1. Shareholders could invest in very risky projects
The management under the directive of the shareholders may undertake highly risky investments than those anticipated by the providers of long term debt finance. The creditors would not be interested in highly risky projects because they stand to lose their funds when the investments collapse. Even if the risky projects succeed they would not benefit because they only get a fixed rate of return.
2. The dividend payments to shareholders could be very high
An increase in the dividend rate in most cases is financed by a decrease in investments. This in turn reduces the value of bonds. If the firm is liquidating and it pays a liquidating dividend to its shareholders, the providers of capital could be left with worthless claims.
3. Default on interest payments to bondholders
4. Shareholders could organize mergers which are not beneficial to creditors
5. Shareholders could acquire additional debt that increases the financial risk of the firm
6. Manipulation of financial statements so as to mislead creditors
7. Shareholders could dispose of assets which are security for the credit given
8. Under investments
The shareholders may invest in projects with a negative net present value.
9. The shareholders may adopt an aggressive management of working capital. This may bring conflicts in liquidity position of the firm and would not be in the interest of the debt holders
Judiesiz answered the question on May 22, 2018 at 11:17
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Give examples of decisions by managers which would result in a conflict with shareholders.
(Solved)
Give examples of decisions by managers which would result in a conflict with shareholders.
Date posted:
May 22, 2018
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Answers (1)
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State five the disadvantage of management accounting
(Solved)
State five the disadvantage of management accounting.
Date posted:
April 24, 2018
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Answers (1)
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Clearly, give the differences between management accounting and financial accounting
(Solved)
Clearly, give the differences between management accounting and financial accounting.
Date posted:
April 24, 2018
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Answers (1)
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Describe the functions of a management accountant
(Solved)
Describe the functions of a management accountant.
Date posted:
April 24, 2018
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Answers (1)
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Explain the various types of management accounting
(Solved)
Explain the various types of management accounting
Date posted:
April 24, 2018
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Answers (1)
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State three limitations of auditing
(Solved)
State three limitations of auditing.
Date posted:
April 14, 2018
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Answers (1)
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Outline four contents of a letter of representation
(Solved)
Outline four contents of a letter of representation.
Date posted:
April 14, 2018
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Answers (1)
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a) Explain the following terms as used in auditing: (i) Audit risk. (ii) Inherent risk. (iii) Control risk. (iv) Detection risk.
(Solved)
(a) Explain the following terms as used in auditing:(i) Audit risk. (ii) Inherent risk. (iii) Control risk. iv) Detection risk.
Date posted:
April 14, 2018
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Answers (1)
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(a) Define the term recurring audit (b) State the circumstance under which the auditor may send a new engagement letter to the existing ...
(Solved)
(a) Define the term recurring audit (b) State the circumstance under which the auditor may send a new engagement letter to the existing ...
Date posted:
April 14, 2018
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Answers (1)
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Explain the procedures an auditor should follow before and after accepting nomination.
(Solved)
Explain the procedures an auditor should follow before and after accepting nomination.
Date posted:
April 10, 2018
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Answers (1)
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(a) Internal controls over non-current assets are designed to ensure the
orderly and efficient running of the business, adherence to management
policies, safeguarding of assets,...
(Solved)
(a) Internal controls over non-current assets are designed to ensure the
orderly and efficient running of the business, adherence to management
policies, safeguarding of assets, the prevention of fraud and error and
the completeness and accuracy of the accounting records.
Required:
List the internal controls that a small printing company with office
equipment, motor vehicles and plant and machinery should have in place
to achieve the objectives described above.
(b) Audit sampling is a technique for drawing conclusions about the
characteristics of a population by testing a sample drawn there from.
Internal and external auditors use it for both tests of controls, and
substantive testing.
Required:
Describe the following:
(i) Judgement sampling and statistical sampling;
(ii) A representative sample;
(iii) Tolerable error;
(iv) Two different methods of selecting a representative sample;
(v)The extrapolation of errors.
Date posted:
April 3, 2018
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Answers (1)
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Your firm is the newly appointed external auditor to a large company that
sells, maintains and leases office equipment and furniture to its customers
and...
(Solved)
Your firm is the newly appointed external auditor to a large company that
sells, maintains and leases office equipment and furniture to its customers
and you have been asked to co-operate with internal audit to keep total
audit costs down. The company wants the external auditors to rely on
some of the work already performed by internal audit.
The internal auditors provide the following services to the company:
(i) A cyclical audit of the operation of internal controls in the company’s
major functions (operations, finance, customer support and
information services);
(ii) A review of the structure of internal controls in each major function
every four years;
(iii) An annual review of the effectiveness of measures put in place by
management to minimise the major risks facing the company.
During the current year, the company has gone through a major internal
restructuring in its information services function and the internal auditors
have been closely involved in the preparation of plans for restructuring,
and in the related post-implementation review.
Required:
a) Explain the extent to which your firm will seek to rely on the work of
the internal auditors in each of the areas noted above.
b) Describe the information your firm will seek from the internal auditors
in order for you to determine the extent of your reliance.
c) Describe the circumstances in which it would not be possible to rely on
the work of the internal auditors.
d) Explain why it will be necessary for your firm to perform its own work
in certain audit areas in addition to relying on the work performed by
internal audit.
Date posted:
April 3, 2018
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Answers (1)
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Why would a company not share all its profits to shareholders?
(Solved)
Why would a company not share all its profits to shareholders?
Date posted:
March 30, 2018
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Answers (1)
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(a) What is meant by the term "fraud"? Give four examples of fraudulent activities.
(Solved)
(a) What is meant by the term "fraud"? Give four examples of fraudulent activities.
(b) What do you consider to be the auditor?s responsibilities in the course of
the normal annual audit in relation to the detection of fraud?
(c) Explain the way in which the auditor should approach and perform his work in order to meet these responsibilities.
Date posted:
March 28, 2018
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Answers (1)
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Emali Co. Ltd. has undergone a period of substantial growth following its establishment five years ago. At the last annual general meeting Smith &...
(Solved)
Emali Co. Ltd. has undergone a period of substantial growth following its establishment five years ago. At the last annual general meeting Smith & Co. Associates, a tow-partner firm of Certified Public Accountants were re-appointed as auditors. However, Smith & Co. Associates have decided that they do not have the necessary resources to audit the enlarge company.
Required:
a) Briefly, explain how Smith & Co. Associates may resign from its appointment before the next annual general meting.
b) How any a casual vacancy arising from the resignation of present auditors be filled and what procedures are necessary before the company‟s next annual general meeting at which the appointment will be presented for ratification?
c) Outline the steps the prospective auditor must take before deciding whether or not to accept the nomination as an auditor.
Date posted:
March 28, 2018
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Answers (1)
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(a) Explain why auditors carry out circularisation of debtors. (b) Distinguish between positive and negative debtors circularisation procedures. (c) Describe in...
(Solved)
(a) Explain why auditors carry out circularisation of debtors.
(b) Distinguish between „positive? and „negative? debtors circularisation procedures.
(c) Describe in detail the work you would carry out in scrutinizing the replies to the debtors circularisation and in confirming whether the debtors balances are collectable in the following situations:
i. where the debtor does not agree with the balance and states a difference; (6 marks)
ii. where the debtor reports that he cannot confirm the balance
iii. where no reply is received from the debtor
Date posted:
March 28, 2018
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Answers (1)
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You have been asked by the partners of your firm to prepare a draft memorandum on materiality which will provide guidance to members of...
(Solved)
You have been asked by the partners of your firm to prepare a draft memorandum on materiality which will provide guidance to members of staff in conducting the audit of the accounts of limited companies.
Required:
a)Define materiality.
b) Explain the importance of this concept to the auditor.
c) Suggest some criteria for determining cut-off point in order to assess the materiality of an error.
Date posted:
March 28, 2018
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Answers (1)
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John Mutiso bought shares of Sh.2 million six months ago in Kenya Company Limited which has since gone into liquidation. He intends to sue...
(Solved)
John Mutiso bought shares of Sh.2 million six months ago in Kenya Company Limited which has since gone into liquidation. He intends to sue XYZ & Co. Certified Public Accountants for the imminent loss of Sh. 2 million which he is likely to suffer. XYZ & Co. had audited the Kenya Company Ltd. The previous year and issued an unqualified report. John Mutiso claims that he solely relied on the audit report when he took that investment decision.
Required:
a) Do the auditors, XYZ & Co. have any liability to Mr. John Mutiso?
b) What circumstances must Mr. John Mutiso demonstrate if he has to succeed against the auditors?
c) State the measures XYZ & Co. should undertake to minimize potential liability for professional negligence.
Date posted:
March 28, 2018
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Answers (1)
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Distinguish between Accrual concept and Prudence concept
(Solved)
Distinguish between Accrual concept and Prudence concept.
Date posted:
March 23, 2018
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Answers (1)
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Explain the following concepts a).Depreciationb) Amortizationc) Depletion
(Solved)
Explain the following
a) Depreciation
b) Amortization
c) Depletion
Date posted:
March 23, 2018
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Answers (1)