Binder 1

Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2010 Exam

The Chartered Institute of Management Accountants Page 3

Suggested Approach This question takes the Aybe scenario forward to show the impact amongst other things of opening a new subsidiary. Part (a) requires candidates to evaluate different risks facing Aybe and the DEC subsidiary allowing candidates to draw on the pre-seen for some risks but then the unseen for the majority of the marks. Part (b) assumes knowledge of a management information system and requires candidates to show the good and bad points of this system. Part (c) is a question on foreign exchange transaction risk facing an international company. Most of normal hedging methods are considered to be inappropriate because of the group situation. Reward is therefore given for considering practical methods of risk mitigation. Part (d) focuses on ethics with the complication of what can be considered a practical method of remitting funds from a subsidiary. Marking Guide

Marks

(a) Max of 1 for identifying each risk and max 3 for evaluating each of those risks Could include currency risks, inflation risk, logistics, transport etc, quality and problems with the joint venture with the government.

15 marks

(b) Maximum of 5 for each of factory extension and African subsidiary. There are very few strengths apparent, so there should be no upper limit on weaknesses.

9 marks

(c) (i) 1 mark for any reasonable point on mitigating foreign exchange risk. Could be countertrade, paying in local currency, futures , options etc Must be a discussion.

10 marks

(c) (ii) 1 mark per reasonable point on accounting issues. Should mention IAS 39 and problems of fair values

6 marks

(d) 1 mark per reasonable point on ways of decreasing the risk of unethical transactions For example, good control environment, good internal controls, ethical code, disciplinary action if found out, good salaries and working conditions, performance related pay must be awarded with care so no temptation to be unethical.

10 marks

Examiners Comments Marks for Q1 were reasonable. Part (a), (c)(i) and (d) were done reasonably well which was encouraging. Parts (b) and (c)(ii) were not answered as well as expected. The main problem was lack of knowledge especially in part (c)(ii)



SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY

Question 2

(a) Evaluate the proposal made by the governor of the central bank. (10 marks)

(b) Evaluate the risk management strategy in B Bank (except for consideration of directors remuneration). Your evaluation should include recommendations for changes that will lower the banks exposure to risk.

(15 marks)

(Total for Question Two = 25 marks)

Rationale

This question focuses on the banking industry, just before the banking crises of 2007/08. The aim is not to analyse the crisis itself, but to identify areas where risk management may have been weak at the time. Elements of the UK banking industry may be seen in the scenario, although this is not necessary to answer the question as areas of poor risk management strategy are noted in the scenario. The issue of directors remuneration in (a) is potentially novel and designed to provide a twist on standard questions in this area.

Suggested Approach The question of whether directors paying a fee for a seat on the board is a reasonable suggestion should be discussed, it is likely that candidates will find few merits in this proposal, we are looking for a reasoned argument. Risks should be identified and discussed; there are several possible risks that could be mentioned. The main area of concern is mortgage lending and candidates are likely to mention the banking crisis in their answers. Marking Guide

Marks

(a) 1 mark per reasonable point. Points may include:

The nature of the banking industry is that bank profits are affected by factors that are not necessarily within the directors control. Interest rates rise and fall in line with economic indicators, as does the demand for finance. There is not necessarily a clear and objective basis against which to measure the performance of the banks board or of the individual directors. The only people who would be willing to work on this basis would be risk-seeking individuals. Failure will cost them very little. Short term outlook They may also be tempted to indulge in dishonest or manipulative reporting for the sake of their bonus. The recent bad publicity attached to bank directors and their bonuses may make it seem attractive to pay directors in a manner that appears to force them to justify their remuneration.

2(a) max 10 marks



(b) There are many different ways of answering this question. Points should be awarded for sensible alternative arguments.

1 mark per sensible point. Points may include: Suggest that strategic reviews should be conducted rather more frequently than once every four years. It is also unsatisfactory that non-executives do not normally challenge the executive directors strategic decisions. The banks lending policy appears to be very risky. In the event of a major downturn in the economy, there could be repossessions. It will end up owning large amounts of property that will have declined in value. The only real protection the bank has against this scenario is an economic forecast that predicts that house prices will rise at a rate well in advance of the general rate of inflation. The bank faces risks in the form of long term revenues. If house prices do continue to rise much faster than wages then it will become increasingly difficult for customers to be able to afford houses. That will cause mortgage applications to dry up and the bank will either have to find other outlets for lending or rely on interest from existing loans. The bank should, perhaps, consider alternative products that could be used to generate returns without undue risk. These could include shorter-term loans. Unrealistic expectations in the past have been met by extreme risk-taking by the banking industry.

2(b) max 15 marks

Examiners comments This question was done reasonably well. Candidates did not tend to go into enough detail in either part of the question but although they did not get high marks they often passed. Most candidates managed to come up with reasonable answers based on the worldwide banking crisis which was good. The benefit of reading the financial press was clearly demonstrated with this question. Common Errors The most common error was a lack of depth in the answers. Overseas candidates possibly did not perform as well as UK candidates in this question mainly due to less awareness of the current financial crisis. Part (a) was answered slightly better than part (b). Part (a) was done reasonably however some candidates missed the point that risk seeking individuals could be attracted by the idea rather than non risk seekers. It would not be to a banks advantage to have risk seekers as directors or people who were only interested in their own gain. Part (b) was done less well by some candidates. Some candidates did not discuss the mortgage policy at all which was poor. Reading the financial press would have been very useful for answering this part of the question as the financial crisis has been linked to risky mortgages in the US market. If the mortgages were not mentioned at all it was difficult to pass this question.



Marking Guide

Marks

(a)(i) 1 mark per relevant point. Points could include the following: The biggest advantage is that N will receive a known amount for the $ that it will receive. N will be able to determine the overall profit that it will make from this sale after allowing for the cost of the forward contract itself. Once the contract has been agreed the arrangement is relatively simple to manage. The biggest disadvantage may be that it could be difficult for a small company to arrange a forward contract for such a small amount. The arrangement is also binding on N. If the customer defaults or pays late then N will still be required to sell the $ amount and that could prove expensive and inconvenient. Overall, the risk is unlikely to justify the time and fees involved. (ii) 1 mark for each part of calculation (b)(i) 1 mark per relevant point The following points could have been made- Even if N has no direct dealings with US suppliers or customers it will be exposed to movements in the $. If the strengthens against the $ then it will become cheaper for Ns UK customers to import competing products from the US. N may use materials or components that are sourced from the US. The cost of those components will fluctuate in line with the $. Ns ambitions to export to the US will be directly affected by exchange rates. If the strengthens then US customers will have to pay more $ for a product and so N will find it harder to compete]. The only alternative would be to fix the price in $ and for N to bear the risk. (ii) 1 mark per reasonable point. Some of the points which could have been made are as follows: Economic exposure is very difficult to quantify because the relationships are not always obvious. For example, imported parts or materials could be sourced from local suppliers and so it will not always be clear that they will be more expensive if, say, the $ strengthens. Some products will have alternatives that could come from different countries and so the impact of a currency change could be mitigated by moving to a slightly more expensive supplier from a different country and so the cost might not be linear. Currency movements can reduce competitors selling prices, but some markets might not be particularly price sensitive. In some cases the competitor might not cut selling prices in pursuit of volume and could be happy to accept existing market share and simply take a larger profit from each sale. In some cases there could be market imperfections that make it difficult for price changes to have an impact

3a(i) max 8

marks

3(a)(ii) max 4 marks

3b(i) max 4 marks

3b(ii) max 9 marks



Question 4

(a) Discuss FIVE factors that the external auditors should consider when performing a risk assessment of Ks IT systems.

(15 marks)

(b) K has been told by a major credit card company that several hundred of its customers had

complained that fraudulent charges had been made to their credit card accounts for downloads from Ks site. Initial investigations in K have been unable to determine either the validity of these claims or why additional charges may have been made.

Evaluate the risks to K of such complaints explaining how those risks could be alleviated.

(10 marks)

(Total for Question Four = 25 marks)

Rationale This question is based on an Internet music download company such as Napster, although with a few variations. Part (a). This question focuses on the audit of IT systems, with an emphasis on the problems that IT can cause auditors. There is a detailed scenario from which many valid points can be drawn. So while the question may not be within the practical skill set of most candidates, the scenario itself will provide points to include in the answer. Part (b). This question asks candidates to link information technology to business strategy and show how the former can support the latter. Again, the scenario provides sufficient examples for a well-prepared candidate to accumulate a pass standard. Suggested Approach In the first part, candidates need to explain what external auditors would be looking for when they first look at the risks of the system in an online environment. In the second part the candidates have to think about the effects of a possible online credit card fraud on the company. Specifically how the customer complaints could affect the business.



Marking Guide

Marks

(a) 1 mark per relevant point Up to 4 marks per risk discussed

Some relevant points are:

Ks dependence on IT is a major factor. The company cannot generate revenue and could even fail if it is deprived of its systems for any length of time. The auditor will be keen to see that Ks management understands the risks that are involved. K should have taken adequate precautions in the form of security and backup of the main system. Systems maintenance will be a significant issue. The technology used by consumers, both hardware and software, will be changing over time. Ks system has valuable data that could be of immense value. Apart from the payments being made the system has customers personal details which are valuable for committing identity fraud. The system is online and is, therefore, a potential target for hackers. The auditors expertise should also be considered. Any five risks are acceptable, up to four marks per risk to a max of 15 marks. (b) 1 mark per relevant point Examples of points which could have been discussed are: There is a huge reputation risk. This type of fraud may attract press attention and Ks name will be associated with dishonest behaviour. There is an even greater risk that the credit card companies will refuse to permit payments to K. If a sale is made that is subsequently discovered to be fraudulent then that address should be blocked from making further payments. Paypal or similar could be used for payments.

4(a) max 15 marks

4(b) max 10 marks

Paper P3 Management Accounting Performance Strategy Post Exam Guide September 2010 Exam


Rationale

This question is based on a pre seen case study and on an unseen case study.

Answers could draw on both.

The unseen scenario is about a company which manufactures specialist components for a technologically advanced sports car.

This question is split into three parts:

Part (a) is drawn from section B of the syllabus risk and internal control. It asks candidates to evaluate the risks associated with the development of a high-tech assembly that is designed to ensure the safe operation of a sports car.

Part (b) is drawn from section C of the syllabus review and audit of control systems. It asks candidates to design an approach to post completion audits of the company in the pre-seen case and to discuss the implications that these audits might have for the companys capital budgeting process. Part (c) is drawn from section D of the syllabus management of financial risk. It deals with the question of hedging movements on commodity prices using derivative financial instruments. It explores candidates understanding of the advantages and disadvantages of hedging.

Suggested Approach This question takes the Aybe scenario forward to show the impact amongst other things of installing specialised parts for a sports car. Part (a) requires candidates to evaluate different risks facing Aybe and Q allowing candidates to draw on the pre-seen for some risks but then the unseen for the majority of the marks. Part (b) looks at evaluation of projects and post completion audits. Part (c) is a question on foreign exchange transaction risk facing an international company. Most of normal hedging methods could be discussed in the answer. Reward is therefore given for considering practical methods of risk mitigation. Marking Guide

Marks

Part (a)(i) The following are some points which could be expanded on: SPD could be accused of encouraging dangerous driving

No control over installation or subsequent maintenance. Dependent on contract Third party involvement

Max 4 marks

Max 4 marks

Max 4 marks

Max 4 marks

Max 12 marks



(a)(ii) Maximum of 4 for each response to the risks in part (a).

(b)(i)

The following points could be expanded on:

Project selection Correct allocation Different stages Focus on costs Correct allocation Variances

(b)(ii)

The following are suggested headings: Deter innovation Open and transparent audits Attitude of management Other relevant points may be made. (c)(i) Calculation (c)(ii) The following points should be expanded on: Inconsistent with hedging Possibility of superior insight Option and short term gain (c)(iii) The following points could be expanded on: Commercial advantage No real saving or reduction of risk in long term

Max 12 marks

Max 2 marks per point

Max 8 marks

2 marks 2 marks 3 marks

Max 5 marks

Max 3 marks

Max 2 marks per point

Max 6 marks

Max of 3 for each

relevant point

Max 4 marks



Examiners Comments Marks for question 1 were reasonable. Part (a) and (b) were done reasonably well which was heartening. Parts (c)(i), (c)(ii) and (c)(iii) were not answered as well as expected. The main problem was lack of knowledge of financial risk. Common Errors Part (c)(ii) and (c)(iii) was answered very badly by many candidates. Hedging has been examined in most past P3 exams so there was nothing new in this one. Many candidates simply missed this part or at least one of the subsections out. This is a poor strategy as high marks must be gained in another area to make up for this. This area requires revision before the next attempt. There will always be a financial risk element in Q1 as it forms 35% of the syllabus. It is impossible to avoid financial risk with this syllabus so it is very important that candidates study it and can do the associated calculations.




Question 2

(a) Advise the branch manager on the importance of adequate information systems (IS) for J.

Your answer to part (a) should NOT discuss the specific matters identified by the member of the IS team during the branch visit.

(10 marks)

(b) Evaluate the control implications of each of the matters discovered by the member of the IS team.

(15 marks)


Rationale

This question is drawn from section E of the syllabus risk and control in information systems. It tests candidates understanding of the importance of controls in systems and also the implications of compliance errors. It places these issues in the practical context of a branch of an entity that is heavily reliant on its information systems.

Suggested Approach

Part (a) should have been answered by suggesting applications of an IS system for the hire car industry.

The answer should have been quite specific and discussed indentifying the customers, identifying the car being hired and any damage to it etc.

Part (b) should discuss the specific risks suggested in the case of failing to use specified computers and software.



Marking Guide

Marks

Part (a) Marks were awarded for relevant points. The following are suggested headings which could be expanded - Control over vehicles Disputes over damage Identification issues Part (b) Laptop viruses, data protection, adverse publicity , branch manager PC - impact on network, copyright, unauthorised software, attitude etc

Max 10 marks

Max 6 marks

Max 9 marks

Max 15 marks

Examiners Comments Candidates scored good marks in question two, with many candidates achieving a pass. Part (a) was not done well but many of the answers to part (b) were excellent. Where candidates related their answers to the car hire industry in part (a) they achieved high marks, however generic answers were not rewarded in the same way. Candidates should always try to relate their answer to the industry in the question. Part (b) was done well by the majority of candidates. Common Errors The most common error was a lack of depth in the answers. Part (b) was answered slightly better than part (a). Part (a) was done quite poorly with few candidates scoring high marks. Many failed to discuss how IS could be useful in a car hire business. When the industry is given in the case candidates should try to base their answer on that industry. A general answer that relates to any business will score low marks. Part (b) was done very well by most candidates.



Question 3

(a) Discuss the operational risks that could arise as a result of the new management control system. Your discussion should include the potential risks associated with this new system.

(15 marks)

(b) Advise Ms directors on the ethical implications of their approach to personnel management.

(10 marks)

(Total for Question Three = 25 marks) Rationale This question is drawn from section A of the syllabus management control systems. It introduces a potentially divisive and dysfunctional management accounting system and tests candidates ability to evaluate the effects of the system for the company as a whole and also the ethical issues that such an approach to management may have. Suggested Approach This question starts with a discussion on the risks which the new system could cause. There are many points which candidates could raise here. Marks were awarded for discussion of all relevant points. Part (b) is a discussion of the ethical implications of the new management control system.



Marking Guide

Marks

Question 3 (a) up to 4 marks per relevant discussion. Could include the following areas: Beyond budgeting issues / no real empowerment Growth in revenue no longer viable objective Constantly changing promotions Competition between branches Effects on sales staff Publicity (b) up to 4 marks for discussion on each of the following areas: Professional behaviour / ruthless approach Employment law Competence and care Integrity

Max 15 marks

Max 10 marks

Examiners Comments Part (a) was done reasonably well by most candidates who chose this question but part (b) was done less well. Most candidates found many issues to discuss on the new management control system and did pick up on points from the scenario. Part (b) was less well done with a surprising number of candidates just discussing the headings in the CIMA ethical guidelines and not relating them to the case at all. Many of these points were not relative to the case at all such as objectivity. Almost no marks were given for this approach. Where there is a scenario candidates should use it in their answer. Common Errors Part (b) was poor. Many candidates did not discuss the main ethical issues raised in the case. Listing the CIMA ethical guidelines gained no marks as many of them were completely irrelevant to the problems raised in the case study. Candidates should always use the scenario when answering questions.



Question 4

(a)

(i) Evaluate the currency transaction risks that will arise under each of these contracts. Your answer should indicate why the nature of the currency risk associated with each of the contracts differs.

(6 marks)

(ii) Recommend, with reasons, an appropriate strategy for the management of each of the currency transaction risks you have identified.

(9 marks)

(b) Recent newspaper reports have documented the high levels of corruption and economic instability in E. Ns directors are concerned that they will be exposed to significant risks if they establish a subsidiary in E and have identified two possible strategies for managing the risks:

(i) Entering into a joint venture with a company located in E

(ii) Borrowing in E Pesos

Discuss the advantages and disadvantages of each of the two strategies for N.

(10 marks)

(Total for Question Four = 25 marks) Rationale This question is drawn from section D of the syllabus management of financial risk. It deals with the financial risks of operating overseas and links those financial risks to some of the more common methods available for the management of those risks, including internal hedging techniques such as netting and sourcing of finance. Suggested Approach Candidates had to consider the two situations carefully and decide what the risks were. One situation had frequent small transactions and the other large infrequent transactions. The ways of dealing with the risks were therefore very different. Part (b) looked at ways of managing political risks and made two suggestions for doing so which candidates had to discuss.



Marking Guide

Marks

(a)(i) 1 mark per relevant point Up to 4 marks per risk discussed

Points may include: Esta - Large volume of small transactions Sorta - small number of large transactions Comparison (a) (ii) Some points which could have been discussed were: Esta Accept risk Net receipt and risk of decline Offset/hedging Sorta Financial instruments Hedging (b) Max of 3 marks for discussion of any of the following: Joint venture Control issues Risk of expropriation Control issues Local borrowing Bank's motivation Gearing

Max 6 marks

Max 3 Max 2 Max 4

Max 4 Max 3

Max 9 marks

Max 9 marks

Examiners Comments This area of financial risk requires revision from many candidates. This question was not well answered. Part (b) was especially poor. Candidates could not distinguish between the two suggestions or come up with any ideas of which might be better.



Common errors Candidates were not good at this area at all. Very few candidates mentioned the difference in size and frequency of the transactions. They then had no ideas of how to manage the different risks in the two situations; candidates gave very generic answers that discussed hedging in general. Part (b) was done poorly as candidates could not come up with any ideas of why the two suggestions given in the question might be different. This whole syllabus area should be revised before the next exam. This area of financial risk is 35% of the paper so cannot be ignored.

Paper P3 Management Accounting Performance Strategy Post Exam Guide November 2010 Exam


SECTION A 50 MARKS ANSWER THIS QUESTION

Question 1

(a) DEFs board is seriously considering the proposal offered by S, but the Directors are

unsure whether the risks that it will create are justified by the associated revenues.

(i) Calculate the impact on DEF Airports annual revenues of:

accepting Ss proposal

winning the contract with the Asian airline that is currently in discussion with the Business Development Manager.

(6 marks)

(ii) Evaluate Ss proposal using your calculations in (a)(i) above and also the other information provided in the scenario.

(10 marks)

(iii) Discuss the operational risks that DEF Airport could face if it accepts the proposal made by S.

(12 marks)

(b) Discuss the advantages and disadvantages of the airport Operations Manager being directly responsible for the supervision of airport security.

(10 marks)

(c)

(i) Advise the directors of DEF Airport on the reasons why the airport is exposed to currency risk.

(7 marks) (ii) Recommend an approach to managing the risks that you have identified in (c)(i) above.

(5 marks)

(Total for Question One = 50 marks)



Rationale This question is based on both the common pre-seen scenario and the unseen scenario. It draws on themes that have been discussed in the context of airport management and travel in recent years, most notably the changes that are being brought about by the encroachment of low-cost airlines and the impact of economic factors on the demand for leisure and business travel.

Part (a) draws mainly on section B of the syllabus (Risk and Internal Control). This part deals with the situation where a business has a large customer which is prepared to use the influence associated with that position to exert some pressure. In this case the entity is faced with a proposal that appears to offer considerable growth in turnover. However, some basic calculations establish that the proposed growth is not particularly attractive in itself and is going to leave the entity with very little scope to pursue any further opportunities that may come along.

Part (b) draws mainly on section A (Management Control Systems). This part asks candidates to think about the agency issues that might arise within an organisation if a manager has a remit that includes a range of competing objectives.

Part (c) focuses on section D (Management of Financial Risk). The P3 syllabus focuses on the international aspects of financial risk and so that will be a recurring theme throughout all diets. This requirement focuses on the economic impact of foreign currency risk for the entity described in the scenario. Paradoxically, all of the entitys income and outgoings are in the local currency and so a superficial analysis might suggest that it does not face any currency risk, but a little more thought indicates that it is, indeed, quite exposed because demand will be influenced by currency movements.

Suggested Approach Section (a)(i) asks for a fairly clear set of computations. Candidates are asked to establish the annual revenues presently obtained from a major customer, those that will be obtained from the customer if a proposal is accepted and those that could be obtained from a new customer if the entity retains the scope to sell further business at its standard rates. This sub-requirement is not particularly testing at this level, but it will force candidates to engage with the proposal on offer that must be analysed in a qualitative way in the next sub-requirement. At the very least, it will help to settle exam nerves.

Section (a)(ii) asks for an analysis of the numbers calculated in section (a)(i). This is quite a subtle question because a hasty analysis will suggest that the proposal is in the entitys best interests because revenue from the major customer will more than double. Having said that, though, the proposal will also take up most of the entitys remaining spare capacity for new business. The much smaller proposal offered by another customer would create almost as much additional revenue and consume very little spare capacity. The key thing that candidates should bring out in this part is that nothing is certain. There are potential upside and downside risks to each of the positions that could be taken by management and so the analysis is never clear-cut. Marks awarded for clarity of argument rather than identifying the correct outcome.

Section (a)(iii) follows on from (a)(ii) by pointing out that offering a special deal to one major customer may have implications for other customers and that could further complicate the analysis of the proposal that has been offered. Candidates will have to use some common sense to pick out facts such as the possibility that passengers using the services described may have little time and inclination to eat and shop at the airport and so they will not bring a great deal of additional business in to the retail side.



Marking Guide

Marks

(a)(i) Calculations 2 marks each - present position, with S and with Asian airline.

6 marks

(a)(ii) Comments on calculations Comments on S proposal Comments on effect on airport Asian airline

2 marks 3 marks 3 marks 2 marks

Max 10 marks

(a)(iii) Comments on offering special deal Comments about low cost airlines Comments about mainstream airlines Comments about services, car parking , shops , food etc

4 marks 2 marks 2 marks 4 marks

Max 12 marks

(b) Candidates must discuss both the advantages and disadvantages

Marks for all good advantages and disadvantages applied to the scenario.

1 mark per reasonable point, which could include the following: Screening and scanning procedures v the throughput of passengers. That could

compromise the safety of flights. It may be that the head of operations will start to see security as a source of

competitive advantage, (e.g. adequate resourcing will reassure passengers and reduce delays).

Security arrangements might also be better linked to the flight schedules, perhaps by having larger teams on duty at times when passenger numbers peak.

A single point of contact for all operational matters may improve communications.

1 mark per point Max 10 marks

C(i) Various approaches are acceptable

1 mark per reasonable point, which could include the following:

Passengers have choice on where they take holidays

Passengers may not want to go to countries with the euro as currency etc

1 mark per point

Max 7 marks

C(ii) 1 mark per reasonable point relating to risks identifies in c(i), which could include the following:

Natural hedges

Diversifying routes etc

1 mark per point

Max 5 marks



Examiners Comments Part (a)(i) was done very badly. Very few candidates scored a high mark. These 6 marks should have been easy to obtain as it was a simple calculation. Answers were often badly laid out and incorrect. Some information was included in the pre-seen case and some in the unseen; candidates got numbers confused and did not do what was asked. Part (a)(ii) was also poor, if candidates got the numbers badly wrong in part I they did not write much for part (ii). Part (iii) was reasonable. Part (b) was done well by most candidates with candidates coming up with good reasons for operations and security being one job or two. In the main candidates had good reasoned arguments for their decision which was excellent. Part (c) was done very badly. Economic risk featured in the previous exam and it was suggested that some revision of this area would be helpful. The same is true of this exam, candidates should revise economic risk. Most candidates suggested various types of hedging to mitigate against the risk and achieved a very low mark. Financial risk and indeed currency risk will generally feature in question 1 from now on. Common Errors The biggest problems were (a)(i) and part (c). In (a)(i) the calculations were done very badly. Poor numerical skills were shown and also very poor layouts. If the layout is poor it is very unhelpful to the markers and the candidate may not gain marks if it is not clear how figures have been derived. In part (c) candidates did not understand economic risk at all and many wrote answers which scored zero marks. If the candidates could not do part (i) then they struggled to make a reasonable attempt at part (ii). Hedging is not effective against economic risk so low marks were achieved if that was all the candidate wrote about.




Question 2

(a) Evaluate THREE operational risks associated with the manufacture of Ws products. (Your answer should include an explanation of how each of these risks could be managed.)

(15 marks)

(b) Evaluate the risks associated with the use of EDI for managing Ws ordering and

accounting processes. (10 marks)


Rationale This question is loosely based on two common themes that underpin a great deal of modern business: outsourcing of manufacturing and the use of IT to manage relationships with a network of suppliers and customers. These themes are clearly interlinked in the real world and so the question has a degree of authenticity. The question is scenario-based and concerns a business that has a range of products for which demand constantly outstrips supply.

Part (a) draws mainly on section B (Risk and Internal Control). It deals with a design-led business that outsources its manufacturing operations.

Part (b) draws on section E (Risk and Control in Information Systems). It focuses on the use of EDI to manage and coordinate the complex manufacturing arrangements introduced in part (a).

Suggested Approach Section (a) asks for the identification of three operation risks from the scenario (which is relatively long and complex). These are to be evaluated and suggestions are to be offered for their management. One part of the secret to answering this question is to select three fairly obvious risks that lend themselves to a discussion of their resolution. Candidates should invest some time in thinking about their approach.

Section (b) is more open-ended. It does not require an extensive knowledge of the IT issues underpinning EDI. Instead, the primary issue is the fact that the entity described in the question has little more than electronic communication with its suppliers and customers. The manufacturing arrangements are complex and any breakdowns will disrupt the production process. The key here is to think about the manner in which the interaction that is possible can be put to the greatest use.



Marking Guide

Marks

(a) 1 mark per reasonable point Max 5 for discussing each of 3 operational risks:

Control over outsourced manufacture Reputation if product poor quality and late Logistics transport etc

(b) 1 mark per reasonable point

1 mark for each good point on EDI system. Only 1 mark for generic points such as viruses, hacking etc. Must relate to EDI.

1 mark per point

5 marks 5 marks 5 marks

Max 15 marks

1 mark per point

Examiners Comments This question was done very poorly. In part (a) the question specifically asked about risks associated with manufacturing. Many candidates ignored this. This was an interesting question where many different risks could have been chosen. Part (b) was also very poor as many generic risks, which could have applied to anything and were not specific to the question scenario, were listed. Candidates should revise this area before the next attempt as it was very clear that very few candidates knew what EDI was and were just writing generic answers about IT. It is very important that candidates read the questions carefully and ensure they answer what is asked otherwise no marks can be awarded. Common Errors Candidates did not answer what was asked and scored low marks. The focus should have been risks associated with manufacturing but most candidates ignored this and just wrote about a multitude of risks in all areas. In part (b) answers should have specifically discussed an EDI but most just wrote about generic IT risks such as hackers and viruses. This approach did not score a high mark.



Question 3

(a) Evaluate the suitability of each of the three nominees. Your answer should include arguments for and against each of the nominees.

(15 marks)

(b) Discuss the problems associated with determining a suitable level of bonus for each of Ps executive directors.

(10 marks)

(Total for Question Three = 25 marks)

Rationale This question is based around a scenario concerning a quoted company that wishes to recruit some additional non-executive directors and remunerate the executive board in a manner that will align the directors interests with the shareholders. These are clearly core issues in the ongoing corporate governance debate.

The question is in two parts, both of which draw on section C (Review and Audit of Control Systems).

Part (a) offers a shortlist of three potential appointments to the board with some biographical information about each. There are some clues that each has strengths and weaknesses, reflecting the fact that appointing a non-executive director is often a difficult task because very few candidates will ever be entirely perfect.

Part (b) asks for a discussion of the issues associated with setting bonuses. That brings together many of the themes running through both management accounting and finance. By this stage, candidates should be able to reflect on the implications of rewarding a decision-maker in a particular way.

Suggested Approach Section (a) asks for some reflection on the role of the non-executive director. Candidates have to sift through the information provided to tease out the potential motivation and contribution that might be expected from each candidate. The requirement stresses the need for a balanced discussion of the pros and cons because there are positive and negative aspects to each.

Section (b) asks for a discussion of the problems associated with operating a bonus system that offers performance-related rewards. The basic problem is partly that of conflicting perceptions and partly of conflicting economic implications. Stakeholders are nervous when their directors have nothing to gain from good performance and nothing to lose from bad. They wish to see rewards being earned, but they are angry when the schemes that determine such rewards seem to be over-generous. These are the complexities that should start to figure in the strategic level.



Marking Guide

Marks

(a) 1 mark per reasonable point Maximum 5 marks for discussion of each nominee (b) 1 mark per reasonable point 1 mark for each sensible comments on bonuses. This should be for each

director.

1 mark per point

Max 15 marks

1 mark per point

Max 10 marks

Examiners Comments Marks were high for this question. Part (a) was done very well by most candidates. There were many clues in the question and most candidates picked up on these and gave very good answers. Part (b) was not quite as well done as some candidates gave generic answers for all directors rather than for each director. Common Errors This question was done very well by many candidates. The main problem was some candidates wrote about all of the directors rather than considering each director separately.



Question 4

(a) (i) Use the information gathered by the Finance Director to produce three alternative

forecasts of the expected spot rate when the payment is received. (9 marks)

(ii) Recommend with reasons the forecasting model that you regard as the most reliable for Vs purposes.

(5 marks)

(b) Discuss the advantages and disadvantages of buying the currency option.

Your answer should include calculations to show the benefit of exercising the option. (6 marks)

(c) The management of V are thinking of changing their policy so that all customers will

be required to pay in Y$.

Discuss the advantages and disadvantages of this policy change for V.

(5 marks)

(Total for Question Four = 25 marks) Rationale This question is partly scenario based and partly theoretical. It presents a business that faces a major transaction risk and asks for some discussion of the issues associated with forecasting currency rates using the market relationships introduced by the syllabus. The whole question is from section D (Management of Financial Risk). The focus on transaction risk means that it complements the foreign currency material examined in question 1, which is on economic risk. Part (a) asks for a range of forecasts using the models available in the syllabus. The different models produce different results and so candidates are asked to identify the most reliable.

Part (b) asks for a calculation to determine which of two risk management instruments to purchase. One is more expensive than the other, but it offers less potential upside risk. Thus, the question has both an upside and a downside risk.

Part (c) asks for a discussion of the merits of invoicing an overseas customer in local currency. Normally candidates are expected to reject this suggestion, but it is less relevant in this case because of the nature of the business. The scenario deals with a marketing consultancy that is being asked to advise on a local market. That makes it more difficult for the customer to threaten to appoint a competitor. At most, our consultancy competes only with other national marketeers.



Suggested Approach Section (a) requires a basic understanding of the key economic relationships that govern foreign currency movements. Given the emphasis placed on this by the syllabus, those relationships should be well understood. Candidates are expected to argue in common sense terms rather than having to use research studies to identify the strongest model.

Section (b) requires the ability to spot the fact that one method has a slightly higher guaranteed minimum reward but that the other has a large potential upside whereas the more lucrative choice is pegged. The resulting qualitative decision has no correct answer, but the issues can be explored.

Section (c) requires candidates to think about the nature of the relationship between the two entities involved. The customer may prefer to be invoiced in one currency (and the reasons will receive credit if explored by the candidate), but the relationship in this scenario means that it is unlikely to be a deal-breaker in this case. Candidates are being asked to think beyond the knee-jerk reaction that forces companies to accept payment in foreign currency.

Marking Guide

(a)(i) 3 forecast calculations - 3 marks each

9 marks

(a)(ii) comments on the 3 models 1 mark per reasonable comment Maximum 2 marks for each model.

Max 5 marks

(b) calculations - max 3 marks Maximum 4 marks for comments on advantages and disadvantages

Max 6 marks

(c) 1 mark per sensible comment

Max 5 marks

Examiners Comments This question was the least popular question but was the one with the best results. Candidates who chose this question were rewarded for learning about financial risk. Part (a)(i) was very straightforward and marks were very high. Part (a)(ii) was done very well with most candidates able to make sensible comments on each model. Part (b) was not done well. Candidates did not know what the benefit of this particular option could be given that there was no financial benefit. Many candidates talked about the generic benefits of options and many missed this part out. Part (c) was reasonable. Common errors Parts (a) and (c) were done well by most candidates. Part (b) was poor. Many candidates wrote very generic answers about options rather that writing about this specific option. This was probably because they did not read the question carefully. Some candidates simply missed this part out completely. It is important to study all areas of the syllabus, missing out an answer, even a small part, lowers the chances of passing considerably.

Paper P3 Management Accounting Performance Strategy Post Exam Guide March 2011 Exam



Question 1 (a)

(i) Evaluate the present structure of DEFs board, as described in the Governance section (page 2) of the pre-seen. Your evaluation should reflect all relevant facts provided about DEF.

(9 marks)

(ii) Evaluate the Chairmans arguments that the board should not cooperate with Max unless it can be determined that the client whom he represents will not change the airport in any fundamental way.

(8 marks)

(iii) Discuss the risks associated with pursuing the airports mission statement (as provided

in page 2 of the preseen) as a basis for the boards strategic management of DEF.

(8 marks)

(b)

(i) Discuss the risks and benefits to DEF of the Chief Executives proposal to accept payments in US$ which would then meet part of the airports US$ outgoings.

(8 marks)

(ii) Explain the benefits of internal hedging methods for managing foreign currency risk

over external methods involving financial instruments.

(8 marks)

(c) Evaluate the risks to the retailers of accepting foreign currency payments at their shops

and cafes.

(9 marks)




Rationale This question is based on both the common pre-seen scenario and the unseen scenario. It draws on themes that have been discussed in the context of airport management and travel in recent years, most notably the changes that are being brought about by the encroachment of low-cost airlines and the impact of economic factors on the demand for leisure and business travel. Candidates should be able to answer this question on the strength of the information provided in the paper, but even some very basic desk research on the pre-seen case should help them.

This question is split into three main parts:

Part (a) covers aspects of sections A, B and C of the syllabus management and control systems, risk and internal control and audit and audit of control systems. It covers aspects of the higher-level strategic management of the entity, bringing in the composition of the board, the boards responsibility to the shareholders and the implications of the mission statement.

Part (b) is drawn from section D of the syllabus management of financial risk. It deals with the management of currency risk, focussing on the role of internal hedging techniques. Part (c) is drawn from section C of the syllabus review and audit of control systems. It deals with the risks associated with accepting cash payments in the form of foreign bank notes, with implications for the reconciliation and recording of takings. Suggested Approach Part (a)(i) asks for an understanding of the corporate governance requirements relating to board structure. This is a straightforward question which relates to having balance on the board.

(a)(ii) asks for an analysis of the proposal made by Max. The chairman suggests the board should not consider the proposal unless the airport will continue in the same vein in the future. There are many points which could be made in a good answer. Good candidates discussed the boards responsibility to shareholders in the light of the structure of the company.

(a)(iii) is looking for a discussion of the mission statement in terms of setting strategy for the future.

(b)(i) is looking at financial risk. Some discussion on the risks of taking payment in foreign currency is required. The answer should consider the idea of hedging using the bureau de change.

(b)(ii) this part continues the discussion of foreign currency. Candidates were asked to discuss internal versus external hedging methods.

(c) This section looks at the risks of the retailers accepting payments in a variety of foreign currencies. There should be a discussion on how this affects the controls in the shops and cafes.



Marking Guide

Marks

(a) (i) Discussion of the board structure

1 mark per relevant point should include some of the following Balance Skills Role on non execs

(ii) 1 mark per relevant point which could include:

Comments on the proposal Duty to shareholders Comments on structure Redundancies

(iii) 1 mark per relevant point on mission statement (b) (i) There must be a discussion. 1 mark per relevant point. Points made should relate to the case material. (ii) 1 mark per relevant point relating to case material. (c) Various risks could be discussed. Discussion should relate to the scenario. 1 mark for any reasonable point which could include:

Cashing up Translation Different rates Forged notes

Max 9 marks

Max 8 marks

Max 8 marks

Max 8 marks

Max 8 marks

Max 9 marks

Maximum marks awarded 50 marks



Examiners Comments Some parts of this question were not answered very well. (a)(iii) which was about the mission statement was poor and a number of candidates missed it out completely. (b)(i) and (ii) were also weak. Part (a)(i) was about governance and was answered very well by most candidates. Part (a)(ii) was not answered as well. It was about whether to accept the proposal made by Max. Candidates gave fairly short answers to this and did not give a structured answer. Part (a)(iii) was about the mission statement and was poor. (b)(i) was about accepting payments in $US and was generally poorly thought through. (b)(ii) was about hedging and the answers were quite general. (c) was reasonably well done, although some answers were very brief. Common Errors Some candidates missed parts out which will always be difficult to recover from. The part of the question most often missed out is that relating to financial risk. It was clear that some candidates had not read the question in detail and did not pick up on several of the points which were there which would have helped to give a good answer. Using the reading time to make sure these points are used is important. The part about the mission statement was done badly; most candidates gave very brief answers which lacked any depth. Parts (b)(i) and (ii) were disappointing. Many answers were very short and missed the main issues. The area of financial risk could do with some revision. Some answers to part (c) about the bureau de change were very good but others were poor. The good candidates were able to apply their knowledge and come up with most of the risks which was pleasing.




Question 2 (a)

(i) Discuss the Director of Operations view that it is impossible to prevent all workplace

injuries. (5 marks)

(ii) Discuss the Chief Executives view that it is unacceptable for Grove Council to tolerate

any workplace injuries. (5 marks)

(b) (i) Analyse the ethical dilemma faced by the internal auditor.

(8 marks)

(ii) Recommend the course of action that the internal auditor should take if she is unable to persuade the Head of Internal Audit to draw these allegations of under-reporting of injuries to the attention of the senior management of Grove Council.

(7 marks)


Rationale

Part (a) is drawn from section B of the syllabus risk and internal control. It deals with the management of the risks associated with workplace accidents, with consequent implications for the inevitability of the risks and the need for avoidance. Part (b) is drawn from section C of the syllabus review and audit of control systems. It deals with the ethical dilemma faced by an internal auditor who has discovered the falsification of health and safety records.

Suggested Approach Section (a)(i) asks for an evaluation of the directors view. Candidates should invest some time in thinking about their approach.

Part (ii) looks for an evaluation of the chief executives view. This view is different from the directors. Marks will not be awarded for negatives of points made in (i).

Section (b)(i) is about ethics. Some consideration of the ethical dilemma is required. This should be discussed in some detail.

Section (b)(ii) is about the response of the auditor.



Marking Guide

Marks

(a)(i) Max of 5 marks for discussing the Directors view 1 mark per reasonable point

Max 5 marks

(a)(ii) 1 mark for each good point on the Chief Executives view (b)(i) 1 mark per relevant point Ethical issues must relate to the scenario or no marks No marks for simply listing CIMA ethical guidelines (b)(ii) 1 mark per relevant point. Must include recommendations.

Max 5 marks

Max 8 marks

Max 7 marks

Maximum marks awarded 25 marks Examiners comments This was the most popular of the optional questions and was done reasonably well. Parts (b)(i) and (ii) were a little poorer than part (a). Common Errors This question was reasonably well done by most candidates who attempted it. The most common mistakes were not to discuss the ethical issues at all or to misunderstand the issues. Part (b)(i) was poorly answered as some candidates did not try to relate their answer to the scenario and just listed CIMAs ethical guidelines. This approach got no marks. When there is a scenario candidates must use it in their answer. Many candidates answered (b)(ii) very badly and could only suggest the auditor resigned. While that is certainly a last resort there are many other options that should be explored first.



Question 3

(a) Evaluate the argument put forward by Ts finance director for refusing to have a post-

implementation review. (10 marks)

(b) Evaluate the suitability of the internal audit department to conduct Ts post-

implementation review in the event that such a review is conducted.

(5 marks)

(c) Discuss the problems that might arise if an entity does not conduct a parallel run when implementing a new system.

(10 marks)


Rationale This question is drawn from section E of the syllabus risk and control in information systems. It deals with the issues associated with implementing and testing a new information system. Suggested Approach Section (a) asks for some reflection on the role of a post implementation review. It does require some understanding of the issues as candidates have to evaluate the reasons the finance director does not want one.

Section (b) asks for a discussion of the suitability of internal audit to carry out such a review. Candidates should demonstrate knowledge and understanding of the role of the internal auditor.

Section (c) asks for a discussion of the importance of a parallel run of the new and old systems.

Marking Guide

Marks

(a) 1 mark per relevant point

Answer must evaluate the finance directors statement. (b) 1 mark for each sensible comment on the role of internal audit

For example: Independence Knowledge of system Experience Skills

(c) Discussion required for maximum marks. Maximum 4 if no discussion.

1 mark per relevant point

Max 10 marks

Max 5 marks

Max 10 marks

Maximum marks awarded 25 marks



Examiners Comments This question was done badly. This was a reasonably popular question but it was not done well. The answers were brief and often did not relate to the scenario at all. Candidates did not seem to understand the risks that were to be discussed. The syllabus has a significant section on IT and IS and candidates would benefit from revising this for future attempts. Candidates are often weak in this area. Common Errors Most candidates did not seem to know what a post implementation review was; this area of the syllabus could do with some revision before the next exam. Many candidates wrote about a post completion audit which is not the same. Few candidates could make sensible suggestions about whether internal audit would be suitable for this task. The role of the internal auditor will be examined fairly often as it is a significant part of the syllabus. Part (iii) of the question was poorly answered; this was surprising as past questions have asked about how to minimise risks when changing a system. Generally, candidates choosing this question answered very briefly and seemed to have a poor level of knowledge.



Question 4

(a) Calculate the net present value (NPV) of the cash flows that W Bank will generate from this swap under each of the three scenarios identified by the swaps department. W Bank discounts cash flows from such projects at 7%.

(8 marks)

(b)

(i) Advise W Bank on the risks that will arise from this swap arrangement.

(6 marks)

(ii) Explain how W Bank might mitigate the risks arising from this swap and identify the

difficulties in doing so.

(6 marks)

(c) Evaluate the benefits to P of entering into this swap arrangement. (5 marks)


Rationale This question is drawn from section D of the syllabus management of financial risk. It deals with the use of swaps for the management of interest rate risk. This question is partly calculation and part theory. Part (a) asks for calculations of the net present value of the cash flow generated from the swap. Part (b) looks at the risks and mitigation of the risks of the swap from banks perspective and part (c) looks at the benefit of the swap. Suggested Approach Section (a) requires a basic understanding of calculations involved in a swap.

Section (b) requires the ability to discuss the risks to W bank and also to understand how the bank could mitigate the risks.

Section (c) requires candidates to think about the nature of the swap and what the benefits could be.



Marking Guide

(a) Up to 3 marks for each of 3 forecast calculations (b)(i) 1 mark per reasonable comment (b)(ii) 1 mark per reasonable comment (c) 1 mark for each reasonable comment.

Max 8 marks

Max 6 marks

Max 6 marks

Max 5 marks

Maximum marks awarded 25 marks Examiners Comments This question was the least popular question but had the best marks. Candidates who chose this question knew this area of the syllabus well which was heartening. The calculations were done well but part (b)(ii) was a little weak. It would be beneficial to all candidates to study this area of the syllabus. It is 35% of the syllabus and it is difficult to pass this subject without good knowledge of this topic. Common errors Part (i) was very well done with many candidates scoring full marks. Part (b)(i) was a little weaker and part (b)(ii) was poor. In part (b)(ii) the obvious solution was for W to organise another matching counterparty swap, very few candidates mentioned this. Part (c) was very well done.




Question 1

(a)

(i) Evaluate the risks arising from the outbreak of food poisoning to F plcs reputation in terms of their likelihood and impact of occurrence.

(8 marks) (ii) Advise the directors of F plc on the suitability of the two arguments proposed by the

managers of the Meals Division for defending the companys reputation.

(8 marks) (b) (i) Advise the board on the implications of the secret recipe being obtained by a

competitor. (4 marks)

(ii) Recommend, stating reasons, suitable precautions for preventing the secret recipe

from being obtained by a competitor.

(6 marks) (c) (i) Evaluate the head of internal audits statement that the divisional management

accountant should not comment on the allocation of internal audit resources. (6 marks)

(ii) Discuss the validity of the head of internal audits assertion that the external auditor

should be prepared to cooperate with the internal audit department. (6 marks)

(d) Evaluate the views of certain board members concerning there being no need to manage F plcs currency risks.

(12 marks)




Rationale This question is based on both the common pre-seen scenario and the unseen scenario. It draws on themes associated with the evaluation and management of risks, the role of internal audit and the evaluation of currency risks. Part (a) draws mainly on section B of the syllabus (Risk and Internal Control), lead outcome 1 (evaluate types of risk facing an organisation), component (b) (evaluate risks facing an organisation). It deals with the evaluation of the risks associated with product safety issues and the associated publicity. The scenario depicts a situation in which the product appears to have been prepared incorrectly and so it is debatable whether the company in question is actually responsible for the ensuing damage. Part (b) also draws mainly on section B of the syllabus (Risk and Internal Control), lead outcome 1 (evaluate types of risk facing an organisation), but deals with component (a) (discuss ways of identifying, measuring and assessing the types of risk facing an organisation, including the organisations ability to bear such risks). It deals with the risks associated with intellectual property and the manner in which that might be protected. In this case there is no possibility of using patents or similar legal safeguards because the property is basically just a recipe that cannot be patented. The entitys primary safeguard is that knowledge of that recipe is restricted to two members of staff. A competitor has already attempted to lure one of those staff members away from the company. Part (c) draws mainly on section C of the syllabus (Audit and Audit of Control Systems), lead outcome 2 (Evaluate the process and purposes of audit in the context of internal control systems) components (b) and (e) (produce a plan for the audit of various organisational activities including management, accounting and information systems and discuss the relationship between internal and external audit work). Part (i) deals with the possibility that the management of a division may request additional support from internal audit. Part (d) draws mainly on section D of the syllabus (Management of Financial Risk), lead outcome 2 (Evaluate alternative risk management tools), component (a) (evaluate appropriate methods for managing financial risks). It deals with the strategic decision as to whether to actively manage currency risk or simply to leave it unmanaged and uncontrolled. Suggested Approach Part (a)

The problem is that the case has already created substantial negative press coverage and the customer who used the product incorrectly was a charity, so any defence will make the company look as if it is attacking a worthy cause in order to escape responsibility. The question focuses more on identifying these risks rather than asking for a solution to an impossible situation. It is worth bearing in mind that there will often be problems that are difficult to resolve and for which there is no single correct answer. Part (b)

This question raises some important questions about the implications of the loss of such information to a competitor. While it could be argued that this would lead to a significant loss of commercial advantage, it is also very possible that the real asset is in the form of the brand that has been created from that product. There are many competing manufactured food products that enjoy considerable success and yet they do not taste very different to their competitors. The suggested answer suggests that the company may have overstated the potential risk, although a candidate would have been given credit for a logical answer that made the contrary argument. In dealing with the protection of the knowledge itself, candidates have to consider the reality. The employee with the recipe has rather more power than is normally considered desirable and the directors will have to take that into account in protecting the companys interests.

Part (c)(i) One issue raised by this question is the possibility that such requests are not necessarily harmful for the independence of internal audit and that the internal auditor should be prepared to make resources available in response to such requests.



Part (ii) deals with the relationship between internal and external audit. This part of the question requires a clear understanding of the roles of both forms of audit. Part (d) Arguably, it would be irresponsible to ignore currency risks altogether but there are circumstances where companies are fairly well protected by natural hedges that make active management unnecessary. This question does require a degree of thought about the nature of the business and the ways in which it might be affected by currency movements. Marking Guide

Marks

(a)(i) Max 3 for any of the following risks: press coverage, regulatory responses, legal responses (a)(ii) 1 mark per valid point - max 5 relating to each argument. All products carry that bacteria and charity was negligent are the two arguments (b)(i) 1 mark per reasonable point - any good arguments accepted There could be a range of answers here - all good points would earn marks. (b)(ii) 1 mark per reasonable point Again, there could be a variety of approaches taken and all good points would earn marks. (c)(i) 1 mark per reasonable point Must be an evaluation if no evaluation max 3 marks Could include the following points: Internal auditors report to the board not anyone else, the board could ask them to assist. Individual managers should not ask internal audit for help Independence (c)(ii) 1 mark per reasonable point Could include: External auditor has a clear role defined by statute, independence is crucial. It is acceptable to use some of the internal auditors work but not vice versa If no discussion max 2 marks

(d) Arguments for managing the risk max 5 marks Arguments against managing the risk max 5 marks Conclusion max 2 marks

Max 8 marks

Max 8 marks

Max 4 marks

Max 6 marks

Max 6 marks

Max 6 marks

Max 12 marks

Maximum mark awarded 50 marks

Examiners comments Some parts of question one were done well but others were very poor. The main problem was not answering the question that was asked. In particular, part (c)(ii) and part (d) were not answered well.



Common Errors Part (a)(i) was not done very well as many candidates ignored the fact that the question asked about risks to reputation and just wrote about all the risks in any area. Answering the specific question asked is the key to a high mark. Part (c)(ii) was very poor with candidates giving very standard answers to the wrong question. The question asked whether the external auditors should cooperate with the internal auditors not the opposite way round. Many candidates gave a standard answer to the question whether internal auditors should cooperate with external auditors and achieved a very low mark. It was also very clear that candidates had very poor knowledge of the role of either. Part (d) was a financial risk question and was done badly. Candidates still do not learn this area of the syllabus even although it will always be a part of question one. Many candidates came up with reasons to hedge the risks but did not evaluate the benefits in any way. Some candidates launched into a list of hedging techniques which was not what the question required. Again, reading the question carefully and answering what was asked would have helped candidates to gain high marks.




Question 2

(a) Evaluate the risks to the quality of service offered to C's clients arising from the competitive nature of the firm's culture.

(12 marks) (b) Evaluate the strengths and weaknesses of Cs governance arrangements with respect

to the partnership and its management committee. (13 marks)


Rationale This question is based on a scenario relating to a consultancy that operates a very aggressive meritocracy for the retention and promotion of its staff. Arguably, such an approach to managing human resources may create significant risks to the entity because it may encourage staff to be more concerned with their own interests rather than those of the entity as a whole. The question also deals with the governance issues associated with appointing senior partners to the lead role in this type of entity. Part (a) draws mainly on section A of the syllabus (Management Control Systems), lead outcome 1 (evaluate control systems for organisational activities and resources), component (b) (evaluate the appropriateness of an organisations management accounting control systems). It describes a fairly typical set of circumstances for a leading consultancy business. The management wishes to attract motivated and ambitious staff who will work hard to provide a competitive service. Unfortunately, that creates the dilemma that such staff will be equipped and motivated to take short-cuts that may threaten the quality of the service that they have been appointed to provide. Part (b) draws mainly on section B of the syllabus (Risk and Internal Control), lead outcome 3 (Evaluate governance and ethical issues facing an organisation), component (a) (discuss the principles of good corporate governance, particularly as regards the need for internal controls). It deals with the implications of running an entity with a management team comprising partners whose involvement with that role will be temporary. This happens frequently in professional partnerships and in other entities.

Suggested Approach Section (a) asks what the risks to the clients may be if the firm has such an aggressive competitive environment. Candidates should be well aware of the risks associated with dysfunctional behaviour and the scenario is a clear example of a setting in which dysfunctional behaviour is likely to thrive. Section (b) asks for an evaluation of the partnerships governance arrangements. This should be discussed in some detail. It raises important issues about the skills and motivation of those appointed to that role and also about the continuity of management.



Marking Guide

Marks

(a) 1 mark per reasonable point Could include: Personal promotion Pressure from partners Antagonising architects Risks to client service: Underspecifying materials Cutting costs (b) 1 mark per reasonable point Strengths They will all be engineers and know the system; no financial reward for being on committee. Weaknesses Huge increase in work; no extra money to motivate etc.

Max 4 Max 4 Max 2

Max 3 Max 3

max 12 marks

max 4 marks

max 9 marks

max 13 marks

Maximum marks awarded 25 marks Examiners Comments This question was popular and was done reasonably well by many candidates. Most candidates came up with many of the points required to gain marks and demonstrated reasonable knowledge of corporate governance in part (b). Common Errors There were no common errors apart from the general complaint of answers being fairly short and some key points being missed. While many candidates achieved a pass mark on this question it would have been good to have seen more candidates achieving higher marks.



Question 3

(a) Advise the directors on the matters that they would have to consider in order to

determine the extent of Gs economic exposure. (5 marks)

(b) Evaluate the validity of the directors concern that the translation gains and losses on the US$ bank balance are visible to shareholders, whereas the offsetting of economic exposure is not and so their hedging policy may be misunderstood.

(10 marks)

(c) (i) Calculate the 95% daily value at risk (VaR) of Gs US$ bank balance.

(3 marks)

(ii) Use your answer to (c)(i) to calculate the 95% 30 day VaR of Gs US$ bank balance.

(2 marks)

(iii) Advise the directors on the relevance of the VaR statistic to their consideration of the risks associated with retaining this US$ bank balance.

(5 marks)


Rationale This question deals with the management of currency risk. It visits important areas such as the measurement of economic risk, the possibility that economic risk is overlooked because it is less visible than other currency-related risks and the use of the value at risk (VaR) statistic. Part (a) draws mainly on section D of the syllabus (Management of Financial Risk), lead outcome 1 (Evaluate financial risks facing an organisation), component (a) (evaluate financial risks facing an organisation). It asks candidates to consider the extent to which the entity in the scenario is exposed to economic risk. Rather than asking for the measurement of those risks, which would be a difficult area to evaluate, it asks for an indication of the factors that would determine economic exposure. That is more about the understanding of how a business might be affected by movements in its costs and selling prices rather than more complicated areas of currency management. Part (b) draws mainly on section D of the syllabus (Management of Financial Risk), lead outcome 2 (evaluate alternative risk management tools), component (d) (recommend risk management strategies and discuss their accounting implications). It deals with the dilemma confronting managers. Translation risk is arguably the least important currency risk and yet it is highly visible to shareholders. Economic risk is arguably the most important currency risk and yet it is almost impossible to observe and measure as a separate component of risk. That raises the question of whether managers might be tempted to waste time and money on hedging translation risks and possibly paying less attention to economic risks in the process. Part (c) draws mainly on section D of the syllabus (Management of Financial Risk), lead outcome 2 (evaluate alternative risk management tools), component (b) (evaluate the effects of alternative methods of risk management). It asks for the calculation of the VaR statistic and for the interpretation of the results. Apart from anything else, VaR is an important measure of risk exposure and so candidates should be capable of making use of it.



Suggested Approach Part (a) Rather than asking for the measurement of those risks, which would be a difficult area to evaluate, part (a) asks for an indication of the factors that would determine economic exposure. That is more about the understanding of how a business might be affected by movements in its costs and selling prices rather than more complicated areas of currency management.

Part (b) There is always a dilemma about whether to worry more about translation risk or economic risk. That raises the question of whether managers might be tempted to waste time and money on hedging translation risks and possibly paying less attention to economic risks in the process. Part (c) asks for a discussion of the importance of VaR and to do some simple calculations.

Marking Guide

Marks

(a) 1 mark per relevant point on economic risk Could include: movement of US$, possible price increase, elasticity, difficult to measure and understand.

(b) 1 mark for each sensible comment on economic risk and translation risk Could include: Maximising shareholder wealth, translation risk more obvious, explain economic risk to shareholders. Must be a discussion not just bullet points (max 5 if no discussion) (c)(i) Calculation

(c)(ii) Calculation - own figure based on answer to c(i) (c)(iii) 1 mark per relevant point on relevance of VaR Could include: Measure of risk, Useful for investment decision

Max 5 marks

Max10 marks

Max 3 marks

Max 2 marks

Max 5 marks

Maximum marks awarded 25 marks Examiners Comments This question was the least popular of the optional questions and was often answered poorly by the candidates who attempted it. All parts of this question were generally answered more poorly than expected. This was very disappointing as the question was well within the syllabus and similar questions to parts (a) and (b) have been asked in the past. Common Errors Candidates still do not understand economic risk. This has been asked in most diets but it seems many candidates have not revised this area at all. In general the small, straightforward calculations were done very badly with few candidates achieving the full marks available for these.



Question 4

(a) Evaluate the difficulties associated with preventing and/or detecting this fraud.

(10 marks)

(b) Advise the college on the weaknesses in its systems and procedures. (8 marks)

(c) Discuss the suggestion that the human elements of control systems are frequently

more important than the software elements in ensuring that records are correct. (7 marks)


Rationale This question deals with the controls that ought to prevent fraud and the extent to which those controls rely on the integrity and commitment of those who operate them. In practice, the main types of fraud perpetrated in computerised systems are generally very simple and rely more on human error than complicated programming and hacking. Part (a) draws mainly on section E of the syllabus (Risk and Control in Information Systems), lead outcome 1 (Evaluate the benefits and risks associated with information related systems), component (e) (evaluate specific problems and opportunities associated with the audit and control of systems which use IT). It asks candidates to identify the cause of a fraud that relied on the authorisation of fictitious salary payments by a senior member of staff and on collusion between that person and a member of the wages department. It also exploited a degree of carelessness in the security over terminals. In theory, the system was sound but the controls were bypassed in a manner that would be difficult to prevent in even the best-designed system. Part (b) draws mainly on section E of the syllabus (Risk and Control in Information Systems), lead outcome 1 (Evaluate the benefits and risks associated with information related systems), component (d) (recommend improvements to the control of IS). This part continues the analysis of the fraud by asking candidates to focus more dir

Binder 1

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Transcript of Binder 1