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A lot of investors have been reading about something called the “new-fund effect”. That is the tendency of new funds to outperform their older peers because of any one of a number of
factors: better access to initial public offerings, more motivated managers, or better spreads on
trades. However, despite the potential growth benefits of new funds , their volatility makes many
investors uncomfortable. Consider a sample of 10 newly M- mutual funds and a sample of 10 newly
Q-mutual funds randomly selected from all mutuals funds in Ghana that are less than 18 months
old as follows:
| Annualized Performance of Newly M- Mutual Funds | Annualized Performance of Newly Q-Mutual Funds |
|---|---|
| 13.7 | 9.5 |
| 15.3 | 14.9 |
| 7.9 | 10.8 |
| 9.8 | 11.5 |
| 13.6 | 11.3 |
| 13.6 | 25.2 |
| 11.4 | 12.0 |
| 8.6 | 6.3 |
| 14.6 | 12.7 |
| 15.2 | 12.4 |
Using a hypothesis testing procedure, investigate whether there is sufficient evidence to conclude
that there is a significant difference in variance of newly created M and Q mutual funds.
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Bolombo Property Investors Ltd. is a property investment company that is involved in the renting of commercial property to various commercial interests throughout the country. Their modus operandi is to purchase existing property, renovate them and rent them out, or to develop property from the scratch and rent them out. Occasionally they sell out property to improve their cash flows. Bolombo Property Investors Ltd. is a company owned by Mr. Joshua Broson, aged 62 and his wife Mabel, aged, 52 holding 60 % and 40 % shares respectively. The couple have been wedded for the past five years and have three children of school going age. Management roles in the company are shared between the couple who are both qualified Civil Engineers by profession. Joshua serves as the CEO whilst his wife serves as General Manager and Accountant. To support them they have employed an accounts clerk Kwesi Mendson, aged 35 who has a diploma in accounting from the University of Ghana, Legion. Bolombo Property Investors has five properties in Accora, one in Takoradi and three in Kumasi. The company has identified a ten-storey property in Takoradi that has been put on sale by an expatriate Property Developer who is leaving the country. The price on offer is GHC 5.000.000.00. They think they can quickly renovate the property andThe unit is in a poor state of repair but Bolomb is believes it could fetch a good price if properly renovated. The building is located in the heart of the city and along the main high street of the city.
Bolombb’s plan is to rent the ground floor to a bank or savings and loans company, and the units in in the upper floor to various types of businesses including supermarkets, restaurants and business oon. His estimates for the renovation are as follows:
| Item | Cost (GHC) |
|---|---|
| Rewiring and | 750,400,000.00 |
| Plumbing | 850,000.00 |
| Internal fittings | 500,000.00 |
| Alocobond panelling | 500,000.00 |
| Painting | 200,000.00 |
| Parking lot | 100,000.00 |
| Total | 2,000,400,000.00 |
Estimated Rental for the property is as follows: | as follows| as follows| as follows| as follows|| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows| as follows|5,000.00.00| as follows| as follows|CIB GH 10-22
He brings the proposal to you for consideration. He proposes that the building would serve as security. In addition a joint and several guarantee would be provided by the directors of the company. He is therefore requesting for a five year loan facility of GHC 7,300,000,00 to finance the purchase and renovation of the project. He is expecting a rate of return of 25%
Critically examine his proposition.
[30 Marks]
Note on Table Correction: The table in the attachment contains errors (e.g., “Rewingring and” likely means “Rewiring and Electrical,” and “750 40 00000” is ambiguous). I assume “750 40 00000” is a typo for GHC 750,000.00, as the total renovation cost (GHC 2,000,400,000.00) seems inflated for a single property. A realistic total of GHC 2,300,000.00 is assumed (summing corrected figures: 750,000 + 850,000 + 500,000 + 500,000 + 200,000 + 100,000). The “Estimated Rental” section is incomplete; I assume rental projections support the 25% return claim, to be verified.
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Mr. Bampoh Humphrey is the Board Chairman and CEO of Gold Coast Shipping Company Ltd. He owns 80 percent of the shares of the company with his foreign Partner Jones Smith, a retired Chairman of Elder Dempster Shipping Company owning the remaining 20%.
The two shareholders acquired the company from the Divestiture Implementation Committee in 1995 when the government divested its shareholding in the national shipping line the Black Star Line. Mr. Bampoh is known to be highly connected with the government in power at the time of AFC.
The company is engaged in transportation of primary products such as bauxite, gold and manganese ore from the country abroad and the transportation of consumer goods in container ships throughout the world.
The company has a fleet of ten cargo ships and ten container ships. It has three main offices located in Tema, Takoradi and London in the UK.
The company has operated an impressive account with you since the acquisition of the national shipping line, until in recent times when you noticed a sharp deterioration in its account operations. Following your painstaking investigation you established that the company incurred a huge loss when a cargo of bauxite was diverted on the high seas and the goods stolen. The ship was later discovered to have been sunken in the high seas to hide the evidence. Another problem you observed was that their fleet was becoming aged and one of them needs immediate replacement.
Each office of the company has an Office Manager all of whom are experienced expatriate shipping managers poached from international shipping companies.
The cost of purchase and delivery of one ship is estimated at USD 5.0 million, and the company is requesting for financial support from the bank to make a down payment of USD 2.0 million for the ship. The company proposes to pay the bank over a period of five years whilst the remainder of the cost of the ship is to be paid over the next period of ten years.
Critically examine this proposition using the information above and the related financial statements provided below.
Gold Star Shipping Ltd Statement of Comprehensive Income as at 31 Dec 2020 GHC
Total Revenue Cost of Revenue Gross Profit Overheads Depreciation Operating Profit Interest Paid Profit Before Tax Tax Profit After Tax 2021 GHC 13,700,000 6,165,000 7,535,000 1,575,500 1,337,000 4,622,500 480,000 4,142,500 1,035,625 3,106,875 2021 GHC 14,400,000 6,912,000 7,488,000 1,843,200 1,514,000 4,130,800 352,000 3,778,800 944,700 2,834,100 2022 GHC 14,920,000 7,758,400 7,161,600 2,333,488 1,564,000 3,264,112 312,500 2,951,612 737,903 2,213,709
Gold Star Shipping Ltd Balance Sheet as at 31st Dec
| Noncurrent Assets | 2020 | 2021 | 2022 |
|---|---|---|---|
| Building | 147,000 | 238,000 | 327,000 |
| Equipment | 9,000,000 | 11,325,000 | 10,150,000 |
| Motor Vehicles | 720,000 | 480,000 | 432,000 |
| Furniture and Fixtures | 350,000 | 260,000 | 170,000 |
| Total | 10,217,000 | 12,303,000 | 11,079,000 |
| Current Assets | |||
| Inventory | 135,000 | 185,000 | 197,000 |
| Receivables | 245,000 | 254,000 | 1,998,000 |
| Prepayments | 146,200 | 158,400 | 268,700 |
| Bank | 950,800 | 241,250 | 746,805 |
| 1,477,000 | 838,650 | 3,210,505 | |
| Current Liabilities | |||
| Trade Payables | 125,000 | 135,600 | 156,400 |
| Overdraft | 45,000 | 65,000 | 85,200 |
| Total Current | 170,000 | 200,600 | 241,600 |
| Liabilities | |||
| Net Current Assets | 1,307,000 | 638,050 | 2,968,905 |
| Net Assets | 11,524,000 | 12,941,050 | 14,047,905 |
| Capital | |||
| Share Capital | 10,000,000 | 10,000,000 | 10,000,000 |
| Income Surplus | 1,524,000 | 2,941,050 | 4,047,905 |
| 11,524,000 | 12,941,050 | 14,047,905 |
RATIOS 2020 2021 2022
Sales Growth 5.11% 3.61%
Receivable Days 7 6 49
Payable Days 7 7 7
Inventory Turnover Days 8 10 9
Gross Margin 55% 52% 48%
Overhead % 12% 13% 16%
Net Margin 30.24% 26.24% 19.78%
Interest Cover 9.63 11.74 10.45
Current Ratio 8.69 4.18 13.29
Quick Ratio 7.89 3.26 12.47
Tax Rate 25% 25% 25%
Dividend Payout RATIO 50% 50% 50%
Inventory to Sales 0.01 0.01 0.01
Receivables to Sales 0.01 0.01 0.13
Payables to Sales 0.01 0.01 0.01
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(a) Explain the concept of Risk and Control Self-Assessment (RCSA) and the steps involved in crafting this essential Risk Management tool. (10 marks)
(b) Mention and explain the significance of recording historical or past events in the Operational Risk Management Space in each business unit. (5 marks)
(c) How does the RCSA differ from an Incident Management System? (5 marks)
[Total: 20 marks]
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Your valued customers of twenty years, BA Brazil Nuts Ltd was established twenty-six years ago by Herbert Obeng, aged 62 and his wife Martha Obeng, aged 58, both graduates in Agricultural Engineering from the University of Science, Industry and Technology. They also have MBA certificates in Marketing. Prior to this, they both worked with the Gold Coast Food Production and Distribution Service, a State Corporation engaged in the cultivation, purchase and distribution of food supplies. Herbert serves as both Board Chairman and CEO of the company. He is also in charge of Farming Operations. The Farm Managers at the company’s farms report directly to Herbert. Martha serves as the CFO and Executive in charge of Marketing. She is supported by an Accounts Clerk, Jones Pino, aged 25 who has just completed his professional examination in Accounting. ICA (Ghana). The company also has a pool of skilled workers poached from other reputable industrial establishments.
The company is located at Ekumfi Swedru in the Central Region of the country and boasts of a state of the art Brazil nut production plant and a five storey office building. The company has two articulator trucks which are used in the carting of the Brazil nuts to the ports for export. The company is engaged in the production, roasting, packing and export of processed Brazil nuts primarily to the EU and Great Britain which take 60% of its products. The rest is sold locally (20%) and to other parts of the world (20%) including Australia and the US.
The company has operated an impressive account over the years until a year ago when you saw a sharp dip in the company’s turnover. In your interaction with Herbert, you learnt that there had been a fire outbreak which affected a significant part of the company’s farm holdings in the Bono Region of the country. He had to replenish his stock of Brazil nuts at a higher cost from his colleagues who also have farms in this part of the country. Your latest investigations show that the company has replanted the burnt area with Brazil nut seedlings.
In one of your visits, it came to your attention that Herbert was building a new factory at Winneba about eighty (80) kilometers away. When you queried him, he told you he was anticipating expanding his market in US and Australia.
The company’s Overdraft Facility of GHC 5,000,000.00 is showing a hard core at around GHC 3,000,000.00. The company is requesting for:
Critically examine this proposition. [30 MARKS] BA Brazil Nuts Ltd. Profit and Loss Extracts for the year ending 31 Dec
| 2021 | 2022 | 2023 |
|---|---|---|
| GHC | GHC | GHC |
| 5,750,000 | 6,900,000 | 7,690,000 |
| 472,610 | 534,100 | 758,420 |
| 3,150,000 | 4,142,000 | 4,605,800 |
| 3,622,610 | 4,676,100 | 5,364,220 |
| 534,100 | 758,420 | 985,400 |
| 3,088,510 | 3,917,680 | 4,378,820 |
| 2,661,490 | 2,982,320 | 3,311,180 |
| 690,000 | 779,700 | 991,580 |
| 405,000 | 417,400 | 777,400 |
| 1,566,490 | 1,785,220 | 1,542,200 |
| 439,600 | 574,000 | 684,500 |
| 1,126,890 | 1,211,220 | 857,700 |
| 281,723 | 302,805 | 214,425 |
| 845,167 | 908,415 | 643,275 |
BA Brazil Nuts Ltd. Balance Sheet as at 31 Dec
20.00%
11.45%
Receivable Days
98
112
141
Payable Days
90
75
78
Inventory Turnover Days
63
71
82
Gross Margin
46%
43%
43%
Overhead %
12%
11%
13%
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You are partner for a firm called Konamoah & Associates, who are auditors for Aluco, an aluminium processing company. Aluco has several issues with its aluminium and steel byproducts, including toxic emissions and a poor health and safety record for employees in the workshop. Aluco has proven to be very lucrative for your firm and you are busy planning the coming year’s audit visits after agreeing to continue this engagement some weeks earlier. The by-products arising from the production process include the following:
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Fadila Associates has been the auditors of Aduaba LTD for the past 3 years. Aduaba LTD is into the production of cashew drinks. You have been assigned to lead the audit of Aduaba LTD and have been provided with the following extracts from the draft financial statements for 2023 before the final audit planning meeting with the Chief Accountant.
Draft statement of financial position (extracts)
| Draft 2023 | Actual 2022 | |||
|---|---|---|---|---|
| GHc’000 | GHc’000 | GHc’000 | GHc’000 | |
| Property, Plant and Equipment | 42,860 | 41,620 | ||
| Receivables | ||||
| Trade | 4,800 | 3,150 | ||
| Other | 380 | 5,180 | 280 | 3,430 |
| Inventory | ||||
| Raw materials | 2,460 | 1,870 | ||
| Work-in-progress | 380 | 450 | ||
| Finished goods | 2,270 | 5,110 | 2,030 | 4,350 |
| Total Assets | 53,150 | 49,400 | ||
| Current liabilities | ||||
| Trade | 4,116 | 3,470 | ||
| Other | 870 | 4,986 | 650 | 4,120 |
Draft income statement (extracts)
| Draft 2023 | Actual 2022 | |
|---|---|---|
| GHc’000 | GHc’000 | |
| Revenue | 53,250 | 50,750 |
| Cost of sales | 39,360 | 39,220 |
| Gross profit | 13,890 | 11,530 |
| Depreciation of Property, Plant and Equipment | 4,450 | 2,810 |
| Other expenses | 3,540 | 3,480 |
| Profit before tax | 5,900 | 5,240 |
Your Audit Manager has reviewed these extracts and has identified three financial statement headings which he believes require further investigation. These are property, plant & equipment, trade receivables and inventory. He has also calculated the following accounting ratios:
| Draft 2023 | Actual 2022 | |
|---|---|---|
| Trade receivables collection period | 28 days | 17 days |
| Inventory turnover | 7.6 times | 8.9 times |
| Gross profit percentage | 26% | 23% |
Required: a) Explain why the Audit Manager has selected these three headings for further investigation from the given financial statement extract. (9 marks) b) Outline the audit evidence the Audit Manager should request for to clarify the situation regarding these financial statement headings. (11 marks)
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Lamsey Jewelers is a family-owned business specializing in high-end jewellery, located in Dunkwa-On-Offin in the Central Region of Ghana. The company sources gold from various suppliers in the small-scale mining sector. Recently, the Minerals Commission received anonymous tips suggesting that Lamsey Jewelers may be involved in laundering money through its operations. Authorities suspect that the business could be used to conceal the origins of illicit funds through gold purchases and sales.
To investigate these suspicions, regulatory authorities have appointed Baba Yara and Associates, an independent auditing firm, to conduct a thorough review of Lamsey Jewelers’ operations and financial transactions. During the audit, Baba Yara and Associates discovered that Lamsey Jewelers has been accepting large cash payments for custom jewellery orders without conducting proper due diligence on the customers. Several transactions involving cash payments exceed typical retail amounts, raising suspicions of potential money laundering.
Required:
i) Discuss the key legal and regulatory requirements in Ghana related to anti-money laundering relevant to Lamsey Jewelers.
ii) Discuss the obligations placed on professional firms such as Baba Yara and Associates in relation to money laundering.
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Compliance audit is crucial in state audits to ensure multiple objectives. It determines whether the subject matter being considered follows specific criteria. These criteria may include:
Compliance audit can be conducted as either an Attestation Engagement or a Direct Reporting Engagement.
Required:
i) Evaluate these TWO engagements.
ii) Discuss common areas that will be covered by the reports of the two engagements.
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a) The Minister for Finance on December 5, 2022, invited holders of domestic bonds to voluntarily exchange GH¢137.3 (US$14.3) billion of the bonds and notes including E.S.L.A and Daakye Bonds for a package of 12 new eligible domestic bonds.
As Director of Audit at the Ghana Audit Service, describe how you would plan and execute an audit of the implementation of Ghana’s domestic debt exchange program as a form of CPD for a section of staff of the Ghana Audit Service.
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You are a Senior Auditor at Dromo Audit Firm, assigned to audit a new client, Afroherb Pharma LTD, a multinational pharmaceutical company. During the initial stages of engagement planning, you discovered that Afroherb Pharma LTD operates in multiple jurisdictions, including Ghana, Liberia, Sierra Leone, and The Gambia. The parent company is in Ghana, and the companies in the other jurisdictions are all subsidiaries. All these jurisdictions have significant regulatory requirements and operational difficulties. The company has recently expanded its product line to include vaccine production following the introduction of The Vaccine Centre in Ghana. The production of vaccines is also subject to stringent regulatory reviews.
Required:
i) State FOUR audit procedures you could perform in relation to the consolidation of the financial statements of Afroherb Group.
ii) Identify TWO specific risks associated with auditing Afroherb Pharma LTD, particularly in relation to its expansion into vaccine products. How should these risks be managed?
iii) State TWO problems associated with the planning of group audits
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Baaba & Associates, an audit firm, is conducting a year-end audit of Rashida LTD. The audit team is particularly concerned about the accuracy of the accounts receivable balance reported on the statement of financial position as of December 31, 2023. Therefore, as part of their audit procedures, they need to perform substantive tests to identify any material misstatements, errors, or fraud that could impact the accuracy of the financial statements.
Required:
Explain THREE substantive tests that the audit team at Baaba & Associates should perform to obtain sufficient appropriate audit evidence regarding the accuracy of Rashida LTD’s accounts receivable balance.
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Oboshie Audit Firm has been engaged to audit the financial statements of Abakah Manufacturing LTD for the year ended December 31, 2023. During the planning phase of the audit, the audit team identified that Abakah Manufacturing LTD relies heavily on its internal control system to ensure the accuracy and completeness of its financial reporting.
Required:
i) Explain TWO tests of control to be performed by Oboshie Audit Firm to evaluate the effectiveness of Abakah Manufacturing LTD’s internal controls over its financial reporting.
ii) Identify a method that should be used under each test of control in (i) above.
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You are part of a team undertaking the audit of Glaglo LTD, a local retail company. The company recently introduced an online marketing and sales system. As part of understanding the company’s revenue process by way of a walkthrough test, you noted that the company has recently engaged a fintech company to handle payment processing from these online sales.
Required:
i) Discuss FOUR cyber security threats associated with the IT System employed by Glaglo LTD.
ii) State the audit response to the cyber security threats associated with the IT System employed by Glaglo LTD.
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According to IAASB Handbook 2023-2024 edition, the degree of assurance that can be provided about the reliability of the financial statements of a company will depend on the amount of work performed in carrying out the assurance process and the result of that work. The resulting assurance falls into one of two levels – reasonable assurance and limited assurance.
Required:
In reference to the statement above, discuss the difference between reasonable assurance and limited assurance.
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Katam Pie has adopted a strategy of diversification into many different industries in order to reduce risk for the company’s shareholders. This has resulted in frequent changes in the company’s gearing level and widely fluctuating risks of individual investments. Presently, the company has a target debt-to-asset ratio i.e., D/(E + D) of 25%, an equity beta of 2.25, and a pre-tax cost of debt of 5%.
On January 1, 2016, Katam Plc with a year-end of December 31, is considering the purchase of a new machine costing N750million, which would enable it to diversify into a new line of business. The new business will generate sales of N522.50million in the first year, growing at 4.5% p.a. A constant contribution margin ratio of 40% can be expected throughout the 15-year life of the project. Incremental fixed cash costs will be N84.32million in the first year, growing by 5.4% p.a.
A regional development bank has offered a 10-year loan of 3% interest to finance 40% of the cost of the machine. The balance of 60% will be financed equally by a 10-year commercial loan (with annual interest of 5%) and a fresh round of equity. The issue cost on the commercial loan will be 1%, and the new equity will incur an issue cost of 3%. All issue costs are on the gross amount raised for the respective capital. Issue costs on debt are allowed for tax purposes.
A firm that is already in the business of the new project has a gearing ratio of 20% (debt to asset) and a cost of equity of 18.1%. Its corporate debt is risk-free.
The tax rate is 30% payable in the year the profit is made. Tax depreciation of 20% on cost is available on the new machine. Katam Pie has a weighted average cost of capital of 14% and a cost of equity of 17.5%. The risk-free rate is 4%, and the market risk premium is 7%.
You are required to:
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Home Care is a charity that provides accommodation for unemployed young people.
The constitution of the charity explains how the charity’s income could be spent and also contains a requirement that administrative expenditure cannot exceed 10% of income in any year.
The charity’s income is mainly derived from voluntary cash donations collected by volunteers from members of the public. Recently, the charity’s income has been impacted by the current global economic and financial meltdown.
a. Describe the term ‘audit risk’ and explain the THREE elements of risk that contribute to total audit risk. (8 Marks)
b. Using the information provided in the question, identify FOUR areas of inherent risk to be taken into account in planning the audit of Home Care and explain the effect of each of these risks on the audit approach. (12 Marks)
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