Risk Management – Knowsia

SCS – L3 – Q32 – Strategy implementation

Explain five common weaknesses of Boards of Directors at Zamu Enterprises.

Question

(a) Boards of Directors are expected to manage companies effectively. However, corporate boards sometimes fail to do so. Recent corporate scandals have highlighted key weaknesses of Board of Directors.

Required:

Explain FIVE common weaknesses of Board of Directors.

(b) Zamu Enterprises began as a small company which operated in the financial services sector of Zamora’s economy. Within the last ten years, the Board, which is chaired by the founder, Ms. Amina Zuri, has incrementally expanded into three more sectors of the economy, namely: telecommunications, logistics and real estate. Currently a conglomerate, Zamu Enterprises has four different companies in its portfolio and has its corporate head office located within the capital city, Zambara.
Required:
Explain the different levels of corporate strategy as it relates to Zamu Enterprises.

(c) Technology is one of the most powerful forces within the external business environment that has changed significantly how business is conducted especially within the 21st Century. For instance, information technology (IT), well exploited, can have significant impact on all the five forces of competition.

Required:

Identify FOUR effects of technological change on organization.

Answer

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Tags: Board Weaknesses, Corporate Governance, Oversight, Risk Management, Strategic management, Zamora
Level: Level 3

Topic: Strategy implementation

PSAF – L2 – Q16.4 – Internal Audit Functions

Explain the four functions of internal audit in the public sector.

Question

16.4 FUNCTIONS OF INTERNAL AUDIT

Internal audit effectiveness is at the heart of public sector governance. In recent public financial management reforms, the role of internal audit has been emphasized. Further, the support role of Audit Committees to internal auditors has been emphasized.

Required:

(a) Explain the four functions of internal audit in public sector.

(b) Discuss five advisory roles and responsibilities of Audit Committees.

Answer

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Tags: Compliance, Financial management, Internal Audit, Public Sector Governance, Risk Management
Level: Level 2

Topic: Public expenditure and financial accountability framework

PSAF – L2 – Q16.2- Public Expenditure and Financial Accountability

Discuss five ways public sector governance differs from private sector governance.

Question

At a recent conference of public sector governance where private sector governance is compared to that of the public sector, the speaker stresses “Public sector governance is different”.

Required:

(a) Discuss the statement of the speaker of the conference, pointing out five ways by which public sector governance is different.

(b) Discuss five benefits of engaging the stakeholders in public sector governance.

Answer

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Tags: Accountability, decision making, Private Sector Governance, Public Sector Governance, Risk Management, Transparency
Level: Level 2

Topic: Public expenditure and financial accountability framework

FM – L2 – Q126 – Internal Control System

Discuss objectives of internal control system and explain COSO framework components in relation to PEFA.

Question

(a)

The PEFA assessment of a PFM system considers internal control system of the country, as the internal control system plays a vital role across every pillar in addressing risks and providing reasonable assurance that operations are carried out in orderly and open manner.

Required:

(i) Explain the objectives of an effective internal control system.

(ii) With reference to the COSO framework, explain the components of internal control system in relation to the PEFA framework.

Answer

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Tags: Accountability, Control Environment, COSO Framework, Internal Control, PEFA framework, Public Financial Management, Risk Management
Level: Level 2

Topic: Treasury Management

FM – L2 – Q122 – Business valuations

Calculate pre-acquisition market values of Clearfield Farms and Village Industries using Gordon’s growth model.

Question

Clearfield Farms Limited is considering acquiring Village Industries Limited, extracts of the financial statement of the two companies is as follows:

Statement of Financial Position

	Clearfield Farms Ltd GH¢’m	Village Industries GH¢’m
Net assets	6,300	1,892
Equity:
Ordinary share capital	2,000	1,000
Retained earnings	4,300	892
	6,300	1,892

The two companies retain the same proportion of profits each year and this is expected to continue into the future. Clearfield Farms Limited return on investment is 16%, while that of Village Industries Limited is 21%. One year after the post-acquisition period, Clearfield Farms will retain 60% of its earnings and expects to earn a return of 20% on new investment.
The dividends of both companies have been paid. The required rate of return of ordinary shareholders of Clearfield Farms Limited is 12% and Village Industries Limited 18%. After the acquisition, the required rate of return will become 16%.

Required:
(a) If the acquisition is to proceed immediately, calculate the:
(i) Pre-acquisition market values of both companies.

(ii) Maximum price Clearfield Farms Limited will pay for Village Industries Limited

(b) As a Finance Manager in your company, you have been asked to produce an explanatory memo to Senior Management on the subject Mergers and Acquisition. Your memo should clearly outline what actions a target company might take to prevent a hostile takeover bid.

Drake Limited is a Ghanaian registered multi-national company with FIVE subsidiaries in Europe, Asia and Africa. These subsidiaries have traditionally been allowed a large amount of autonomy, but Drake Limited is proposing to centralize most of the group’s treasury management operations.

Required:
(c) Acting as Group Head of Finance to Drake Limited, prepare a memo suitable for distribution to Senior Management of each of the subsidiaries explaining the potential benefits of treasury centralization.

Answer

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Tags: Centralization, Corporate finance, Financial efficiency, Risk Management, Treasury management
Level: Level 2

Topic: Treasury Management

FM – L2 – Q116 – Management of Receivables and Payables

Evaluate the impact of a new discount policy on Atefufu Foods Limited’s annual profit and suggest an alternative receivables management policy.

Question

Atefufu Foods Limited has annual sales revenue of GH¢8 million. It has a contribution to sales ratio of 45% and its annual fixed costs are GH¢2.5 million. These figures exclude bad debts which are currently 1.25% of sales. All sales are on credit and standard credit terms are 30 days, although customers take on average 45 days to pay. Accounts receivable are financed by a bank overdraft on which interest is payable at 8%.
The company’s management are considering whether to offer a discount of 2.5% for all customers who pay within 14 days, and to extend the credit period for other customers to 60 days. It has been estimated that if this policy is introduced, 25% of customers would take the settlement discount and the rest would take the full 60 days credit offered.
The new policy would result in higher administration costs equal to 0.5% of total gross sales. It is expected that total (gross) sales would be boosted, and would increase by 3% per year. It is also expected that bad debts would fall to 1% of gross sales.

Required:
(A) Calculate the effect that the new policy would have on annual profit and recommend whether the new policy should be introduced. Suggest an alternative policy for the management of receivables that might improve profit by a larger amount.

(B) Esuna Processing Limited is a subsidiary of Atefufu Foods Limited. It uses the Miller-Orr model to manage its cash balances and has set a minimum cash balance of GH¢12,500. The average rate received on investments is currently 5.68%. Over the past year, the standard deviation of daily cash flows has been GH¢2,800. The cost to the company of selling investments or making deposits is GH¢20 per transaction.

Required:
Calculate the spread, the upper limit and the return point for cash balances using the Miller-Orr model and explain the meaning and purpose of these amounts for the purpose of cash management.

(D) Discuss the main factors that should be taken into consideration by a company’s management when deciding on how its working capital should be funded.

Answer

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Tags: Financing Policy, Liquidity, Matching Principle, Risk Management, Working Capital Funding
Level: Level 2

Topic: Working capital management

FM – L2 – Q115 – Management of receivables and payables

Evaluate if a new credit policy with early settlement discounts increases profitability for Tamale Transport Ltd.

Question

Tamale Transport Ltd has annual sales revenue of GH¢6 million, and all sales are on 30 days’ credit, although customers on average take ten days more than this to pay. Contribution represents 60% of sales, and the company currently has no bad debts. Accounts receivable are financed by an overdraft at an annual interest rate of 7%.
Tamale Transport Ltd plans to offer an early settlement discount of 1.5% for payment within 15 days and to extend the maximum credit offered to 60 days. The company expects that these changes will increase annual credit sales by 5%, while also leading to additional incremental costs equal to 0.5% of turnover. The discount is expected to be taken by 30% of customers, with the remaining customers taking an average of 60 days to pay.

Required:
(A) Evaluate whether the proposed changes in credit policy will increase the profitability of Tamale Transport Ltd.

(B) Salaga Enterprises, a subsidiary of Tamale Transport Ltd, has set a minimum cash account balance of GH¢7,500. The average cost to the company of making deposits or selling investments is GH¢18 per transaction, and the standard deviation of its cash flows was GH¢1,000 per day during the last year. The average interest rate on investments is 5.11%.

Required:
Determine the spread, the upper limit, and the return point for the cash account of Salaga Enterprises using the Miller-Orr model and explain the relevance of these values for the cash management of the company.

(D) Discuss the key factors to be considered when formulating a working capital funding policy.

Answer

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Tags: Funding Policy, Long-term Finance, Matching Principle, Risk Management, Short-term Finance, Working Capital
Level: Level 2

Topic: Working capital management

FM – L2 – Q3 – Corporate Social Responsibility

Identify main issues covered by a company's corporate social responsibility policy.

Question

(A). What are the main issues that might be covered by a company’s policy on corporate social responsibility?

(B). What types of company are most likely to face CSR risks?

(C). What is the nature of CSR risk?

Answer

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Tags: Corporate Social Responsibility, Ethical Investing, Litigation risk, Reputation Risk, Risk Management
Level: Level 2

Topic: Economic and regulatory environment

AAA – L3 – Q12 – Professional responsibility and liability

Discuss measures to reduce negligence claims against audit firms by firms, the profession, or governments.

Question

Increasingly, the auditing profession is finding itself on the receiving end of large negligence suits.

Answer

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Tags: Auditor Liability, Legal Claims, Negligence, Professional standards, Risk Management
Level: Level 3

Topic: Professional responsibility and liability

Tag (SQ): Risk Management

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SCS – L3 – Q32 – Strategy implementation

Explain five common weaknesses of Boards of Directors at Zamu Enterprises.

PSAF – L2 – Q16.4 – Internal Audit Functions

Explain the four functions of internal audit in the public sector.

PSAF – L2 – Q16.2- Public Expenditure and Financial Accountability

Discuss five ways public sector governance differs from private sector governance.

FM – L2 – Q126 – Internal Control System

Discuss objectives of internal control system and explain COSO framework components in relation to PEFA.

FM – L2 – Q122 – Business valuations

Calculate pre-acquisition market values of Clearfield Farms and Village Industries using Gordon’s growth model.

FM – L2 – Q116 – Management of Receivables and Payables

Evaluate the impact of a new discount policy on Atefufu Foods Limited’s annual profit and suggest an alternative receivables management policy.

FM – L2 – Q115 – Management of receivables and payables

Evaluate if a new credit policy with early settlement discounts increases profitability for Tamale Transport Ltd.

FM – L2 – Q3 – Corporate Social Responsibility

Identify main issues covered by a company's corporate social responsibility policy.

AAA – L3 – Q12 – Professional responsibility and liability

Discuss measures to reduce negligence claims against audit firms by firms, the profession, or governments.

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SCS – L3 – Q32 – Strategy implementation

Explain five common weaknesses of Boards of Directors at Zamu Enterprises.

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PSAF – L2 – Q16.4 – Internal Audit Functions

Explain the four functions of internal audit in the public sector.

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PSAF – L2 – Q16.2- Public Expenditure and Financial Accountability

Discuss five ways public sector governance differs from private sector governance.

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FM – L2 – Q126 – Internal Control System

Discuss objectives of internal control system and explain COSO framework components in relation to PEFA.

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FM – L2 – Q122 – Business valuations

Calculate pre-acquisition market values of Clearfield Farms and Village Industries using Gordon’s growth model.

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FM – L2 – Q116 – Management of Receivables and Payables

Evaluate the impact of a new discount policy on Atefufu Foods Limited’s annual profit and suggest an alternative receivables management policy.

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FM – L2 – Q115 – Management of receivables and payables

Evaluate if a new credit policy with early settlement discounts increases profitability for Tamale Transport Ltd.

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FM – L2 – Q3 – Corporate Social Responsibility

Identify main issues covered by a company's corporate social responsibility policy.

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AAA – L3 – Q12 – Professional responsibility and liability

Discuss measures to reduce negligence claims against audit firms by firms, the profession, or governments.

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