AAA – May 2017 – L3 – Q4b – Assurance Engagements

Explain "value for money" and the 3Es of achieving it in assurance engagements.

Question

Alhaji Chukwudi is the Chairman and majority shareholder of Talking Drums Limited, a telecommunications company operating in Nigeria. The company had experienced considerable growth in the past. However, over the last three years, there has been noticeable increase in cost of operations which is slowing down the growth of the company. Management had explained that the increasing cost is a result of expansion of coverage area which management believes will lead to further expansion and growth of the company in the nearest future. Alhaji Chukwudi wants to get a certain level of assurance that there is value for the increased expansion costs the company was incurring. As a result, the Board of Directors resolved to engage a practitioner for a „value for money‟ evaluation of the coverage expansion costs.

Required:

i. Explain „value for money‟. (2 Marks)

ii. Explain the 3Es of achieving value for money. (6 Marks)

Answer

i. Explanation of “Value for Money” (2 Marks)

Value for money (VFM) refers to the optimal use of resources to achieve desired outcomes. It involves ensuring that expenditures are economical, efficient, and effective, maximizing benefits while minimizing costs. VFM emphasizes accountability and transparency in resource allocation and management, particularly in evaluating whether an organization achieves its objectives in a cost-effective manner.

ii. The 3Es of Achieving Value for Money (6 Marks)

Economy (Minimizing Costs):
- Focuses on acquiring resources at the lowest cost without compromising quality.
- It ensures that inputs (e.g., materials, labor, and services) are procured at a reasonable price and aligned with the organization’s needs.
- Example: Negotiating favorable supplier contracts for network infrastructure to reduce expansion costs.
Efficiency (Optimal Use of Resources):
- Relates to using available resources in the best possible way to maximize outputs.
- Ensures that operations and processes are streamlined, avoiding waste and redundancies.
- Example: Ensuring that telecommunications infrastructure is utilized to its full potential without underuse or overcapacity.
Effectiveness (Achieving Objectives):
- Focuses on whether the organization is meeting its intended goals and delivering the desired outcomes.
- Measures the success of outputs in achieving strategic objectives.
- Example: Assessing whether the expanded coverage leads to increased subscriber base and revenue growth.

Tags: and Economy, Audit of Efficiency, Effectiveness, Value for Money
Level: Level 3

Topic: Assurance Engagements

Uploader: Kofi