Part 1: Using the company profile below, identify TWO material misstatement risks- either at the entity-level (i.e. risk of material misstatement at the overall financial statement level) or account assertion level. For each account or entity-level risk identified, briefly describe why it qualifies as risky.

Part 2: Using the comparative financial information given in the next tab, identify THREE specific account-related misstatement risks. For each risk, briefly describe why it qualifies as a risk and the related accounts and assertions that potentially may be violated.

Company Profile: Your audit firm has been engaged to issue an opinion on the financial statements of CNX Corporation which sells and leases office equipment. Initially, CNX focused on selling and leasing copiers but CNX is finding that its customers, as is the general trend, are becoming increasingly paperless and adopting cloud computing as opposed to maintaining their own servers. This change in the business environment has hurt CNX’s sales of copiers, printers, and computer servers, and CNX is feeling the need to shift to selling cloud computing solutions on a subscription basis to better serve its customers. CNX's revenue has been declining over the past 3 years, but this was the first year that CNX experienced a net loss. In response, the CEO Darren Paul, issued a press release stating, “Our repositioning will necessarily require some additional expenses in the initial years, but we are confident that it will set the stage for CNX to exploit the explosive growth in cloud computing solutions." CNX benefits from its long established relationships with its exisiting customers, giving it an advantage over other companies in the same industry; however, cloud-based software companies are increasingly establishing their own sales forces to sell directly to customers. CNX has a reputation for being a good corporate citizen, and the CEO and CFO serve on the boards of major charities. CNX has had the same accounting team in place for the past ten years and has lower than average employee turnover throughout its ranks. This is your firm's eighth audit of CNX. There have been no disagreements over accounting issues in any of the previous audits.

A firm announced that it will pay a $0.10 dividend per share to holders of record as of Wednesday, July 29, 2020. Holding all else constant, the stock price will be lower by $0.10 per share at the opening of trading on

1. A) Monday, July 27, 2020

2. B) Tuesday, July 28, 2020.

3. C) Wednesday, July 29, 2020.

4. D) Thursday, July 20, 2020

5. E) The stock price will not be lower on any of the above days.

Following the outbreak of the Novel Coronavirus (COVID 19), CPCa pharmaceutical company is considering introducing a new vaccine unto the market to help fight the virus. This will require the injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH¢5,500,000 to set up the production facility and install that equipment for production. Mr. Smart, the CEO of CPC believes that the vaccine could be manufactured in a building owned by the firm and located in East Legon. This vacant building and the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capital investment) by issuing 2000,000 new common stocks at GH¢ 20 per share from its existing shareholders. A total of GH¢ 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bond with a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, the Finance Director has estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on Government of Ghana traded Treasury bills is 5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:

Again the following information should be taken note of:

·Feasibility studies cost the company GH¢2,000,000

·Test marketing expenses amounts to GH¢1,000,000

·The research into the discovery of the vaccine costs GH¢5,000,000

·Variable cost will increase by 5% per annum

·Selling price will increase by 10% per annum

·Marketing expense will be 5% of sales revenue per year

·Overhead cost will be fixed at GH¢6000,000 per year

·The project will last for five (5) years (2021-2025)

Charge depreciation using the straight-line method

·Salvage value for equipment is GH¢2,000,000

·CPC falls within the 25% tax bracket

·An initial working capital investment of GH¢10,000,000will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life

·The introduction of this new vaccine is expected to lead to 10,000units per annum drop in sales of vaccines for other types of corona virus by. The selling price per unit of existing products is GH¢100while the variable cost is GH¢70.This has no tax implications for the new vaccine.

·The project will be financed with debt and equity

Required

a.Evaluate the project using the NPV and Profitability index and recommend whether CPC should go ahead with the production of the vaccine.

b.Discuss three(3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the production of the vaccine. (6 marks )

c.Under what circumstances will you prefer profitability index to NPV as project evaluation techniques. (2marks )

d.Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included. (2 marks )

Following the outbreak of the Novel Coronavirus (COVID 19), CPCa pharmaceutical company is considering introducing a new vaccine unto the market to help fight the virus. This will require the injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH¢5,500,000 to set up the production facility and install that equipment for production. Mr. Smart, the CEO of CPC believes that the vaccine could be manufactured in a building owned by the firm and located in East Legon. This vacant building and the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capital investment) by issuing 2000,000 new common stocks at GH¢ 20 per share from its existing shareholders. A total of GH¢ 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bond with a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, the Finance Director has estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on Government of Ghana traded Treasury bills is 5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:

Again the following information should be taken note of:

·Feasibility studies cost the company GH¢2,000,000

·Test marketing expenses amounts to GH¢1,000,000

·The research into the discovery of the vaccine costs GH¢5,000,000

·Variable cost will increase by 5% per annum

·Selling price will increase by 10% per annum

·Marketing expense will be 5% of sales revenue per year

·Overhead cost will be fixed at GH¢6000,000 per year

·The project will last for five (5) years (2021-2025)

Charge depreciation using the straight-line method

·Salvage value for equipment is GH¢2,000,000

·CPC falls within the 25% tax bracket

·An initial working capital investment of GH¢10,000,000will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life

·The introduction of this new vaccine is expected to lead to 10,000units per annum drop in sales of vaccines for other types of corona virus by. The selling price per unit of existing products is GH¢100while the variable cost is GH¢70.This has no tax implications for the new vaccine.

·The project will be financed with debt and equity

Required

a.Evaluate the project using the NPV and Profitability index and recommend whether CPC should go ahead with the production of the vaccine.

b.Discuss three(3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the production of the vaccine. (6 marks )

c.Under what circumstances will you prefer profitability index to NPV as project evaluation techniques. (2marks )

d.Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included. (2 marks )

Following the outbreak of the Novel Coronavirus (COVID 19), CPCa pharmaceutical company is considering introducing a new vaccine unto the market to help fight the virus. This will require the injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH¢5,500,000 to set up the production facility and install that equipment for production. Mr. Smart, the CEO of CPC believes that the vaccine could be manufactured in a building owned by the firm and located in East Legon. This vacant building and the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capital investment) by issuing 2000,000 new common stocks at GH¢ 20 per share from its existing shareholders. A total of GH¢ 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bond with a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, the Finance Director has estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on Government of Ghana traded Treasury bills is 5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:

Again the following information should be taken note of:

·Feasibility studies cost the company GH¢2,000,000

·Test marketing expenses amounts to GH¢1,000,000

·The research into the discovery of the vaccine costs GH¢5,000,000

·Variable cost will increase by 5% per annum

·Selling price will increase by 10% per annum

·Marketing expense will be 5% of sales revenue per year

·Overhead cost will be fixed at GH¢6000,000 per year

·The project will last for five (5) years (2021-2025)

Charge depreciation using the straight-line method

·Salvage value for equipment is GH¢2,000,000

·CPC falls within the 25% tax bracket

·An initial working capital investment of GH¢10,000,000will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life

·The introduction of this new vaccine is expected to lead to 10,000units per annum drop in sales of vaccines for other types of corona virus by. The selling price per unit of existing products is GH¢100while the variable cost is GH¢70.This has no tax implications for the new vaccine.

·The project will be financed with debt and equity

Required

a.Evaluate the project using the NPV and Profitability index and recommend whether CPC should go ahead with the production of the vaccine.

b.Discuss three(3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the production of the vaccine. (6 marks )

c.Under what circumstances will you prefer profitability index to NPV as project evaluation techniques. (2marks )

d.Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included. (2 marks )

Gale, McLean, and Lux are partners of Burgers and Brew Company with capital balances as follows: Gale, $88,000; McLean, $77,000; and Lux, $151,000. The partners share profit and losses in a 3:2:5 ratio. McLean decides to withdraw from the partnership. Prepare General Journal entries to record the May 1, 2020, withdrawal of McLean from the partnership under each of the following unrelated assumptions:

a. McLean sells his interest to Freedman for $172,000 after Gale and Lux approve the entry of Freedman as a partner (where McLean receives the cash personally from Freedman).

b. McLean gives his interest to a son-in-law, Park. Gale and Lux accept Park as a partner.
c. McLean is paid $77,000 in partnership cash for his equity.

d. McLean is paid $136,000 in partnership cash for his equity.

e. McLean is paid $31,250 in partnership cash plus machinery that is recorded on the partnership books at $119,000 less accumulated depreciation of $87,000. (Round final answers to 2 decimal places.)

QUESTION 1

Coro Ltd makes two products, Quara and Lock. The following data are relevant for the year ending 31st December 2020:

Material prices:

Material M GHS2 per unit

Material N GHS3 per unit

Direct labour is paid GHS10 per hour.

Production overhead cost is estimated to be GHS 200,000. Production overhead cost is absorbed into product costs using a direct labour hour absorption rate. Selling and administration overhead is budgeted to be GHS 75,000.

Each unit of finished product requires:

Quara Lock

Material M 12 units 12 units

Material N 6 units 8 units

Direct labour 7 hours 10 hours

The sales director has forecast that sales of Quara and Lock will be 5,000 and 1,000 units respectively during the year 2020. The selling prices will be as follows:

Quara GHS182 per unit

Lock GHS161 per unit

She estimates that there will be opening inventory of 100 units of Quara and 200 units of Lock. At the end of the year 2020, the company does not intend holding any inventory of Quara and Lock.

The Production Director estimates that the opening inventories of raw materials will be 3,000 units of M and 4,000 units of material N. At the end of the year 2020, the inventories of these raw materials are to be:

M 4,000 units

N 2,000 units

Statement of financial position extracts for year ended 31st December 2019 are as follows:

Inventory of finished goods GHS 15,000

Inventory of Raw materials GHS 20,000

Retained earnings GHS 81,000

The Finance Director advises that the rate of tax to be paid on profits during the year 2020 is likely to be 30%.

Required:

a. Prepare all functional budgets and budgeted statement of profit or loss for the year ending 31st December 2020.

b. The Managing Director of Coro Ltd is of the view that the budget preparation and presentation process is a waste of resources considering the time and money invested into it. He thinks the cost far outweighs the benefits and the company could still operate effectively without any budget. Do you agree with him? Explain why?

c. The Management Accountant suggested that cash budget need to be prepared in addition to the functional budgets and the budgeted statement of Profit or Loss to make the budgeting process complete. Meanwhile, he claims he does not have enough information to prepare the cash budget. Advise him on the process and sources of information for preparation of a cash budget.

Do you agree with below paragraph? Why or why not ? write 200-250 words and gives examples .

A bankrupt company reform its debt criteria except going with any business with the reorganization process. When reorganization starts, the debtor companies usually retains ownership of all the assets and continue with the business process. Basically, when a company face with the financial problem and scared of paying for loan payment, then they want to go for a reorganization process for paying its debt and loan payment to continue the business process smoothly. In a liquidation the creditor have more priority and they seize the debtors for any business and operations. Liquidation is the worst process as after these company does not belong to the market.

Because of the pandemic situation of 2020, bad luck came on many companies. I want to talk about the most well-known, budget friendly clothing departmental store who are in the market last 118 years J. C Penny. On Friday 2020, J. C Penny files for the bankruptcy protection as the company said they had gone for a deal which will help them with reducing several billion dollars. This biggest companies have more than 800 stores, but they will close approximately 180-200 stores with some of the locations. The company missed its debt payment around $12million to its bondholders and $17million in its credit line in April 2020 because Coronavirus. The company filled for the chapter 11 protection which I think clearly indicating that they are getting a limited amount of time in which they could restructure the debt and I hope they could come back to a stable situation. The advantage of this chapter 11 is that they could easily avoid the creditors during this time. For the J. C Penny, they are going for 900million in financing form its existing lenders to fund bankruptcy which will have $450million of new money and nearly $500 million in cash on hands.

For my Judgement filling chapter 11 for bankruptcy can be turned into a good deal if J. C Penny become successful it will continue operating in an efficiently way with some new debt. It was continuously indicating for Chapter 11 Reorganization process when they were uninterruptedly missing the loan payment. Also with these steps they could get the advantages form its creditors and taxation facilities.

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