). If fraud involves senior management or the detected fraud is material, they are required to communicate this to the appropriate authorities, as mandated by professional and legal standards. In extreme cases, external auditors may report the fraud to external bodies if public interest is involved.

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  • 10 Marks

AA – Mar 2024 – L2 – Q4b – Internal Audit and Its Relationship with External Audit

Explain the differences between internal and external auditors in fraud prevention, detection, and reporting responsibilities.

There are similarities and differences between the responsibilities of internal and external auditors. Both internal and external auditors have responsibilities relating to the prevention, detection, and reporting of fraud, for example, but their responsibilities are not the same.

Required:
In reference to the statement above, explain the difference between the responsibilities of internal auditors and external auditors in relation to:
i) Prevention and detection of fraud. (5 marks)
ii) Reporting of fraud. (5 marks)

i) Difference in prevention and detection of fraud:

  • Internal auditors:
    • They are actively involved in the prevention of fraud by evaluating and improving the effectiveness of internal controls. Internal auditors often conduct tests specifically designed to detect fraud or irregularities as part of their internal control reviews.
    • Internal auditors are more likely to be involved in both preventing and detecting fraud through routine monitoring and risk assessments.
  • External auditors:
    • External auditors are not primarily responsible for preventing fraud. However, ISA 240 requires that external auditors assess the risk of material misstatements due to fraud and design audit procedures to detect fraud if it exists. Their role is more focused on detection rather than prevention.
    • The external auditor’s responsibility for fraud detection is limited to obtaining reasonable assurance that the financial statements are free from material misstatements caused by fraud.

(5 marks = 2.5 marks each)

ii) Difference in reporting of fraud:

  • Internal auditors:
    • Internal auditors report fraud directly to senior management or the audit committee, as they are part of the organization’s governance structure. They provide ongoing reports and make recommendations to improve controls and mitigate risks of fraud.
  • External auditors:
    • External auditors must report suspected or detected fraud to those charged with governance (e.g., the board of directors or audit committee). If fraud involves senior management or the detected fraud is material, they are required to communicate this to the appropriate authorities, as mandated by professional and legal standards. In extreme cases, external auditors may report the fraud to external bodies if public interest is involved.

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  • 10 Marks

AA – Mar 2024 – L2 – Q4a – Institutional Regulation and Standard-Setting

Discuss significant audit issues faced by national standard-setting bodies and the IAASB.

Santom Ltd is a global company that produces and sells consumer electronics. In the past year, Santom Ltd has faced several challenges, including the COVID-19 pandemic, supply chain disruptions, and increased regulatory scrutiny. Recent global events have raised significant audit issues for external auditors.

The national standard-setting bodies and the International Auditing and Assurance Standards Board (IAASB) are currently dealing with several significant audit issues.

Required:
Discuss FIVE (5) of these significant audit issues.

Significant audit issues faced by national standard-setting bodies and the IAASB:

  1. Climate change reporting: Growing emphasis on sustainability and environmental issues has increased the need for auditing the accuracy and completeness of climate change disclosures in financial statements.
  2. Fraud detection: Enhanced audit standards are being developed to strengthen auditors’ ability to detect and report fraudulent activities, especially in light of technological advancements and complex financial environments.
  3. Cybersecurity risks: As businesses rely heavily on technology, assessing a company’s cybersecurity controls has become crucial to audit procedures to mitigate risks of cyberattacks.
  4. Going concern assessments: In the context of the COVID-19 pandemic, companies face financial difficulties, making it essential for auditors to assess the ability of companies to continue as a going concern.
  5. Non-financial reporting: Increased demand for disclosures of non-financial information, such as social and environmental impacts, requires new audit standards to ensure the completeness and reliability of such information.

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  • 10 Marks

AA – Mar 2024 – L2 – Q4a – Institutional Regulation and Standard-Setting

Discuss significant audit issues faced by national standard-setting bodies and the IAASB.

Santom Ltd is a global company that produces and sells consumer electronics. In the past year, Santom Ltd has faced several challenges, including the COVID-19 pandemic, supply chain disruptions, and increased regulatory scrutiny. Recent global events have raised significant audit issues for external auditors.

The national standard-setting bodies and the International Auditing and Assurance Standards Board (IAASB) are currently dealing with several significant audit issues.

Required:
Discuss FIVE (5) of these significant audit issues.

Significant audit issues faced by national standard-setting bodies and the IAASB:

  1. Climate change reporting: Growing emphasis on sustainability and environmental issues has increased the need for auditing the accuracy and completeness of climate change disclosures in financial statements.
  2. Fraud detection: Enhanced audit standards are being developed to strengthen auditors’ ability to detect and report fraudulent activities, especially in light of technological advancements and complex financial environments.
  3. Cybersecurity risks: As businesses rely heavily on technology, assessing a company’s cybersecurity controls has become crucial to audit procedures to mitigate risks of cyberattacks.
  4. Going concern assessments: In the context of the COVID-19 pandemic, companies face financial difficulties, making it essential for auditors to assess the ability of companies to continue as a going concern.
  5. Non-financial reporting: Increased demand for disclosures of non-financial information, such as social and environmental impacts, requires new audit standards to ensure the completeness and reliability of such information.

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  • 10 Marks

AA – Mar 2024 – L2 – Q3b – Audit and Assurance Evidence

Identify examples of external confirmations and their corresponding audit assertions.

ISA 500: Audit Evidence identifies seven main testing procedures. One of these is external confirmation.

Required:
i) List FOUR (4) examples of external confirmation. (2 marks)
ii) For each of the examples in (i) above, explain: ONE (1) audit assertion that the external confirmation supports, and ONE (1) audit assertion that the external confirmation does not support. (8 marks)

i) Examples of external confirmation:

  1. Accounts receivable confirmation
  2. Bank confirmation
  3. Legal confirmation (lawyer’s letter)
  4. Inventory held by third parties
    (4 points @ 0.5 marks each = 2 marks)

ii) Audit assertions supported and not supported by external confirmation:

  1. Accounts receivable confirmation
    • Supports: Existence (confirmation from the debtor provides evidence that the receivable exists).
    • Does not support: Valuation (the confirmation does not provide information on the likelihood of the receivable being collectible).
  2. Bank confirmation
    • Supports: Existence (confirms the existence of bank balances).
    • Does not support: Completeness (it does not confirm whether all bank accounts have been disclosed).
  3. Legal confirmation (lawyer’s letter)
    • Supports: Rights and obligations (provides evidence on potential legal obligations).
    • Does not support: Valuation (it does not quantify the financial impact of ongoing legal cases).
  4. Inventory held by third parties
    • Supports: Existence (confirms that the inventory is held by a third party).
    • Does not support: Valuation (it does not provide details on the condition or value of the inventory).

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  • 10 Marks

AA – Mar 2024 – L2 – Q3b – Audit and Assurance Evidence

Identify examples of external confirmations and their corresponding audit assertions.

ISA 500: Audit Evidence identifies seven main testing procedures. One of these is external confirmation.

Required:
i) List FOUR (4) examples of external confirmation. (2 marks)
ii) For each of the examples in (i) above, explain: ONE (1) audit assertion that the external confirmation supports, and ONE (1) audit assertion that the external confirmation does not support. (8 marks)

i) Examples of external confirmation:

  1. Accounts receivable confirmation
  2. Bank confirmation
  3. Legal confirmation (lawyer’s letter)
  4. Inventory held by third parties
    (4 points @ 0.5 marks each = 2 marks)

ii) Audit assertions supported and not supported by external confirmation:

  1. Accounts receivable confirmation
    • Supports: Existence (confirmation from the debtor provides evidence that the receivable exists).
    • Does not support: Valuation (the confirmation does not provide information on the likelihood of the receivable being collectible).
  2. Bank confirmation
    • Supports: Existence (confirms the existence of bank balances).
    • Does not support: Completeness (it does not confirm whether all bank accounts have been disclosed).
  3. Legal confirmation (lawyer’s letter)
    • Supports: Rights and obligations (provides evidence on potential legal obligations).
    • Does not support: Valuation (it does not quantify the financial impact of ongoing legal cases).
  4. Inventory held by third parties
    • Supports: Existence (confirms that the inventory is held by a third party).
    • Does not support: Valuation (it does not provide details on the condition or value of the inventory).

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  • 10 Marks

AA – Mar 2024 – L2 – Q3a – Audit and Assurance Evidence

Explain audit procedures to obtain sufficient and appropriate audit evidence for Galito Ltd's inventories.

Galito Ltd is a Ghanaian company that operates in multiple industries and has several subsidiaries. Due to the complexity of its operations, its inventories and properties are scattered across the country and used by any of its subsidiaries.

Required:
As the auditor of Galito Ltd, explain FIVE (5) audit procedures to help obtain sufficient and appropriate audit evidence for its inventories.

Audit procedures for obtaining evidence on inventories:

  1. Physical verification: Conduct physical verification of inventory at various locations to confirm the existence of inventories.
  2. Inspection of documents: Review inventory records, purchase invoices, and goods receipt notes to verify ownership and rights to the inventory.
  3. Observation: Observe the client’s inventory count procedures to assess the effectiveness of controls over inventory and to validate the completeness of the count.
  4. Recalculation: Recalculate the value of inventory, comparing the recorded inventory cost to the net realizable value (NRV), ensuring that items are correctly valued and costs are properly allocated.
  5. Analytical procedures: Perform trend analysis by comparing current inventory levels and values to prior periods, investigating any unusual fluctuations or variances.

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  • 10 Marks

AA – Mar 2024 – L2 – Q3a – Audit and Assurance Evidence

Explain audit procedures to obtain sufficient and appropriate audit evidence for Galito Ltd's inventories.

Galito Ltd is a Ghanaian company that operates in multiple industries and has several subsidiaries. Due to the complexity of its operations, its inventories and properties are scattered across the country and used by any of its subsidiaries.

Required:
As the auditor of Galito Ltd, explain FIVE (5) audit procedures to help obtain sufficient and appropriate audit evidence for its inventories.

Audit procedures for obtaining evidence on inventories:

  1. Physical verification: Conduct physical verification of inventory at various locations to confirm the existence of inventories.
  2. Inspection of documents: Review inventory records, purchase invoices, and goods receipt notes to verify ownership and rights to the inventory.
  3. Observation: Observe the client’s inventory count procedures to assess the effectiveness of controls over inventory and to validate the completeness of the count.
  4. Recalculation: Recalculate the value of inventory, comparing the recorded inventory cost to the net realizable value (NRV), ensuring that items are correctly valued and costs are properly allocated.
  5. Analytical procedures: Perform trend analysis by comparing current inventory levels and values to prior periods, investigating any unusual fluctuations or variances.

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  • 10 Marks

AA – Mar 2024 – L2 – Q2b – Audit and Assurance Risk Environment

Discuss audit risks and the necessary measures auditors should take to mitigate issues in the engagement.

Abansro Corporation is a publicly traded company in the manufacturing industry. The company is yet to appoint an auditor to replace its previous auditor. A member of the board of Abansro Corporation, who is also a friend of the owners of an audit firm, referred the audit firm to Abansro Corporation. The board approved the appointment of the audit firm without considering the potential audit risks associated with the referral.

The audit firm conducted the audit for the year 2022, and the audit opinion issued was unqualified. However, in the course of 2023, it was discovered that there were material misstatements in the financial statements that were not detected by the audit firm. These misstatements resulted in a significant loss for the company and its shareholders.

As a result, Abansro Corporation faced legal action from its shareholders for the losses incurred due to the misstatements. The audit firm was also held liable for negligence and breach of professional duty.

Required:
i) Describe THREE (3) audit risks for a board member referring his friend who is the owner of an audit firm to be appointed by Abansro Corporation. (6 marks)

ii) What measures should have been undertaken by the Auditors to mitigate the issues associated with this engagement? (4 marks)

i) Audit risks associated with the referral:

  1. Conflict of interest: The referral of the audit firm by a board member who is a friend of the firm’s owner may impair the audit firm’s independence, leading to a lack of objectivity in the audit.
  2. Undue influence: The friendship between the board member and the audit firm’s owner may result in pressure on the audit firm to overlook or understate material misstatements, increasing the risk of audit failure.
  3. Lack of professional skepticism: The personal relationship may lead the audit firm to adopt a less rigorous audit approach, reducing their level of professional skepticism and leading to the omission of material errors in the financial statements.
    (3 points @ 2 marks each = 6 marks)

ii) Measures to mitigate audit risks:

  1. Disclose the relationship: The audit firm should have disclosed the personal relationship between the board member and the owner of the firm to the shareholders and board of Abansro Corporation to ensure transparency.
  2. Exclude the firm owner from the engagement: The firm owner should have been excluded from the engagement team to mitigate any potential conflict of interest.
  3. Engagement quality control review: An independent engagement quality control reviewer should have been assigned to review the audit procedures and final report.
  4. Assign qualified staff: Experienced and competent audit staff should have been assigned to the engagement to ensure thoroughness and quality in the audit process.
    (4 points @ 1 mark each = 4 marks)

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  • 10 Marks

AA – Mar 2024 – L2 – Q2b – Audit and Assurance Risk Environment

Discuss audit risks and the necessary measures auditors should take to mitigate issues in the engagement.

Abansro Corporation is a publicly traded company in the manufacturing industry. The company is yet to appoint an auditor to replace its previous auditor. A member of the board of Abansro Corporation, who is also a friend of the owners of an audit firm, referred the audit firm to Abansro Corporation. The board approved the appointment of the audit firm without considering the potential audit risks associated with the referral.

The audit firm conducted the audit for the year 2022, and the audit opinion issued was unqualified. However, in the course of 2023, it was discovered that there were material misstatements in the financial statements that were not detected by the audit firm. These misstatements resulted in a significant loss for the company and its shareholders.

As a result, Abansro Corporation faced legal action from its shareholders for the losses incurred due to the misstatements. The audit firm was also held liable for negligence and breach of professional duty.

Required:
i) Describe THREE (3) audit risks for a board member referring his friend who is the owner of an audit firm to be appointed by Abansro Corporation. (6 marks)

ii) What measures should have been undertaken by the Auditors to mitigate the issues associated with this engagement? (4 marks)

i) Audit risks associated with the referral:

  1. Conflict of interest: The referral of the audit firm by a board member who is a friend of the firm’s owner may impair the audit firm’s independence, leading to a lack of objectivity in the audit.
  2. Undue influence: The friendship between the board member and the audit firm’s owner may result in pressure on the audit firm to overlook or understate material misstatements, increasing the risk of audit failure.
  3. Lack of professional skepticism: The personal relationship may lead the audit firm to adopt a less rigorous audit approach, reducing their level of professional skepticism and leading to the omission of material errors in the financial statements.
    (3 points @ 2 marks each = 6 marks)

ii) Measures to mitigate audit risks:

  1. Disclose the relationship: The audit firm should have disclosed the personal relationship between the board member and the owner of the firm to the shareholders and board of Abansro Corporation to ensure transparency.
  2. Exclude the firm owner from the engagement: The firm owner should have been excluded from the engagement team to mitigate any potential conflict of interest.
  3. Engagement quality control review: An independent engagement quality control reviewer should have been assigned to review the audit procedures and final report.
  4. Assign qualified staff: Experienced and competent audit staff should have been assigned to the engagement to ensure thoroughness and quality in the audit process.
    (4 points @ 1 mark each = 4 marks)

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  • 10 Marks

AA – Mar 2024 – L2 – Q2a – Regulatory Framework and Audit Responsibilities

Discuss the circumstances under which BoG can appoint or terminate the appointment of an auditor for a bank.

In 2018, the Bank of Ghana (BoG) revoked the licenses of five struggling banks in Ghana and merged them to form a new bank. Following the merger, the BoG appointed an external auditor for the new bank, as the previous auditors of the merged banks were no longer able to continue in their roles.

However, in 2019, the BoG terminated the appointment of the external auditor for the new bank due to concerns about the independence and competence of the auditor. As a result, the BoG appointed new external auditors for the bank.

Required:
i) Discuss THREE (3) circumstances under which BoG may appoint an auditor to audit the financial statements of a bank. (5 marks)

ii) Discuss THREE (3) circumstances under which BoG may terminate the appointment of an auditor to audit the financial statements of a bank. (5 marks)

i) Circumstances under which BoG may appoint an auditor:

  1. Failure to appoint an auditor: If a bank fails to appoint an auditor within the prescribed period.
  2. Resignation or removal of the appointed auditor: If the auditor previously appointed by the bank has resigned or has been removed by the bank.
  3. Inappropriate appointment: When BoG determines that the appointment made by the bank is inappropriate or the auditor does not meet the required qualifications.
    (3 points @ 1.67 marks each = 5 marks)

ii) Circumstances under which BoG may terminate the appointment of an auditor:

  1. Independence concerns: If BoG suspects that the auditor is not independent and therefore unable to carry out an unbiased audit.
  2. Incompetence: When BoG believes that the appointed auditor is not competent to perform the audit effectively.
  3. License suspension or revocation: If the auditor’s license is suspended or revoked by the relevant professional body, such as ICAG.
    (3 points @ 1.67 marks each = 5 marks)

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  • 10 Marks

AA – Mar 2024 – L2 – Q2a – Regulatory Framework and Audit Responsibilities

Discuss the circumstances under which BoG can appoint or terminate the appointment of an auditor for a bank.

In 2018, the Bank of Ghana (BoG) revoked the licenses of five struggling banks in Ghana and merged them to form a new bank. Following the merger, the BoG appointed an external auditor for the new bank, as the previous auditors of the merged banks were no longer able to continue in their roles.

However, in 2019, the BoG terminated the appointment of the external auditor for the new bank due to concerns about the independence and competence of the auditor. As a result, the BoG appointed new external auditors for the bank.

Required:
i) Discuss THREE (3) circumstances under which BoG may appoint an auditor to audit the financial statements of a bank. (5 marks)

ii) Discuss THREE (3) circumstances under which BoG may terminate the appointment of an auditor to audit the financial statements of a bank. (5 marks)

i) Circumstances under which BoG may appoint an auditor:

  1. Failure to appoint an auditor: If a bank fails to appoint an auditor within the prescribed period.
  2. Resignation or removal of the appointed auditor: If the auditor previously appointed by the bank has resigned or has been removed by the bank.
  3. Inappropriate appointment: When BoG determines that the appointment made by the bank is inappropriate or the auditor does not meet the required qualifications.
    (3 points @ 1.67 marks each = 5 marks)

ii) Circumstances under which BoG may terminate the appointment of an auditor:

  1. Independence concerns: If BoG suspects that the auditor is not independent and therefore unable to carry out an unbiased audit.
  2. Incompetence: When BoG believes that the appointed auditor is not competent to perform the audit effectively.
  3. License suspension or revocation: If the auditor’s license is suspended or revoked by the relevant professional body, such as ICAG.
    (3 points @ 1.67 marks each = 5 marks)

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