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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  • 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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