BUSINESS & FINANCE

Time allowed- 2:15 hours

Total marks- 100
[N.B. - The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take account of the
quality of language and the manner in which the answers are presented. Different parts, if any, of the same question
must be answered in one place in order of sequence.]
Marks
1. (a) What are the general objectives of the Financial Reporting Council (FRC) as envisaged in the
Financial Reporting Act-2015? 5

(b) Discuss the various threats to professional principles faced by the practicing accountants and the safe
guards against those threats. 5

Answer to the Question # 1(a)

The general objective of FRC as per FRA Act 2015 are:

 To promote the provision of high quality reporting of financial and non-financial information by public
interest entities;
 To promote the highest standards among licensed auditors;
 To enhance the credibility of financial reporting and
 To improve the quality of accountancy and audit services

Hence the FRC’s goal is to support overall investment including FDI by ensuring high quality corporate
reporting, auditing and corporate governance by setting standards, reviewing quality, regulating, overseeing
self-regulation and taking disciplinary action.

Answer to the Question # 1 (b)

The various threats to professional principles faced by practicing Chartered Accountants generally fall into the
following categories:

 Self-interest threats, which may occur as a result of dominance of the financial or other interests of the
professional accountants or an immediate or close family member.
 Self-review threats, which may occur when a previous judgment needs to be re-evaluated by the
professional accountant responsible for that judgment.
 Advocacy threats, which may occur when a professional accountant promotes a position or opinion to the
point that subsequent objectivity may be compromised.
 Familiarity threats, which may occur when, because of a close relationship, a professional accountant
becomes too sympathetic to the interests of a particular group.
 Intimidation threats, which may occur when a professional accountant is deterred from acting objectively
by threats, actual or perceived

Safeguards against threats as mentioned above:

Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories:
 Safeguards created by the profession, legislation or regulation
 Safeguards in the work environment

Safeguards created by the profession, legislation or regulation include, but are not restricted to:
 Educational, training and experience requirements for entry into the profession
 Continuing professional education requirements
 Corporate governance regulations
 Professional standards
 Professional or regulatory monitoring and disciplinary procedures
 External review by a legally empowered third party of the reports, returns, communications or information
produced by a professional accountant
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The nature of the safeguards to be applied in the workplace will vary depending on the circumstances. In
exercising professional judgment, a professional accountant should consider what a reasonable and informed
third party, having knowledge of all relevant information, including the significance of the threat and the
safeguards applied, would conclude to be unacceptable.

2. (a) How are KPIs (Key performance indicators) used to measure the performance of an organization? 5
(b) Discuss the theory in relation to human behavior as developed by McGregor. 5

Answer to the Question # 2(a)

Every business are facing lots of struggles and competition from different rivals home and abroad. The
following steps may be followed to identify critical success factors (CSF) and key performance standards /key
performance indicators (KPI).

 Review business objective.

 Analyze current performance.
 Set short and long term KPI target.
 Review targets with present strength.
 Review progress and readjust.

A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving
key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets.
High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on
processes in departments such as sales, marketing, HR, support and others.

Answer to the Question # 2(b)

McGregor's model: Theory X and Theory Y

McGregor developed two theories, X and Y. Each one represents a different set of assumptions about how people
are. He did not imply that one or other theory typifies all people. X and Y are two extremes with a whole spectrum
of values between the two.

Theory X
 Individuals dislike work and avoid it where possible
 Individuals lack ambition, dislike responsibility and prefer to be led
 A system of coercion, control and punishment is needed to achieve business objectives
 Above all, the individual desires security

Theory Y
 Physical and mental effort in work is as natural as rest or play
 Commitment to objectives is driven by rewards – self-actualization is the most important reward (see Maslow's
hierarchy below)
 External control and threats are not the only way to achieve objectives – self-control and direction are very
important
 People learn to like responsibility
The intellectual potential of the average human is only partially utilized – it needs to develop further in order to
understand 'what' motivates people we shall look first at content theories of motivation, then focus on creating
conditions that meet individuals' needs.

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3. (a) What is motivation? 4
(b) What is the hierarchy of needs suggested by Abraham Maslow for an individual’s motivation? 5

Answer to the Question # 3 (a)

Motivation is the process that initiates, guides, and maintains goal-oriented behaviors. It is what causes you to
act, whether it is getting a glass of water to reduce thirst or reading a book to gain knowledge. Motivation
involves the biological, emotional, social, and cognitive forces that activate behavior.

Answer to the Question # 3(b)

Abraham Maslow (Motivation and Personality (1954)) suggested a hierarchy of such needs to explain an
individual's motivation.

 A person will start at the bottom of the hierarchy or pyramid and will initially seek to satisfy basic needs – food,
shelter, clothing etc.
 Once these needs are satisfied, they no longer motivate and the individual concerned moves up to the next level;
safety/security needs;
 Safety needs could encompass physical safety (e.g. wearing a hard hat on a building site) and/or protection
against unemployment, the consequences of sickness as well as being safeguarded against unfair treatment;
 Again, once these needs are satisfied (e.g. by company rules re dismissal, pension policies etc.) they no longer
motivate and the person moves up to the next level in the hierarchy;
 Social needs recognize that people want to belong to a group;
 Status/ego needs involve the desire to have the respect and esteem of others. This could be satisfied, for
example, by gaining a promotion;
 Self-actualization needs are concerned with what people think about themselves, whether they feel that their
lives are worthwhile and that they have meaning. For many this can only be satisfied by ongoing success and
new challenges;

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4. ABC Company, considering shortening its credit period from 80 to 60 days, believes that, as a result of this
change its average collection period will decline from 90 to 72 days. Bad-debt expenses are expected to
decrease from 3% to 2% of sales. The company is currently selling 24,000 units but believes that as a result of
the proposed change, sales will decline to 20,000 units. The sale price per unit is Tk 112, and the variable cost
per unit is Tk 90. The company has a required return on equal-risk investments of 25%. Evaluate this decision
and make recommendation/s to the company. 10

Answer to the Question # 4

Evaluation of Credit policy of ABC Company.

A. Reduction in profit contribution due to reduce of credit period from 80 days to 60 days.
(24,000 units - 20,000 units) = 4000 units × Tk 22 (Tk 112- Tk 90) = (Tk 88,000)

B. Cost of marginal investment in Accounts Receivable

20,000 Units × Tk. 90 × 72 days

𝑃𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝑝𝑙𝑎𝑛 = = 𝑇𝑘. 3,60,000
360 𝑑𝑎𝑦𝑠

24,000 Units × Tk. 90 × 90 days

𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝑝𝑙𝑎𝑛 = = 𝑇𝑘. 5,40,000
360 𝑑𝑎𝑦𝑠

Reduced investment/working capital in Accounts Receivable = Tk. 1,80,000

Hence, Benefit from reduced investment/working capital Tk. 1,80,000 × 0.25 = Tk. 45,000
In accounts receivable

C. Reduced marginal bad debts:

Proposed plan = (20,000 units × Tk. 112 × 0.02) = Tk. 44,800
Existing plan = (24,000 units × Tk. 112 × 0.03) = Tk. 80,640
= Tk. 35,840
Net loss (A-B-C) = Tk. (7,160)

Recommendation:
The proposal is not acceptable as stated in the above evaluation report.

5. (a) Why is 'price' considered an important component of marketing mix of 4(four) P’s? 4
(b) What factors influence the pricing policy of the products of a business? 5

Answer to the Question # 5(a)

Price:
Price is the amount the consumer must exchange to receive the offering. A company’s price level sends signals
about the quality of its products to the customer. A customer always compares the company’s prices with those
of its competitors. The competitors also keep an eye on the price levels of a company. Very low prices may
invite price wars, while high prices without sufficient additional features or quality invite bad publicity.
Distribution channel members also exert pressure on prices by demanding higher margins. Place is also known
as channel, distribution, or intermediary. It is the mechanism through which goods and/or services are moved
from the manufacturer/service provider to the user or consumer.

Product:
Product means the goods-and-services combination the company offers to the target market.

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Promotion:
Promotion includes all of the activities marketers undertake to inform consumers about their products and to
encourage potential customers to buy these products.

People
(People are)… All human actors who play a part in service delivery and thus influence the buyers’ perceptions;
namely, the firm’s personnel, the customer, and other customers in the service environment.

Process
(Process is)… The actual procedures, mechanisms, and flow of activities by which the service is delivered –
this service delivery and operating systems.

Hence price considered an important component of marketing mix of 4 (four) P’s.

Answer to the Question # 5(b)

Some of the major factors influencing pricing decisions of a company are as follows:

1. Price-quality relationship:
Customers use price as an indicator of quality, particularly for products where objective measurement of quality is
not possible, such as drinks and perfumes. Price strongly influences quality perceptions of such products. If a
product is priced higher, the instinctive judgment of the customer is that the quality of the product must be higher,
unless he can objectively justify otherwise.

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2. Product line pricing:
A company extends its product line rather than reduce price of its existing brand, when a competitor launches a
low price brand that threatens to eat into its market share. It launches a low price fighter brand to compete with
low price competitor brands.

The company is able to protect the image of its premium brand, which continues to be sold at a higher price. At a
later stage, it produces a range of brands at different price points, which serve segments of varying price
sensitivities.

3. Explicability:
The company should be able to justify the price it is charging, especially if it is on the higher side. Consumer
product companies have to send cues to the customers about the high quality and the superiority of the product.

A superior finish, fine aesthetics or superior packaging can give positive cues to the customers when they cannot
objectively measure the quality of the offering. A company should be aware of the features of the product that the
customers can objectively evaluate and should ensure superior performance of those features.

In industrial markets, the capability of salespeople to explain a high price to customers may allow them to charge
higher prices. Where customers demand economic justifications of prices, the inability to produce cost arguments
may mean that high price cannot be charged.

A customer may reject a price that does not seem to reflect the cost of producing the product. Sometimes it may
have to be explained that premium price was needed to cover R&D expenditure, the benefits of which the
customer is going to enjoy.

4. Competition:
A company should be able to anticipate reactions of competitors to its pricing policies and moves. Competitors can
negate the advantages that a company might be hoping to make with its pricing policies. A company reduces its
price to gain market share.

Competitors who have similar ambitions to increase their market share and have deep pockets will swiftly reduce
price if any one of them reduces prices.

5. Negotiating margins:
A customer may expect its supplier to reduce price, and in such situations the price that the customer pays is
different from the list price. Such discounts are pervasive in business markets, and take the form of order-size
discounts, competitive discounts, fast payment discounts, annual volume bonus and promotions allowance.

Negotiating margins should be built, which allow price to fall from list price levels but still permit profitable
transactions. It is important that the company anticipates the discounts that it will have to grant to gain and retain
business and adjust its list price accordingly. If the company does not build potential discounts into its list price,
the discounts will have to come from the company’s profits.

6. Effect on distributors and retailers:

When products are sold through intermediaries like retailers, the list price to customers must reflect the margins
required by them Sometimes list prices will be high because middlemen want higher margins.

But some retailers can afford to sell below the list price to customers. They run low-cost operations and can
manage with lower margins. They pass on some part of their own margins to customers.

7. Political factors:
Where price is out of line with manufacturing costs, political pressure may act to force down prices. Exploitation
of a monopoly position may bring short term profits but incurs backlash of a public enquiry into pricing policies.
It may also invite customer wrath and cause switching upon the introduction of suitable alternatives.

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8. Earning very high profits:
It is never wise to earn extraordinarily profits, even if current circumstances allow the company to charge high
prices. The pioneer companies are able to charge high prices, due to lack of alternatives available to the
customers.

9. Charging very low prices:

It may not help a company’s cause if it charges low prices when its major competitors are charging much higher
prices. Customers come to believe that adequate quality can be provided only at the prices being charged by the
major companies.

If a company introduces very low prices, customers suspect its quality and do not buy the product in spite of the
low price. If the cost structure of the company allows, it should stay in business at the low price. Slowly, as some
customers buy the product, they spread the news of its adequate quality.

The customers’ belief about the quality-price equation starts changing. They start believing that adequate quality
can be provided at lower prices. The companies which have been charging higher prices come under fire from
customers. They either have to reduce their prices or quit.

6. (a) What are the characteristics of perfect competition? 5

(b) What is meant by Supply? What factors influence supply of goods in the market? 5

Answer to the Question # 6(a)

A perfectly competitive market has the following characteristics:

 There are many buyers and sellers in the market.
 Each company makes a similar product.
 Buyers and sellers have access to perfect information about price.
 There are no transaction costs.
 There are no barriers to entry into or exit from the market.

Answer to the Question # 6 (b)

In economics, supply refers to the quantity of a product available in the market for sale at a specified price at a
given point of time.

Unlike demand, supply refers to the willingness of a seller to sell the specified amount of a product within a
particular price and time.

Supply is always defined in relation to price and time. For example, if a seller agrees to sell 500 kgs of wheat, it
cannot be considered as supply of wheat as the price and time factors are missing.

Similarly, if a seller is ready to sell 500 kgs at a price of Rs. 30 per kg then again it would not be considered as
supply as the time element is missing. Therefore, the statement “a seller is willing to sell 500 kgs at the price of
Rs. 30 per kg in a week” is ideal to understand the concept of supply as it relates supply with price and time.

Apart from this, the supply also depends on the stock and market price of the product. Stock of a product refers
to quantity of a product available in the market for sale within a specified point of time.

Both stock and market price of a product affect its supply to a greater extent. If the market price is more than
the cost price, the seller would increase the supply of a product in the market. However, the decrease in market
price as compared to cost price would reduce the supply of product in the market.

For example Mr. X has 100 kgs of a product. He expects the minimum price to be Rs. 90 per kg and the market

Page 7 of 15
price is Rs. 95 per kg. Therefore he would release certain amount of the product, say around 50 kgs in the
market, but would not release the whole amount. The reason being he would wait for better rates for his
product. In such a case, the supply of his product would be 50kgs at Rs. 95 per kg.

Determinants of Supply:
Supply can be influenced by a number of factors that are termed as determinants of supply. Generally, the
supply of a product depends on its price and cost of production. In simple terms, supply is the function of price
and cost of production.

Some of the factors that influence the supply of a product are described as follows:

i. Price:

Refers to the main factor that influences the supply of a product to a greater extent. Unlike demand, there is a
direct relationship between the price of a product and its supply. If the price of a product increases, then the
supply of the product also increases and vice versa. Change in supply with respect to the change in price is
termed as the variation in supply of a product.

Speculation about future price can also affect the supply of a product. If the price of a product is about to rise in
future, the supply of the product would decrease in the present market because of the profit expected by a seller
in future. However, the fall in the price of a product in future would increase the supply of product in the
present market.

ii. Cost of Production:

Implies that the supply of a product would decrease with increase in the cost of production and vice versa. The
supply of a product and cost of production are inversely related to each other. For example, a seller would
supply less quantity of a product in the market, when the cost of production exceeds the market price of the
product.

In such a case the seller would wait for the rise in price in future. The cost of production rises due to several
factors, such as loss of fertility of land, high wage rates of labor, and increase in the prices of raw material,
transport cost, and tax rate.

iii. Natural Conditions:

Implies that climatic conditions directly affect the supply of certain products. For example, the supply of
agricultural products increases when monsoon comes on time. However, the supply of these products decreases
at the time of drought. Some of the crops are climate specific and their growth purely depends on climatic
conditions. For example Kharif crops are well grown at the time of summer, while Rabi crops are produce well
in winter season.

iv. Technology:
Refers to one of the important determinant of supply. A better and advanced technology increases the
production of a product, which results in the increase in the supply of the product. For example, the production
of fertilizers and good quality seeds increases the production of crops. This further increase the supply of food
grains in the market.

v. Transport Conditions:
Refer to the fact that better transport facilities increase the supply of products. Transport is always a constraint
to the supply of products, as the products are not available on time due to poor transport facilities. Therefore
even if the price of a product increases, the supply would not increase.

In India sellers usually use road transport and the poorly maintained road makes it difficult to reach the
destination on time the products that are manufactured in one part of the city need to be spread in the whole
country through road transport This may result in the damage of most of the products during the journey, which
can cause heavy loss for a seller. In addition the seller can also lose his/her customers because of the delay in
the delivery of products.
Page 8 of 15
vi. Factor Prices and their Availability:
Act as one of the major determinant of supply. The inputs, such as raw material man, equipment, and machines,
required at the time of production are termed as factors. If the factors are available in sufficient quantity and at
lower price, then there would be increase in production.

This would increase the supply of a product in the market. For example, availability of cheap labor and raw
material nearby the manufacturing plant of an organization would help in reducing the labor and transportation
costs. Consequently, the production and supply of the product would increase.

vii. Government’s Policies:

Implies that the different policies of government, such as fiscal policy and industrial policy, has a greater
impact on the supply of a product. For example, increase in tax on excise duties would decrease the supply of a
product. On the other hand, if the tax rate is low, then the supply of a product would increase.

viii. Prices of Related Goods:

Refer to fact that the prices of substitutes and complementary goods also affect the supply of a product. For
example, if the price of wheat increases, then farmers would tend to grow more wheat than nee. This would
decrease the supply of rice in the market.

7. (a) Paramount Company turns over its inventory six times each year; it has an average collection period of 45
days and an average payment period of 30 days. The company’s annual sales is Taka 3.00 million. Assume
there is no difference in the investment per Taka of sales in inventory, receivables, and payables; and assume a
360-day year.

Requirement: Calculate the company’s cash conversion cycle, its daily cash operating expenditure, and the
amount of resources needed to support its cash conversion cycle. 8

(b) A Company has determined that its optimal capital structure consists of 40 percent debt and 60 percent
equity. Assume the company will not have enough retained earnings to fund the equity portion of its capital
budget. Also, assume that the company accounts for flotation costs by adjusting the cost of capital. Given the
following information, calculate the company’s weighted average cost of capital. 8

 kd = 8%
 Net income = Taka 40,000
 Payout ratio = 50%
 Tax rate = 40%
 PO = Taka 25.
 Growth = 0%
 Shares outstanding = 10,000
 Flotation cost on additional equity = 15%

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Answer to the Question # 7(a)

Inventory turnover days = 360 / 6 times inventory = 60 days

Operating Cycle = Inventory turnover days + Average Collection Period
= 60 days + 45 days
= 105 days
Cash Conversion Cycle = Operating cash – Average payable period
= 105 days – 30 days
= 75 days
Daily financing required = Tk 3,000,000 / 360 days
= Tk 8,333
Resources/Working capital required = Daily financing X Cash conversion cycle
Tk 8,333 X 75 days
Tk 624,975

Answer to the Question # 7(b)

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 Here:
1. Cost of equity, Ke = +𝐺 𝑃0 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒
𝑃0
2
(New issue because no retained earning) = + 0 G = Growth rate of a company
25(1−0.15)
2
=
21.25

= 0.0941

𝑜𝑟 9.41%

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑋 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜

Working @ dividend payment ratio =
𝑆ℎ𝑎𝑟𝑒 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

40,000 𝑋 0.50
=
10,000

= 𝑇𝑘. 2

2. Cost of Debts, Kd = 8% (1 − Tax Rate)

= 8(1 − 0.40)
= 0.0480
𝑜𝑟 4.80%

𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝐶𝑎𝑝𝑖𝑡𝑎𝑙, 𝑊𝐴𝐶𝐶 = (𝐾𝑒 𝑋 𝑊𝑒𝑖𝑔ℎ𝑡 ) + (𝐾𝑑 𝑋 𝑊𝑒𝑖𝑔ℎ𝑡 )

= (0.0941 𝑋 0.60) + (0.0480 𝑋 0.40)
= 0.05646 + 0.0192
= 0.07566
𝑜𝑟 7.57%
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8 SmartTech Company has developed a new product that will be marketed for the first time during the next fiscal
year. Although the Marketing Department estimates that 70,000 units could be sold at Tk. 72 per unit, SmartTech’s
management has allocated only enough manufacturing capacity to produce a maximum of 50,000 units of the new
product annually. The fixed expenses associated with the new product are budgeted at Tk. 900,000 for the
year. The variable expenses of the new product are Tk 32 per unit.

Requirements:
i) How many units of the new product must SmartTech sell during the next fiscal year in order to break
even on the product? 5

ii) What is the profit Smart Tech would earn on the new product if all of the manufacturing capacity
allocated by management is used and the product is sold for Tk 72 per unit? 5

Answer to the Question # 8

Requirement# i
Total Fixed Cost
𝐵𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡

Tk.900,000
= Tk.40
(Working-a)

= 22,500 𝑈𝑛𝑖𝑡𝑠 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦

Requirement# ii

Income Statement

Sales (50,000 × Tk 72) (Working-b) = Tk. 36,00,000

Less. Total variable cost (50,000 × Tk 32) = Tk. 16,00,000
Contribution margin (50,000× Tk 140) = Tk. 20,00,000
Less. Total Fixed overhead = Tk. 9,00,000
Net income = Tk. 11,00,000

Working-a: Contribution per Unit:

Selling price per Unit Tk. 72.00
Less. T. Variable Cost Tk. 32.00
Contribution per Unit Tk. 40.00

Working-b:
Marketing department estimates that 70,000 units could be sold @ Tk. 72 but Management has maximum
production capacity is 50,000 units. Hence income statement prepared for 50,000 units.

Page 11 of 15
9. (a) Who is responsible for internal control of an organization? 4
(b) What constitutes a sound system of internal control? 4
(c) What is an ethical culture? Write the objectives of corporate governance. 8

Answer to the Question # 9(a)

According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Framework,
everyone in an organization has responsibility for internal control to some extent. Virtually all employees
produce information used in the internal control system or take other actions needed to affect control. Also, all
personnel should be responsible for communicating upward problems in operations, non-compliance with the
code of conduct, or other policy violations or illegal actions. Each major entity in corporate governance has a
particular role to play.

However the following authorities are responsible for internal control of an organization.

(i) Management
The Chief Executive Officer (the top manager) of the organization has overall responsibility for designing and
implementing effective internal control. More than any other individual, the chief executive sets the "tone at the
top" that affects integrity and ethics and other factors of a positive control environment. In a large company, the
chief executive fulfills this duty by providing leadership and direction to senior managers and reviewing the
way they're controlling the business.

(ii) Board of directors

Management is accountable to the board of directors, which provides governance, guidance and oversight.
Effective board members are objective, capable and inquisitive. They also have a knowledge of the entity's
activities and environment, and commit the time necessary to fulfil their board responsibilities. Management
may be in a position to override controls and ignore or stifle communications from subordinates, enabling a
dishonest management which intentionally misrepresents results to cover its tracks. A strong, active board,
particularly when coupled with effective upward communications channels and capable financial, legal and
internal audit functions, is often best able to identify and correct such a problem.

(iii) Auditors
The internal auditors and external auditors of the organization also measure the effectiveness of internal control
through their efforts. They assess whether the controls are properly designed, implemented and working
effectively, and make recommendations on how to improve internal control. They may also review Information
technology controls, which relate to the IT systems of the organization. To provide reasonable assurance that
internal controls involved in the financial reporting process are effective, they are tested by the external auditor.

(iv) Audit committee

The role and the responsibilities of the audit committee, in general terms, are to:

(a) Discuss with management, internal and external auditors and major stakeholders the quality and adequacy
of the organization’s internal controls system and risk management process, and their effectiveness and
outcomes, and meet regularly and privately with the Director of Internal Audit; Monitor management's
response to all audit findings;

(b) Manage complaints concerning accounting, internal accounting controls or auditing matters;

(c) Receive regular reports from the Chief Executive Officer, Chief Financial Officer and the Company's other
Control Committees regarding deficiencies in the design or operation of internal controls and any fraud that
involves management

(d) Support management in resolving conflicts of interest.

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Answer to the Question # 9(b)

In an effective internal control system, the following five components work to support the achievement of an
entity’s mission, strategies and related business objectives:

1. Control Environment

 Exercise integrity and ethical values.

 Make a commitment to competence.
 Use the board of directors and audit committee.
 Facilitate management’s philosophy and operating style.
 Create organizational structure.
 Issue assignment of authority and responsibility.
 Utilize human resources policies and procedures.

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2. Risk Assessment

 Create companywide objectives.

 Incorporate process-level objectives.
 Perform risk identification and analysis.
 Manage change.

3. Control Activities

 Follow policies and procedures.

 Improve security (application and network).
 Conduct application change management.
 Plan business continuity/backups.
 Perform outsourcing.

4. Information and Communication

 Measure quality of information.

 Measure effectiveness of communication.

5. Monitoring

 Perform ongoing monitoring.

 Conduct separate evaluations.
 Report deficiencies.

These components work to establish the foundation for sound internal control within the company through directed
leadership, shared values and a culture that emphasizes accountability for control. The various risks facing the
company are identified and assessed routinely at all levels and within all functions in the organization. Control
activities and other mechanisms are proactively designed to address and mitigate the significant risks. Information
critical to identifying risks and meeting business objectives is communicated through established channels across
the company. The entire system of internal control is monitored continuously, and problems are addressed timely.

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Answer to the Question # 9(c)

Ethical culture
Ethical culture can be defined as a set of experiences, assumptions, and expectations of managers and employees
about how the organization prevents them from behaving unethically and encourages them to behave ethically,
according to Muel Kaptein, a professor of business ethics and integrity management at Rotterdam School of
Management. Ethical culture is also part of the ethical context that incorporates multiple components, including
formal and informal systems. Formal systems are the tangible organizational elements pertaining to ethics that are
purposefully designed and implemented (e.g., ethics programs), whereas informal systems are the unwritten
policies, practices, and values that are relevant to ethics (e.g., ethical culture or climate). Ethical culture is less
visible than the formal elements of ethics programs (e.g., code of ethics, helpline, training), because it is rooted
deeply within the organization and the mind-set of its employees; therefore, it is more difficult to assess.

Objectives of corporate Governance

Corporate governance refers to the systems and processes embedded in an organization to control, monitor and
minimize risk. It is more than just ticking boxes and having good paperwork. Corporate governance principles of
effective and efficient organizations include;

1. Acting ethically and responsibly;

2. Ensuring transparency and accountability;
3. Recognizing and managing risk;
4. Ensuring correct board composition and structure;
5. Strong quality management framework; and
6. Clearly defined purpose and strategy.

It doesn't take much to be develop strong leadership approaches to corporate governance. Whether you are for
profit or not for profit, private or public, volunteer or publicly listed. The principles remain the same.

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