Question Tag: Profit Forecast

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  • 15 Marks

AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

Allhope Publications Limited is an old established publishing company owned by two brothers. Over the years, the company had made consistent progress both in sales and profitability.

Due to the quality of their work, the patronage of the company has grown to the extent that its working capital cannot accommodate the work on hand.

The Directors have approached their bankers, Owopo Bank Plc for a facility of N500m to procure essentially modern machinery and printing materials and also for running expenses, particularly salaries.

In support of its application for the bank facility, the company has prepared a profit forecast which is being presented to your firm for review.

Required:

As contained in ISAE 3400: “The Examination of Prospective Financial Information (PFI)”:

a. What will you take into consideration before accepting this assurance engagement? (5 Marks)
b. Enumerate the procedures to be adopted after you have agreed to take up the engagement:
i. As regards PFI assurance engagements generally.
ii. On the Profit forecast. (10 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

Investigation under investment decision will NOT include:
A. Loan facility decision
B. Purchase of shares
C. Purchase of business
D. Reporting on profit forecast
E. Partnership participation

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

Which of the following is NOT an objective of profit forecast investigation on which an opinion can be given?
A. Whether or not the profit forecast complies with the Generally Accepted Accounting Principles
B. As to whether the profit forecast has been prepared on the basis of the existing organization’s accounting policies
C. Whether or not the profit forecast has been prepared on the basis of management assumptions and judgment
D. On the reasonableness of the management assumptions and judgment of the profit forecast
E. As to whether the profit forecast agrees with the underlying records

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  • 16 Marks

MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

Kuntu Ltd manufactures one standard product, the standard marginal cost of which is as follows:

Cost Element GH¢
Direct material per unit 10.00
Direct wages per unit 7.50
Variable production overhead 1.25
Total Marginal Cost per Unit 18.75

The budget for the year includes the following:

  • Output (units): 80,000
  • Total fixed Overheads:
    • Production: GH¢1,000,000
    • Advertising: GH¢600,000
    • Marketing: GH¢500,000
  • Contribution: GH¢2,500,000

In reviewing the budget for the coming year, management is dissatisfied with the results likely to arise. An emergency board meeting was held to discuss possible strategies to improve the situation, and the following strategies were proposed:

Strategy 1: The Production Manager suggested reducing the selling price by 10%. This could increase output by 25%. It is estimated that these changes would result in an increase in fixed production overhead by GH¢50,000 and fixed marketing overhead by GH¢25,000.

Strategy 2: The Director of Finance suggested increasing the selling price by 10%. Additionally, with an increase in advertising cost by GH¢400,000, sales units would increase to 90,000 units. It is also estimated that this strategy would increase the fixed production overhead by GH¢25,000 and marketing overhead by GH¢20,000.

Strategy 3: The Marketing Director suggested that with an appropriate increase in advertising expenditure, sales could be increased by 20%, and a profit on turnover of 15% could be obtained. It is estimated that fixed production overhead would increase to GH¢1,040,000 and marketing overhead would increase by GH¢25,000.

Strategy 4: The Managing Director seeks a profit of GH¢600,000. He would like to know at what selling price the target profit could be achieved given the following estimates: An increase in advertising expenditure by GH¢360,000 would result in a 10% increase in sales. However, fixed production and marketing overheads would increase by GH¢25,000 and GH¢17,000 respectively.

Required:

i) Prepare a forecast profit statement for Strategy 1 and Strategy 2. (6 marks)

ii) Estimate the additional expenditure on advertisement to achieve results in Strategy 3. (5 marks)

iii) Estimate the selling price that is required to achieve a profit of GH¢600,000 in Strategy 4. (5 marks)

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  • 15 Marks

AAA – Nov 2016 – L3 – Q6 – Audit of Prospective Financial Information

Evaluate considerations before accepting PFI engagements and procedures for reviewing profit forecasts under ISAE 3400.

Allhope Publications Limited is an old established publishing company owned by two brothers. Over the years, the company had made consistent progress both in sales and profitability.

Due to the quality of their work, the patronage of the company has grown to the extent that its working capital cannot accommodate the work on hand.

The Directors have approached their bankers, Owopo Bank Plc for a facility of N500m to procure essentially modern machinery and printing materials and also for running expenses, particularly salaries.

In support of its application for the bank facility, the company has prepared a profit forecast which is being presented to your firm for review.

Required:

As contained in ISAE 3400: “The Examination of Prospective Financial Information (PFI)”:

a. What will you take into consideration before accepting this assurance engagement? (5 Marks)
b. Enumerate the procedures to be adopted after you have agreed to take up the engagement:
i. As regards PFI assurance engagements generally.
ii. On the Profit forecast. (10 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q10 – Assurance Engagements

This question assesses which elements are typically excluded from investigations related to investment decisions.

Investigation under investment decision will NOT include:
A. Loan facility decision
B. Purchase of shares
C. Purchase of business
D. Reporting on profit forecast
E. Partnership participation

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q2 – Assurance Engagements

Identifying non-objectives in profit forecast investigations by auditors.

Which of the following is NOT an objective of profit forecast investigation on which an opinion can be given?
A. Whether or not the profit forecast complies with the Generally Accepted Accounting Principles
B. As to whether the profit forecast has been prepared on the basis of the existing organization’s accounting policies
C. Whether or not the profit forecast has been prepared on the basis of management assumptions and judgment
D. On the reasonableness of the management assumptions and judgment of the profit forecast
E. As to whether the profit forecast agrees with the underlying records

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  • 16 Marks

MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

Kuntu Ltd manufactures one standard product, the standard marginal cost of which is as follows:

Cost Element GH¢
Direct material per unit 10.00
Direct wages per unit 7.50
Variable production overhead 1.25
Total Marginal Cost per Unit 18.75

The budget for the year includes the following:

  • Output (units): 80,000
  • Total fixed Overheads:
    • Production: GH¢1,000,000
    • Advertising: GH¢600,000
    • Marketing: GH¢500,000
  • Contribution: GH¢2,500,000

In reviewing the budget for the coming year, management is dissatisfied with the results likely to arise. An emergency board meeting was held to discuss possible strategies to improve the situation, and the following strategies were proposed:

Strategy 1: The Production Manager suggested reducing the selling price by 10%. This could increase output by 25%. It is estimated that these changes would result in an increase in fixed production overhead by GH¢50,000 and fixed marketing overhead by GH¢25,000.

Strategy 2: The Director of Finance suggested increasing the selling price by 10%. Additionally, with an increase in advertising cost by GH¢400,000, sales units would increase to 90,000 units. It is also estimated that this strategy would increase the fixed production overhead by GH¢25,000 and marketing overhead by GH¢20,000.

Strategy 3: The Marketing Director suggested that with an appropriate increase in advertising expenditure, sales could be increased by 20%, and a profit on turnover of 15% could be obtained. It is estimated that fixed production overhead would increase to GH¢1,040,000 and marketing overhead would increase by GH¢25,000.

Strategy 4: The Managing Director seeks a profit of GH¢600,000. He would like to know at what selling price the target profit could be achieved given the following estimates: An increase in advertising expenditure by GH¢360,000 would result in a 10% increase in sales. However, fixed production and marketing overheads would increase by GH¢25,000 and GH¢17,000 respectively.

Required:

i) Prepare a forecast profit statement for Strategy 1 and Strategy 2. (6 marks)

ii) Estimate the additional expenditure on advertisement to achieve results in Strategy 3. (5 marks)

iii) Estimate the selling price that is required to achieve a profit of GH¢600,000 in Strategy 4. (5 marks)

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