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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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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.
Contract manufacturing has grown in popularity in recent years because of its usefulness to companies.
Required:
i) Explain contract manufacturing.
(2 marks)
ii) Outline THREE main reasons for the recent surge in contract manufacturing.
(3 marks)
iii) Explain TWO factors that will ensure effective contract manufacturing.
(3 marks)
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Anim Shoes Ltd produces and sells Ghana-made shoes with two main departments: production/sales and repairs departments. The production and sales department produces and sells 10,000 pairs of shoes each year. Due to the low quality of raw materials available in the country, the company includes an additional GH¢11 in the cost of a pair of shoes sold to cater for one-year after-sales repairs. On average, it is expected that a quarter of the total pairs of shoes sold would come back for repairs a year after sale. Repair works on a pair of shoes take 2 labour hours, and it is estimated that total repair cost on the quarter of shoes will be GH¢27,500.
In addition to providing repair services to the production and sales department, the repair department sometimes picks up offers from outside the company. Such external offers are billed at full cost and a margin on sales of 20%. The following is the breakdown of the average repair cost of a pair of shoes:
| Cost Item | Cost (GH¢) |
|---|---|
| Material | 2.50 |
| Labour (1.5 per hour) | 3.00 |
| Variable Overheads | 1.00 |
| Fixed Overheads | 2.30 |
Required:
i) Calculate the individual profits of the Production/Sales department, Repairs department, and Anim Ventures if repairs are done by the repairs department of Anim Ventures at either full cost plus 20% margin on sales or at marginal cost.
(8 marks)
ii) Pee Shoe Repairs has offered to repair each pair of shoes for Anim Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Anim Ventures accept this offer?
(5 marks)
iii) Identify THREE other factors Anim Ventures should consider in finalizing the decision in (ii) above.
(3 marks)
iv) Explain TWO principles of a good transfer pricing method.
(4 marks)
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You have been consulted by the CEO of Infinity Graphix, a designing and publishing company, to clarify some strategic management terminologies to aid him to finish a proposal for consideration by the company’s board of directors.
Required: Using relevant examples, explain the following types of modular organisation structures. i) Outsourcing. ii) Offshoring. iii) Shared servicing. (6 marks)
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a) The current medium-term strategic plan of Dumko Municipal Assembly (DMA) has the overall objective of improving the performance of the Assembly. One critical strategy towards the attainment of this goal is the adoption of a new public management strategy to increase participation of the private sector in the provision of public services without losing sight of the differences between the public sector and the private sector. In fact, some of these differences are so fundamental that they cannot be washed away anytime soon.
The Chief Executive suggested outsourcing as a key strategy in improving the delivery of public services at the local level through the private sector. DMA is currently bedevilled with poor revenue mobilization, lack of proper data on the Assembly’s activities, and poor infrastructure provision. Other supporting activities like cleaning and security are not well performed or are performed at a very high cost by internal staff. These issues have been tabled at the first strategy meeting convened by the Chief Executive.
Required:
i) Describe THREE fundamental differences between public sector and private sector entities that DMA should take cognizance of in pursuance of the new public management strategy. (3 marks)
ii) Explain the term ‘outsourcing’ in the public sector context and advance TWO arguments for the use of outsourcing by DMA in its operations. (4 marks)
iii) Explain THREE factors that the management of DMA should consider in making the decision to outsource some of its functions. (3 marks)
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