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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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Your audit firm, Beauties Consult, is going to audit for the first time the financial statements of Black Gold Co. Ltd. for the year ended 31 December, 2017. Black Gold Co. Ltd. operates a chain of fuel filling stations in the Greater Accra, Ashanti and Western Regions of Ghana. Customers pay cash for the main products – premium, diesel, and kerosene.
According to its directors, the company has had a “challenging” year and is renegotiating its bank overdraft facility with its bankers. The Statement of Profit or Loss for the year ended 31 December, 2016, is shown below together with the draft Statement of Profit or Loss for the year ended 31 December, 2017.
Required:
As head of the audit team, you are carrying out risk assessment at the planning stage. Perform an analytical review of the draft statement of profit or loss to identify possible risk areas requiring further audit work and provide the necessary risk responses. (12 marks)
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Musah Diara is a Malian resident in Ghana. He has established Tagoe Company Ltd (Tagoe) which engages in trading in West African countries; Ghana, Nigeria, and Mali. Musah is always funded by his brother who is also a resident in Ghana. Musah’s brother does not have a bank account in Ghana. He always gives huge cash to Musah who buys goods in Ghana and sells it in Nigeria or Mali. He pays the profit into Tagoe’s account in Ghana and bank the amount given to him by his brother into his brother’s account in Mali.
Required:
You have been engaged to audit Tagoe. Discuss the risk you are likely to encounter in this audit, specifying your expectation of the risk format and the action you have to take.
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Mr. Asare Jones inherited the Mindsworth Textile Company Ltd (Mindsworth), an unlisted company, from his Father. The company has 1,000,000 shares which are solely owned by Mr. Asare Jones. For the past five years, profits have fallen below the industry average, with a growth rate of only 2%, while the industry average is more than twice this rate.
Mr. Asare Jones has been approached by Indiana Textiles Ltd (Indiana), a competitor, with a bid to take over the assets and liabilities of Mindsworth in exchange for 800,000 shares in Indiana. The shares would add up to Indiana’s existing 7,200,000 shares. Indiana’s shares are currently valued at GH¢9.50 per share.
Meanwhile, Obiba Management Associates (OMA), a corporate finance consultancy firm, has offered GH¢3,000,000 to take up 49% of the shares of Mindsworth and grow the company’s current earnings of GH¢850,000 per the last financial year by 5% in the first three years and after that, 3% into perpetuity.
Mr. Asare Jones, after assessing the risks associated with the various options, has revised his current expected rate of return of 15%. This is to increase by three percentage points for the offer from Indiana and five percentage points for the offer from OMA.
Required:
a) With appropriate computations, advise Mr. Asare Jones on the following:
i) The benefits and risks associated with each of the options available, including not accepting any of the offers. (12 marks)
ii) Advise on the best option to take. (2 marks)
b) Distinguish between the value of a company and the market capitalisation of a company. (3 marks)
c) Explain THREE (3) challenges Mr. Asare Jones will face with the valuation of his unlisted company in the textile industry. (3 marks)
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