AFM Exam Prep

Date: 2023-07-09

 What is the fundamental role of Finance Managers?

The fundamental role of finance managers is to enhance shareholder value. Shareholders value is
determined by the level pf expectation of future expected dividend.
 What is the concept of Modigliani and Miller.
The concept proves the irrelevance of dividend policy. Companies should be focused on improving
earnings since it’s from earnings that dividends are paid. Considering the earnings, the company will have
a choice as to the level of dividend to be paid. As a result, shareholders should be indifferent on level of
dividend and therefore the company should focus of enhancing earnings.
 Problems with Modigliani and Miller.
 Signaling effect- While M&M indicated shareholders should be indifferent on level of dividend,
practically paying lower dividend gives a signal to shareholders that the company is in bad shape
and therefore they will react negatively to the share price.
 Liquidity preference- An investor with income investment preference will prefer higher dividend
while those with capital growth preference will prefer lower dividend with higher expectation of
future dividend. The preference of investors determines their choice of companies to invest. A
change in the dividend policy after the fact will get the investors negatively react to them share
price.
 Taxation- The choice between high dividend and low capital growth and the reserve could be
determined due to investor preference of tax rules since dividend income and capital gains are
taxed differently.
 What companies do to overcome the problems of Modigliani and Miller.
To avoid the problems with M&M, companies embark on
 Constant increase in dividend- Companies can provide a constant increase in dividend paid
thereby reducing the signaling effect. Periods with lower earnings income below the dividend
threshold will be compensated for by periods with higher earnings income.
 Scrip Dividend- Companies can give the option to shareholders on the level of dividend thereby
avoiding the problems with liquidity preference.

 Why are rational decision making normally sacrificed in real world

Rational decision Behavior in real world
It is believed investors take decisions to However, this may not always set in as
maximise the value of their wealth portfolio investors may try to defend their past
Maximisation of and finance managers take decision to decision which may not enhance the value
utility maximise the value of the company. of their wealth portfolio.
It is believed financial decisions from However, there are irrelevant information
Analysis of all investors and finance managers considers all that leads to financial decisions. Investors
relevant relevant information. may buy shares because others are buying
information or sell shares because of others.
It is believed that the financial information However, financial decision makers may
Rational, objective are rational, objective and neutral. value certain information to confirms their
and risk-neutral beliefs more than others which defeats the
analysis beliefs.

 Identify and address deficiencies in controls eg. Payroll. Mar/Jun 2018

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 My strategy-When asked about controls, try to bring out weaknesses in Control Activities, Control
Environment, Risk Assessment, Monitoring and Information Systems. Some detail from the given scenario
is a must to earn more points.

Control Deficiency Control Recommendation

Production Supervisor is
responsible for approving
bonus to be paid to
employees. Production
Supervisor should not approve
such bonuses as it will aid The Production Director should approve bonuses according to written
them to approve bonuses to policy. If bonus is material, should be approved by the BOD especially the
their friends. remuneration committee as stipulated by the OECD.

 Identify 8 audit risks and auditors’ response to address them.

ISA 200-Audit risk is the risk that the Auditor gives the wrong opinion about the fairness of the subject
matter being audited. This is the same as assessing risk of material misstatement flowing into the
financial statement.
My strategy will be a focus on existing weaknesses that can negatively affect financial statement
assertions (ACCA COVER)- Accuracy, Completeness, Cut-off, Allocation, Classification, Occurrence,
Valuation, Existence, Rights and Obligations. Reference must be made to deviations from IAS’s.
Audit Risk Auditors Response
Blackberry includes overheads Auditor should enquire the nature the nature of the overheads from Mgt
when valuing inventory. IAS 2 to ensure Indirect overheads are excluded as they are supposed to
Inventories requires the charged direct to the Income Statement. If included, Auditor should
exclusion of indirect overheads request management to remove from the valuation of inventory in the
when calculating inventory. financial statement.

 Corporate Governance weakness and how to address them.

Weakness How to address them

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  Substantive procedure.
Procedure
Compare to investigate Compare depreciation value in current year to prior year, investigate
significant differences significant differences.
Agree depreciation at year end to depreciation records to confirm
Agree for accuracy accuracy.
Reperform depreciation calculation for a sample of assets to confirm
Reperform for accuracy accuracy.
Review any disclosures for depreciation and assess whether they are in
Review disclosures compliance with accounting standards.

 Describe ways to record a system and give 1 advantage and 1 disadvantage of each.
Ways Definition Advantage Disadvantage
A detailed written –Simple to record during enquiry
description of the system at with staff members. -With a complex system,
each stage and the controls – Enhances better understanding Narrative notes may prove to be
which operate that each for all team members especially too cumbersome.
stage. inexperience ones who may find – This can be time consuming to
Narrative alternative methods complex. audit review due to its detail
Notes nature.
Internal This focus on whether Its more useful for auditors in test
Control control objectives are met. of controls.
Evaluation ICE does not cover the entire
Questionnaire system.
This gives a graphical -It saves time as pictures say a -It can lead to misinterpretation
illustration of the internal thousand words. thereby increasing audit risk.
control system. – Due to the use of standard – They can sometimes be
symbols for controls, they are easy difficult to amend, as any
Organisational to spot as are any missing controls. amendments may require the
Charts/Flow whole flowchart to be redrawn.
Charts
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 This is a standard list of – Questionnaires are quick to
possible controls for each prepare, which means they are a
area of the financial timely method for recording the
Internal statement. system. A standard list of questions may
Control – Since standardised, it aids not cover every control in an
Questionnaire comparison of entities and units. entity.

 Which audit procedures do Auditors use for Test of Controls and Substantive Testing
Test of Controls ISA 315 Substantive Testing
Risk Assessment Process-If robust policies to assess business
risk, the risk of material misstatement will be lower. Analytical Procedures
Control Activities-Authorisation, Reviews, Segregation of
Duties, Physical Controls, Information processing. Enquiry
Monitoring Inspection
Information System Observation
Control Environment-Ethics, HR policies, organisational
structure, BOD involvement, Commitment to competence. RecalcUlation

 Define the two types of IT Controls and what do the cover

Application Controls General Controls
These are the policies that support the effectiveness of
These are the controls built in the system. application controls.
Arithmetic Checks Access security- pw, door locks, swipes, safes.
Range Checks Backup procedures
Validation Checks Change and maintenance
System software acquisition
Training on cyber
Data Centre and Network Operations

 How to auditors conduct test of controls

 How to auditors conduct Substantive Tests
 How to auditors conduct overall review of an audit
 Describe audit procedures to perform to reach an opinion
 What should an auditor do if an issue remains unresolved

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