Question Tag: Risk Management

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  • 10 Marks

SCS – Nov 2024 – L3 – Q5b – Board Responsibilities in Corporate Governance

Evaluate the role of the board in corporate governance, focusing on responsibilities for strategy, oversight, and ethical leadership.

The role of the board of directors is critical in corporate governance. The National Corporate Governance Code for Ghana (the National Code) issued in November 2022 outlines the board’s core responsibilities.

Required:

Advise the board of BOGML on the FIVE key responsibilities of the board of directors as outlined in the National Code.

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  • 10 Marks

SCS – Nov 2024 – L3 – Q5b – Board Responsibilities in Corporate Governance

Identify and explain the five governance pillars in the National Corporate Governance Code for Ghana 2022.

It is evident that all is not well with the current corporate governance at BOGML. However, for the company to achieve sustainable growth and remain competitive, it must adhere to sound corporate governance principles.

Required:

Using the FIVE governance pillars identified in the National Corporate Governance Code for Ghana 2022 (the National Code), issued in November 2022 by the Institute of Directors-Ghana, advise the company on how to improve upon its current governance structure.

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  • 5 Marks

SCS – Nov 2024 – L3 – Q2a – Approaches to Risk Management

Discusses risk management approaches to address identified risks in BOGML.

Approaches to risk management in BOGML – Advice to the board of directors

The following are the risk management approaches that the board of BOGML can adopt to manage the following risks identified in the company:

Risk A

  • Description: Low probability but high impact, e.g., pandemics, natural disasters.
  • Approach: Risk Transfer or Risk Sharing
  • Since this risk has a low likelihood of occurring but can result in severe financial losses, the company should consider transferring this risk or sharing risk. This can be done through the company taking full or partial (i.e. sharing of risk) insurance policies specifically designed for catastrophic events, such as business interruption insurance, pandemic insurance, or property insurance that covers natural disasters. Since the impact will be high when the risk occurs, the company can take insurance to pass on the high impact on the company to the insurance company which has to compensate BOGML in the event that the risk does occur.
  • The risk could also be shared through BOGML forming partnerships and collaborating with other OMCs to undertake investment in their oil stations.
  • The company should also develop a disaster recovery and business continuity plan to manage potential impacts effectively.

Risk B

  • Description: High likelihood but low financial impact, e.g., labor turnover and software downtime due to internet instability.

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  • 10 Marks

AAA – Nov 2024 – L3 – Q5a – Roles of an Audit Committee in Corporate Governance

Explain four roles of an audit committee in compliance with good corporate governance practices.

An Audit Committee is a sub-group of a company’s Board of Directors responsible for the oversight of the financial reporting and disclosure process. The duties and responsibilities of the Audit Committee greatly contribute to good corporate governance practices of a company.

Required:
Explain FOUR roles of an Audit Committee in compliance with good corporate governance practices.

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  • 15 Marks

AA – Nov 2024 – L2 – Q3a – Management’s Expert and Audit Evidence

Explain the term "management’s expert" and four factors to consider before relying on their work as audit evidence.

Question:
ISA 500: Audit Evidence provides guidance for auditors intending to rely on the work of a management’s expert. If the information to be used as audit evidence has been prepared using the work of a management’s expert, the auditor must evaluate the management’s expert.

Required:
i) Explain the term “management’s expert.” 
ii) Explain FOUR factors to consider before relying on the work of a management’s expert as audit evidence.

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  • 5 Marks

AA – Nov 2024 – L2 – Q2b – Advantages of Outsourcing Internal Audit

Explain the advantages and disadvantages of outsourcing the internal audit function.

As organisations look for ways to cut costs, the idea of outsourcing internal audit work goes on the agenda. While outsourcing may be appealing in theory, there are good reasons to keep internal audit in-house.

Required:
i) State TWO advantages of outsourcing the internal audit function. 
ii) State THREE disadvantages of outsourcing the internal audit function.

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  • 20 Marks

AAA – May 2016 – L3 – Q3 – Internal Audit and Corporate Governance

Identify internal controls for managing risks at KAGM and explain related financial statement risks.

The Kuramo Art Gallery and Museum (KAGM) is in the centre of a city that is popular with tourists. About 65% of its income comes from admission fees and annual memberships, and about 30% of its income comes from sponsorship of special exhibitions by companies. Most of the remaining income comes from a small cafe and gift shop in the art gallery and museum.
Admission fees come from sales of tickets to daily visitors and from annual membership subscriptions from ‘Friends of KAGM’ who are entitled to free entry to the art gallery and museum at any time.
Day tickets can be purchased by credit card in advance, by a telephone ‘hotline’ or at KAGM’s website on the Internet. Alternatively, day tickets can be bought with cash or credit card at the ‘door’ on the day of the visit. Reduced prices are available for children, students, and individuals aged over 65, and there are also special reduced-price ‘family tickets’ for two adults and two children.
Sponsorship arrangements are agreed up to 18 months in advance. Some corporate sponsors, particularly transport companies (bus companies and railway companies) sell advertising to KAGM.
The management of KAGM have identified the following applicable risks that need careful attention. They believe that these risks should be managed actively.

(i) There is a failure to attract more visitors because of the poor condition of many of the paintings in the art gallery and of the items in the museum. Paintings must be restored regularly because their condition deteriorates. KAGM has just one specialist restorer, who is unable to keep up with the required volume of work. The management of KAGM recognise that investment in new items and the restoration of existing items is inadequate, but blame the lack of income for the problem.
(ii) Some corporate sponsorship agreements may not be invoiced due to poor communication between the sponsors, KAGM’s sponsorship managers, and the accounts department of KAGM.
(iii) Some sponsorship agreements are not invoiced at their correct amount. This happens often when a sponsor is also a company that provides advertising for KAGM. Normal practice is for these sponsors to deduct their advertising charges from the amount they pay to KAGM in sponsorship. However, the accounts department in KAGM is not given the details of these set-off arrangements.
(iv) Some of the cash received from day visitors at the door may be stolen (or lost, or used by management for business expenses) and does not reach KAGM’s cashier.
(v) The on-line booking system for buying tickets in advance on the KAGM website is not always available because the website is ‘down’.

Required:

(a) Describe appropriate internal controls to manage each of the applicable risks described above. (15 Marks)
(b) Explain the financial statement risks that arise from each of these applicable risks. (5 Marks)

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  • 7 Marks

FM – May 2016 – L3 – Q6a – Financial Risk Management

Calculating the number of call options needed to delta-hedge the position of a bank's investment in shares.

You work in the corporate finance department of a major bank. The bank has invested in 20,000,000 shares of Ode Oil Plc. You are concerned about the recent volatility in Ode Oil Plc’s share price due to the recent instability in the global oil market. You plan to protect the bank’s investment from a possible fall in Ode Oil Plc’s share price for the next three months and do not plan to sell the shares at present.

You have the following additional information:

  • Ode Oil Plc’s current share price: N10
  • Call option’s current share price: N11
  • Option expiry: 3 months
  • Interest rate (annual): 8%
  • Ode Oil Plc’s share annual standard deviation: 64%

You are required to calculate:
How many call options you need to buy or sell in order to delta-hedge the bank’s position. Please be specific.

Note: Delta may be estimated using N(d1).

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  • 15 Marks

FM – May 2017 – L3 – Q6 – Financial Risk Management

Analyze the use of an interest rate swap between two companies for mutual benefit.

Large Plc. (LP) wishes to borrow N200 million for five years to finance the purchase of new non-current assets. The preference of the company’s Directors is that these funds are borrowed at a fixed rate of interest. The company’s long-term debt is currently rated BBB, meaning LP would have to pay 6.5% p.a. for fixed rate borrowing. Alternatively, LP could borrow at a floating rate, i.e. the prime lending rate (PLR) + 2.25% at the present time.

The Directors of LP have recently been informed by its bank that TK Plc. is also currently looking to borrow N200 million for five years at a floating rate of interest, and its AA rating gives it access to floating rate borrowing at PLR + 1.50% per annum. TK Plc. would pay 5.50% per annum for fixed rate borrowing at the present time.

Required:

a. State FIVE reasons that a company might have for entering into an interest rate swap. (5 Marks)

b. Show how an interest rate swap could be used to the equal benefit of both companies, assuming that the terms of the swap agreement are such that LP’s swap payment to TK Plc. is to be 5.5% fixed per annum. (7 Marks)

c. Identify, with a supporting brief explanation, which of the two companies would be disadvantaged if the PLR were to fall consistently within the five-year term of the interest rate swap. (1 Mark)

d. Identify TWO risks that both companies will face, should they decide to enter into the interest rate swap agreement. (2 Marks)

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  • 20 Marks

AAA – May 2019 – L3 – Q3 – Audit of IT Systems and Data Analytics

Explain COBIT as an IT governance tool, its purpose, and six specific components of the framework.

Jemigboran Commercial Industries has been operating for some years. Its management has sought your input as the auditor of the company on a proposal by the information technology (IT) team of the company to introduce a framework as “Control Objectives for Information and Related Technologies (COBIT)” for its operations.

Required:
a. Explain COBIT as an IT governance tool, and the purpose it serves in an organisation. (8 Marks)
b. Identify and explain SIX specific components of COBIT. (12 Marks)

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  • 20 Marks

FM – May 2019 – L3 – Q5 – Portfolio Management

Evaluate whether an option price is fair for hedging Yaro Plc. shares, and explain how changes in volatility and the risk-free rate affect the value of a call option.

You are the portfolio manager of an asset management company based in Kano. Your company has in its portfolio 27,750,000 shares of Yaro Plc., a company listed on the Nigerian Stock Exchange. The shares are currently trading at N3.60 per share.

Your company plans to sell the shares in six months’ time to pay dividends, and you plan to hedge the risk of Yaro’s shares falling by more than 5% from their current market value. A decision has therefore been taken to buy an over-the-counter option to protect the shares. A merchant bank has offered to sell an appropriate six-month option to your company for N1,250,000.

Yaro’s share price has an annual standard deviation of 13%, and the risk-free rate is 4% per year.

Required:

a. Evaluate whether or not the price at which the merchant bank is willing to sell the option is a fair price.

b. Explain briefly (without any calculations) how a decrease in the value of each of the following variables is likely to change the value of a call option:
i. Volatility of the stock price
ii. Risk-free rate

(Total: 15 Marks)

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q7 – Audit of IT Systems and Data Analytics

Evaluates factors influencing the use of CAATs in audit planning and identifies solutions to address audit trail loss.

CAATs

The availability of Computer Assisted Audit Techniques (CAATs) should be considered by auditors when planning the nature, extent, and timing of tests in an audit. Auditors must determine their testing strategies which will depend on their choice of either using a manual testing method or a computer-assisted method.

Required:

(a) Explain FIVE factors that will determine auditors’ choice of method of testing in the planning of an audit in a computer environment. (10 Marks)

(b) Identify FIVE solutions to loss of audit trail. (5 Marks)

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  • 5 Marks

FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

Discuss any FIVE reasons why conflict of interest may exist between shareholders and bondholders. (5 Marks)

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  • 5 Marks

FM – Nov 2014 – L3 – SC – Q5b – Financial Risk Management

Examine financial objectives, strategic changes, and risks during privatization of a state-owned enterprise.

What are the associated risks that the company may be exposed to as a result of privatization? (5 Marks)

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  • 3 Marks

FM – May 2022 – L3 – Q6b – Financial Risk Management

Calculate the number of put options needed to delta-hedge a short position.

In your personal investment portfolio, you have gone short (i.e., you have sold) 110,000 units of Big Bank plc. Call and put options exist on the bank’s shares. You decide to hedge your position using put options on the bank’s shares. For the relevant option, you know that:
N(d1) = 0.45

You are required to calculate how many put options you will need to buy or sell to delta-hedge. Be specific.

 

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  • 20 Marks

CR – Dec 2020 – L3 – Q3 – Regulatory Environment for Corporate Reporting

Discuss SEC risk management provisions and analyse components of effective risk reports and their benefits to financial institutions.

Exposure to a variety of risks may affect the ability to achieve corporate objectives, thereby making risk management a corporate governance issue. Risk reports enable stakeholders to evaluate the importance attached to risk management and the company’s effectiveness in managing identified risks. Therefore, risk reports boost shareholders’ confidence that the company has adopted a responsible attitude towards risk.

As part of the regulatory framework to manage risk, the Securities and Exchange Commission (SEC) provided several guidelines for rules and content of effective risk reports.

Required:

a. Discuss the regulatory risk management provisions by SEC in Nigeria. (10 Marks)

b. Analyse the components of effective risk reports and state the benefits of their application to financial institutions in Nigeria. (10 Marks)

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  • 20 Marks

ATAX – May 2023 – L3 – Q2 – Emerging Trends in Taxation

Discuss risks, mitigation measures, roles, benefits, and challenges of technology in accounting and tax practice.

Tax legislations are becoming increasingly complex, creating more risks for professional accountants and tax practitioners. The role of technology in running a contemporary accounting firm and/or tax practice is evolving rapidly, bringing new layers of complexity and regulatory pressure.

Your firm of chartered accountants is organizing an in-house training for the newly employed audit officers. You have been mandated by the Senior Partner to prepare a paper on: “Risk and Role of Technology in Accounting/Tax Practice.”

Required:

As the paper presenter, prepare a paper for the training addressing the following:

(a) Risks of running a professional accounting firm and/or tax practice (4 Marks)
(b) Measures to mitigate the identified risks (5 Marks)
(c) Roles of technology in running a contemporary accounting/tax practice (3 Marks)
(d) Benefits and challenges of adopting technology by professionals in accounting firms and/or tax practices (8 Marks)

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  • 1 Marks

AAA – Nov 2012 – L3 – AII – Q18 – Risk Management in Audits

Identifies the corporate factor that has increased the risk exposure of auditors over the last decade.

The rate of corporate ………… in the last ten years has tended to increase the risk exposure of the auditor.

 

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  • 15 Marks

AAA – May 2024 – L3 – SC – Q5 – Auditor’s Legal Liability

Assess the auditor's legal position and requirements for due care in Globamedia's case, and outline preventive steps.

Globamedia is a company listed on The Nigerian Exchange (NGX) and is a long-established media company. In the last three years, it made some losses, though it is making investment in digital publishing. This investment and the company’s projected sound future prospects have led to a good market rating since it was generally seen that this digital publishing is a leading edge in the media industry. Its investments have been funded through the use of reserves built over many years.

However, a few weeks ago, Globamedia’s shares were suspended, having fallen by more than the stipulated threshold by The Nigerian Exchange Group on rumors that asset values have been significantly overstated and that the company was no longer financially viable. Your firm as the auditors has come under significant criticism and is considered as being negligent.

Required:

a. Evaluate the legal position of your firm. (5 Marks)

b. Discuss the requirements for due care. (5 Marks)

c. Highlight the steps and procedures that the firm could have taken to prevent such a situation from occurring. (5 Marks)

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  • 30 Marks

FM – Nov 2020 – L3 – Q1 – International Financial Management

Evaluates a foreign investment project in Linder, with NPV, payback period, and real options for abandonment analyzed under two scenarios.

Assume today is November 20, 2019. In 2018, the Oyin Division of Aba plc successfully launched a new premium wine, “Aladun,” in Nigeria. The Divisional Board of Oyin Division is now considering plans put forward by the Divisional Marketing Manager to launch the full range of Aladun in another country, “Linder.” Linder has the Linderian dollar (L$) as its currency, and the launch is planned for January 1, 2020.

It is known that breaking into the Linderian market for fruit wine is challenging due to strong local brand loyalty. Initial market research based on free tasting sessions has been promising, though uncertainties remain. The biggest risk identified is the potential for a Nigerian competitor to enter the same market with a similar product.

Financial Data for the Project:

  • Initial market research for the Linderian market: N5 million (already spent).
  • Additional detailed market research and packaging design (if approved): N20 million.
  • Launch campaign (radio and TV advertising): N10 million.
  • Distribution center in Linder: L$84 million.

Operating cash flow forecasts for the year ending December 31, 2020, vary based on two scenarios:

  • Scenario A: Sales revenue L$100 million; costs L$10 million + N20 million.
  • Scenario B: Sales revenue L$55 million; costs L$10 million + N15 million.
  • Probability of occurrence: 70% for Scenario A, 30% for Scenario B.

Other relevant financial data:

  • Oyin Division’s project evaluation discount rate: 15%.
  • Project duration: 4 years.
  • Expected operating cash flow growth: 5% per year.
  • Residual value of the distribution center: L$52 million after 4 years.
  • Exchange rate: N1 = L$1.2000 on January 1, 2020 (strengthening by 2% per year).
  • Corporate tax rate in Nigeria: 35%.
  • Tax allowances on capital expenditure: 100% (tax-deductible in Nigeria).

Additional Option:

  • The project could be abandoned on January 1, 2021, with the distribution center sold for an estimated L$70 million if Scenario B occurs.

Required:

a. Ignoring the abandonment option: i. Calculate the NPV for the project as of January 1, 2020, for each scenario and the overall total expected NPV. (17 Marks) ii. Calculate the payback period for each scenario. (4 Marks) iii. Interpret your results. (4 Marks)

b. Evaluate the abandonment decision on January 1, 2021, if Scenario B occurs. (7 Marks)

c. Advise on how real options and other strategic financial issues may influence the investment decision. (8 Marks)

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