Unbalanced and Co. Ltd. is a trading company at Abossey Okai. It deals in auto parts. It is owned by a husband and wife; Divine and Grace. Divine travels to South Korea twice a year to buy auto parts for the business whilst Grace run the day to day administration of the shop.
Divine borrows (loans) from friends to add up to the company’s money to buy parts when he travels. These loans are repaid when the goods are sold back home. The loans are not receipted. Some of the loans are banked, others are not. The company’s money and the loans collected are changed into foreign currency, some through the bank, and others not through the bank. The company does not keep receipts for air tickets, hotel bills and the expenses made by the owners. However, Divine can reel off what he paid without batting an eyelid.
Import duties are paid by bankers’ drafts so those are clearly stated in the bank statements.
Grace has a note book in which she enters the daily sales but the records in the book is scanty. However, all imports invoices are properly filed. Most of the sales are banked and the bank statements are readily available. Grace is assisted by one attendant.
The success of the business, you understand, depends on the vigilance and strictness of the owners.
Required:
i) Identify the business risks in the passage and explain why they are risks. (10 marks)
View Solution
• Divine traveling to South Korea to buy goods for resale, because the currencies he deals in are not at parity and prices are influenced by inflation, there is a risk of exchange loss which can cripple the finances of the company.
• Risk of pricing goods. Correct price may not be assigned to the goods procured. Goods may be underpriced or overpriced.
• Loans contracted are not recorded. Actual loan amount may not be accounted for
• Banked loans may be accounted for as sales or sales figures may be accounted for as loans thereby, distorting the financial records of the company.
• Not all money converted for purchases go through the bank, as that, purchases not invoiced and money used by John for his personal purpose may not be captured.
• No invoices are kept for air tickets, hotel bills and expenses incurred by John. There is the likelihood that those expenses many be understated.
• Most of the sales are banked. An indication that sales are likely to be understated.
• Inadequate control, vigilance and strictness are not good measure of control.
• Inadequate documentation, making it difficult for business transactions to be documented.
(Any 5 points @ 2 marks each =10 marks)