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The Internal Audit Unit of Oluvia Bank Limited has been accused of collusion with staff in committing monumental fraud. The following types of fraud were found to be common:
The bank examiners came and were surprised at the level of fraud in the bank and requested management to address it urgently.
After the supervisory visit, the board of directors discussed the issue with the bank’s external auditors, who suggested that the bank could outsource the internal audit functions. The Board of Directors found this suggestion favorable and mandated the Managing Director to act swiftly and report back with details at the next board meeting.
Required:
a. Discuss the main reasons for outsourcing internal audit functions. (3 Marks)
b. Outline the advantages and disadvantages of outsourcing. (10 Marks)
c. Discuss which part of the internal audit function cannot be outsourced. (2 Marks)
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KEMTA Nigeria Limited is a private electrical and mechanical engineering company. The company is one of the major players in the provision of cutting-edge engineering construction services in the Nigerian electrical, mechanical, and communication engineering industry. The company has sites in all 36 States of the Federation, including Abuja. They also work for major financial institutions, educational institutions, Federal, State, and Local Governments. The company has over 500 professionals, skilled, and unskilled workers on its payroll.
You have been the auditor of the company for the past five years. During your audit, you observed some weaknesses in the internal control system of the company. Your review of the domestic reports showed that your firm has been recommending the establishment of an internal audit department for the past three years. However, you observed that the Managing Director is not favorably disposed to this idea, seeing it as an additional cost to the company. He requested to know more about outsourcing the internal audit department.
Required:
a) State and explain the purpose and functions of internal audit in an organisation. (5 Marks)
b) Enumerate the fundamental differences between the internal and external auditors. (10 Marks)
c) Present:
i) The main reasons for outsourcing internal audit. (3 Marks)
ii) The benefits of outsourcing. (2 Marks)
iii) Possible problems of outsourcing. (4 Marks)
d) Identify and explain the THREE main categories of risks usually considered by internal auditors. (6 Marks)
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Divine Grace (DG) Limited currently produces “Part-2011” internally but has received an offer from KK Plc to outsource the production. The offer is for 1,000 units at N100 per unit for the next five years. The cost accountant provides the following cost breakdown for internal production of 1,000 units:
| Cost Components | Amount (₦) |
|---|---|
| Direct materials | 44,000 |
| Direct production labour | 22,000 |
| Variable production overhead | 14,000 |
| Depreciation on machine | 20,000 |
| Product and process engineering | 8,000 |
| Rent | 4,000 |
| General overheads | 10,000 |
| Total | 122,000 |
Additional information:
Required:
a. Should DG Limited outsource “Part 2011”? (10 Marks)
b. What maximum price should KK Plc quote for 1,000 units to make DG indifferent between outsourcing and internal production? (5 Marks)
c. What non-financial factors would favor internal production over outsourcing? (5 Marks)
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Kikelomo Limited manufactures three products K, T, and F, using different quantities of the same resources. Budget information per unit is provided:
| K | T | F | |
|---|---|---|---|
| Market selling price | 1,800 | 2,520 | 3,000 |
| Direct labour (₦140/hour) | 280 | 560 | 700 |
| Material A (₦60/kg) | 300 | 240 | 420 |
| Material B (₦120/kg) | 480 | 720 | 600 |
| Variable overhead (₦80/hour) | 160 | 320 | 400 |
| Fixed overhead | 240 | 140 | 240 |
| Total cost | 1,460 | 1,980 | 2,360 |
| Profit | 340 | 540 | 640 |
| Total budgeted sales units | 500 | 800 | 1,600 |
The budgeted sales are for the month of June but do not include an order from a major customer to supply 400 units per month of each of the three products at a discount of ₦200 per unit. During June, management anticipates a shortage of material B, with only 17,500 kgs available. Kikelomo Ltd cannot hold inventory of raw materials, work-in-progress, or finished products.
Required:
a. State THREE factors that may cause input materials to be a budget constraint and identify steps to overcome this constraint. (6 Marks)
b. Prepare calculations to show production that will maximise Kikelomo Ltd’s profit for June. (9 Marks)
c. Kikelomo Ltd has realised that the contract with the major customer does not have to be fully met, but a financial penalty may apply. Calculate the lowest value of the financial penalty to ensure the order is met in full. (6 Marks)
d. Assume the material B shortage will continue and management has decided to outsource some production. Advise management on the advantages and disadvantages of outsourcing. (9 Marks)
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Find Related Questions by Tags, levels, etc.
JJ Company specializes in the manufacture and distribution of accessories for cars and motorcycles across central Lagos and the suburbs. The board and management of the company have decided to expand their potential market by capitalizing on the recent demand for pedal cycles caused by congestion and concerns for global warming. They intend to start manufacturing pedal cycles from 2019.
The design team has developed four models A, B, C, and D for the initial launch of the pedal cycle. The manufacturing process involves frame manufacturing and assembly/accessory fitting.
At present, there are 40 employees available to undertake frame manufacturing and 20 available for assembly and accessory fitting. Each employee works a 37-hour week, and no overtime is permitted. Employees working on frame manufacturing cost N1,100 per hour, while those working on assembly/accessory fitting cost N1,500 per hour. All employees can be fully utilized elsewhere if not working on this venture.
The anticipated time in hours that each process will take is as follows:
| Model | Frame Manufacturing (hours) | Assembly/Accessory Fitting (hours) |
|---|---|---|
| A | 2.25 | 1.25 |
| B | 2.20 | 1.80 |
| C | 2.20 | 1.40 |
| D | 2.60 | 3.00 |
Direct materials are expected to cost N5,500 for Model A, N6,000 for Models B and C, and N10,000 for Model D. There is no limit on the availability of materials.
Variable overheads of N2,700 per pedal cycle are incurred for both Models A and C, and N3,000 per pedal cycle for both Models B and D.
Fixed overheads allocated to the pedal cycle workshop are N666,000 per annum. The organization uses labor hours to base its overhead absorption rates.
Initial market research indicates that demand and selling prices are likely to be as follows:
| Model | Number of Pedal Cycles | Selling Price (N) |
|---|---|---|
| A | 200 | 14,550 |
| B | 75 | 16,500 |
| C | 220 | 17,000 |
| D | 80 | 24,000 |
In Year 2, two additional options are available:
a. Determine the production plan that would maximize the profit available to JJ Company in Year 1, assuming no overtime is worked. State the profit that would be earned as a result of this plan. (14 Marks)
b. Advise JJ Company of its most profitable course of action in Year 2, assuming all demand is to be satisfied. (8 Marks)
c. Explain in detail how the relationship between the company and the chosen supplier should be controlled if the directors are considering outsourcing key inputs. (8 Marks)
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Managers think about non-financial issues as well as financial issues when making outsourcing decisions.
i. Explain SIX non-financial considerations that will be relevant to a make-or-buy decision. (6 Marks)
ii. Describe with the aid of an example in each case, two non-financial benefits from outsourcing work to an external supplier. (4 Marks)
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According to Cole and Kelly, “An organisation is a group of people with a common purpose who work together to achieve shared goals.”
a. Define the term group cohesion and explain briefly FIVE characteristics of an effective team. (10 Marks)
b. Explain briefly the following concepts:
i. Formal organisation
ii. Organisational structure
iii. Flat organisation
iv. Outsourcing
v. Shared services
(10 Marks)
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Find Related Questions by Tags, levels, etc.
SEAGULL FABRICATORS LIMITED buys a component for N280 per unit, 6,000 units of which it uses monthly. Below is the cost of making the same component in-house:
| UNIT COST (N) | TOTAL COST (N) | |
|---|---|---|
| Direct Material | 100 | 600,000 |
| Direct Labour | 100 | 600,000 |
| Variable Overheads | 50 | 300,000 |
| Total | 250 | 1,500,000 |
To be able to fabricate the component, the company needs to purchase a mould for N5,000,000 with an expected life span of five years. Also, an annual rent of N1,000,000 needs to be paid for the space needed for the fabrication. Power consumption is also expected to increase by N500,000 per year.
Required:
a. You are required to advise the company whether to discontinue the outsourcing of the component or commence local fabrication. (8 Marks)
bi. State THREE qualitative factors to be taken into consideration before a decision is taken to outsource a component hitherto fabricated in-house. (6 Marks)
ii. List THREE quantitative factors usually considered in the case referred to in (bi) above. (6 Marks)
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he management of your company is carrying out major restructuring of the operations of the company for more effective and efficient achievement of objectives and targets. One of the major decisions taken was the outsourcing of the Internal Audit Function.
Required:
i) Define outsourcing. (2 marks)
ii) Identify FOUR (4) advantages and FOUR (4) disadvantages of outsourcing the internal audit function. (8 marks)
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Your management has decided to outsource the internal audit function in your organization. You have been assigned to make a presentation to management.
Required:
Discuss THREE (3) advantages and TWO (2) disadvantages of outsourcing the Internal Audit function in your presentation
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Traditionally, internal audit work is undertaken mainly by in-house teams. However, in recent times many organizations outsource either completely or partially their internal audit function. Kofi Krakye, the Financial Controller of BHB Ltd, has advised management to consider outsourcing their internal audit function to FPP Ltd.
Required:
Explain TWO (2) advantages and THREE (3) disadvantages of outsourcing the internal audit function to FPP Ltd.
(5 marks)
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a) Proper Banking Limited (PBL) has been trading for 20 years selling banking products and has recently become a listed company. In accordance with corporate governance principles of Bank of Ghana, PBL maintains a small internal audit department. The board of directors feels that the authorized business of the Company is banking which is core to the success of PBL. On 20 November 2017, the Operational and Governance Committee of the Board met to discuss whether to maintain the internal audit department and increase its size and build its expertise or to outsource the whole function to their external auditors, International & Co with headquarters in Accra, Ghana, with a global presence in over ninety-nine (99) countries.
Required:
Advise the Board of PBL on the advantages and disadvantages of whether to outsource or maintain their internal audit function. (10 marks)
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b) Aggya Owusu & Co is a well-established audit firm licensed by the Institute of Chartered Accountants, Ghana (ICAG). The firm is a member of a global association of over 250 independent legal and accounting firms in more than 100 countries.
Aggya Owusu & Co has been the External Auditor of BetGhana Ltd (BetGhana) for about four years. BetGhana has recently been awarded a provisional license by the Gaming Commission of Ghana to operate an Online Sports betting operation. The provisional license requires BetGhana to establish a unit with sufficient independence from the day-to-day management and control to enable the effective review of the business and promote a compliance environment, undertake betting-customer due diligence with respect to money laundering and terrorist financing.
Required:
As the Audit Manager of Aggya Owusu & Co, write a proposal to the Directors of BetGhana explaining:
i) The need for an Internal Audit Unit. (5 marks)
ii) FOUR (4) benefits of outsourcing the Internal Audit function to Aggya Owusu & Co. (5 marks)
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Hwerema Technologies produces various components for telecom companies. The demand for these components is increasing. However, Hwerema Technologies’ production facility is restricted to 50,000 machine hours. Therefore, the company is considering whether to import certain components to make up for the shortfall in production to meet market demand. In this respect, the following information has been gathered:
Factory overheads include fixed overheads estimated at GH¢1.50 per machine hour.
Required:
a) Determine the optimal units to be produced in-house and units to be imported. (16 marks)
b) State FOUR (4) qualitative considerations relevant to make-or-buy decisions. (4 marks)
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Find Related Questions by Tags, levels, etc.
PieceJoz FM, a media organization, is considering hosting a two-day beauty pageant in June 2018. The show will be expensive to run and promote. There will be three cash prizes on offer for the pageant, namely:
Other costs will include:
PieceJoz FM expects that:
Required:
a) Using the information above, advise, from a financial perspective, whether management of PieceJoz FM should organize the beauty pageant or outsource it to Magic Media.
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b) Bee Ltd could outsource the production of Ohenewa to an overseas manufacturer. The Accountant has presented figures to show that the NPV of the project based on outsourcing the production is GH¢0.5 million higher than the positive NPV of in-house production.
Required:
Explain THREE (3) non-financial factors that Bee Ltd would need to consider before making the decision either to outsource or produce in-house. (3 marks)
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