Binder 1

Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2010 Exam
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 (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. (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. (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. (c) (ii) 1 mark per reasonable point on accounting issues. Should mention IAS 39 and problems of fair values (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.
Marks 15 marks
9 marks
10 marks
6 marks
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)
The Chartered Institute of Management Accountants
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Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2010 Exam 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 (a) 1 mark per reasonable point. Points may include:
Marks 2(a) max 10 marks
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.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2010 Exam (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. 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. 2(b) max 15 marks
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Marking Guide (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.
Marks 3a(i) max 8 marks
(ii) 1 mark for each part of calculation
3(a)(ii) max 4 marks
(b)(i)
1 mark per relevant point
3b(i) max 4 marks
The following points could have been madeEven 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
3b(ii) max 9 marks
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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.
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Marking Guide (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.
Marks 4(a) max 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(b) max 10 marks
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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 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
Marks
Max 4 marks Max 4 marks Max 4 marks Max 4 marks
Max 12 marks
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Paper P3 Management Accounting Performance Strategy Post Exam Guide September 2010 Exam (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.
Max 12 marks
Max 2 marks per point
Max 8 marks
2 marks 2 marks 3 marks Max 5 marks
(c)(i) Calculation (c)(ii) The following points should be expanded on: Inconsistent with hedging Possibility of superior insight Option and short term gain Max 3 marks
Max 2 marks per point Max 6 marks
(c)(iii) The following points could be expanded on: Commercial advantage No real saving or reduction of risk in long term Max of 3 for each relevant point Max 4 marks
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Paper P3 Management Accounting Performance Strategy Post Exam Guide September 2010 Exam 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.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide September 2010 Exam SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY
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) (Total for Question Two = 25 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.
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Marking Guide 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
Marks
Max 10 marks
Part (b) Laptop viruses, data protection, adverse publicity , branch manager
Max 6 marks Max 9 marks Max 15 marks
PC - impact on network, copyright, unauthorised software, attitude etc
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.
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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.
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Marking Guide 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
Marks
Max 15 marks
(b) up to 4 marks for discussion on each of the following areas: Professional behaviour / ruthless approach Employment law Competence and care Integrity
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.
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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) Recommend, with reasons, an appropriate strategy for the management of each of the currency transaction risks you have identified.
(ii)
(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) (ii)
Entering into a joint venture with a company located in E 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.
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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 Max 6 marks
Max 3 Max 2 Max 4
Max 4 Max 3 Max 9 marks
(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 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.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide September 2010 Exam 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.
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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)
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Paper P3 Management Accounting Performance Strategy Post Exam Guide November 2010 Exam
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.
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Marking Guide (a)(i) Calculations 2 marks each - present position, with S and with Asian airline. (a)(ii) Comments on calculations Comments on S proposal Comments on effect on airport Asian airline
Marks 6 marks 2 marks 3 marks 3 marks 2 marks Max 10 marks 4 marks 2 marks 2 marks 4 marks Max 12 marks 1 mark per point
(a)(iii) Comments on offering special deal Comments about low cost airlines Comments about mainstream airlines Comments about services, car parking , shops , food etc
(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.
Max 10 marks 1 mark per point
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
Max 7 marks 1 mark per point
C(ii) 1 mark per reasonable point relating to risks identifies in c(i), which could include the following: Natural hedges Diversifying routes etc
Max 5 marks
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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.
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SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY
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) (Total for Question Two = 25 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.
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Marking Guide (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
Marks 1 mark per point
(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
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.
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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.
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Marking Guide (a) 1 mark per reasonable point Maximum 5 marks for discussion of each nominee
Marks 1 mark per point Max 15 marks
(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 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.
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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.
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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 dealbreaker 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 (a)(ii) comments on the 3 models 1 mark per reasonable comment Maximum 2 marks for each model. (b) calculations - max 3 marks Maximum 4 marks for comments on advantages and disadvantages (c) 1 mark per sensible comment
9 marks
Max 5 marks
Max 6 marks 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.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide March 2011 Exam SECTION A 50 MARKS ANSWER THIS QUESTION
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) (Total for Question One = 50 marks)
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Paper P3 Management Accounting Performance Strategy Post Exam Guide March 2011 Exam
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.
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Marking Guide (a) (i) Discussion of the board structure 1 mark per relevant point should include some of the following Balance Skills Role on non execs
Marks
Max 9 marks
(ii)
1 mark per relevant point which could include: Comments on the proposal Duty to shareholders Comments on structure Redundancies
Max 8 marks
(iii)
1 mark per relevant point on mission statement
Max 8 marks
(b) (i) There must be a discussion. 1 mark per relevant point. Points made should relate to the case material.
Max 8 marks
(ii) 1 mark per relevant point relating to case material.
Max 8 marks
(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 50 marks
Maximum marks awarded
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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.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide March 2011 Exam SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY
Question 2
(a)
(i) Discuss the Director of Operations view that it is impossible to prevent all workplace injuries. (5 marks) Discuss the Chief Executives view that it is unacceptable for Grove Council to tolerate any workplace injuries. (5 marks) Analyse the ethical dilemma faced by the internal auditor. (8 marks)
(ii)
(b)
(i)
(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) (Total for Question Two = 25 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.
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Marking Guide (a)(i) Max of 5 marks for discussing the Directors view 1 mark per reasonable point (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. Maximum marks awarded
Marks Max 5 marks
Max 5 marks
Max 8 marks
Max 7 marks 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.
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Question 3
(a)
Evaluate the argument put forward by Ts finance director for refusing to have a postimplementation review. (10 marks) Evaluate the suitability of the internal audit department to conduct Ts postimplementation review in the event that such a review is conducted. (5 marks)
(b)
(c)
Discuss the problems that might arise if an entity does not conduct a parallel run when implementing a new system. (10 marks) (Total for Question Three = 25 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 (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
Marks Max 10 marks
Max 5 marks
(c) Discussion required for maximum marks. Maximum 4 if no discussion. 1 mark per relevant point Maximum marks awarded Max 10 marks 25 marks
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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.
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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) (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 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.
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Marking Guide (a) (b)(i) Up to 3 marks for each of 3 forecast calculations 1 mark per reasonable comment Max 8 marks Max 6 marks Max 6 marks Max 5 marks
(b)(ii) 1 mark per reasonable comment (c) 1 mark for each reasonable comment.
Maximum marks awarded Examiners Comments
25 marks
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.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2011 Exam SECTION A 50 MARKS ANSWER THIS QUESTION
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) 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)
(ii)
(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)
(d)
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) Evaluate the views of certain board members concerning there being no need to manage F plcs currency risks. (12 marks)
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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.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2011 Exam 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 (a)(i) Max 3 for any of the following risks: press coverage, regulatory responses, legal responses
Marks Max 8 marks
(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
Max 8 marks
(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
Max 4 marks
Max 6 marks
Max 6 marks
(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 Maximum mark awarded Examiners comments
Max 6 marks
Max 12 marks
50 marks
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.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2011 Exam 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.
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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) Evaluate the strengths and weaknesses of Cs governance arrangements with respect to the partnership and its management committee. (13 marks) (Total for Question Two = 25 marks)
(b)
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.
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Marking Guide (a) 1 mark per reasonable point Could include: Personal promotion Pressure from partners Antagonising architects Risks to client service: Underspecifying materials Cutting costs
Marks
Max 4 Max 4 Max 2
Max 3 Max 3 max 12 marks
(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 marks
max 9 marks max 13 marks
25 marks
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.
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Question 3
(a) (b)
Advise the directors on the matters that they would have to consider in order to determine the extent of Gs economic exposure. (5 marks) 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) (Total for Question Three = 25 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.
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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 (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 Marks Max 5 marks Max10 marks
Max 3 marks
(c)(ii) Calculation - own figure based on answer to c(i)
Max 2 marks
(c)(iii) 1 mark per relevant point on relevance of VaR Could include: Measure of risk, Useful for investment decision
Max 5 marks
25 marks
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.
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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) (Total for Question Four = 25 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 bestdesigned 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 directly on the shortcomings of the system. In doing so candidates should be careful not to criticise sound systems because they could be circumvented by collusion. Part (c) 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 (a) (advise managers on the development of information management (IM), information systems (IS) and information technology (IT) strategies that support management and internal control requirements). It asks candidates to discuss the respective importance of the programmed controls in any system relative to the controls operated by people. The human element of any system is often overlooked, despite the fact that authorisation and supervision are often vitally important processes that rely largely, if not totally, on human intervention.
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Suggested Approach Section (a) requires a basic understanding of risks which may lead to fraud being committed. Section (b) requires the ability to discuss these risks and the failings of the system which has allowed fraud to take place. Section (c) requires candidates to think about the nature of IT information and the importance of human error.
Marking Guide (a) 1 mark for identification 2 for explanation of risks which could lead to fraud Main risks - collusion, senior staff, falsification of record and small amount relative to total
Max 10 marks
(b) 1 mark per weakness identifies and 1 for explanation Security over keys, passwords, budget and authorisation
Max 8 marks
(c) 1 mark for each sensible comment. Should have a discussion of human elements and software elements Max 3 if no discussion. Maximum marks awarded Examiners Comments
Max 7 marks
25 marks
This question was quite well done with many candidates scoring very high marks. Some parts of this question were done well but others were very poor. Part (b) was done well and part (c) was not too bad. Common errors Part (a) was done very poorly with candidates demonstrating a poor level of knowledge on why fraud is difficult to detect. The question was straightforward and the scenario clearly set out the issues candidates should have discussed. The fraud was carried out by senior people; there was collusion; the amounts were small relative to the total payroll and the security was lax. This area should be revised for future attempts. Part (c) was done well by some candidates but poorly by others. This question required some thought about whether human error was important in an IT system. Some candidates just talked generally about human error and issues like bookkeeping rather than focusing on the question requirement.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide September 2011 Exam SECTION A 50 MARKS ANSWER THIS QUESTION
Question 1
(a)
(i)
F plcs directors are concerned about the risks to F plcs reputation arising from moving production to West Africa. Use CIMAs Risk Management Cycle to evaluate FOUR possible risks to F plcs reputation. (8 marks) Recommend appropriate actions to manage those risks. (8 marks) (Total for part (a) = 16 marks)
(ii)
(b)
Advise the board of F plc on the control procedures that should be established over the development and running of the food technology courses that will be provided by the West African colleges for F plc. Your answer should consider the following areas: Governance Staffing Support facilities Course content (10 marks)
(c)
Advise the board on the controls necessary during the development and implementation of the changes to the inventory management system. (12 marks)
(d)
Evaluate both the currency and the non-currency risks associated with each of the two loan packages for the financing of the West African factory. (12 marks) (Total for Question One = 50 marks)
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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 outsourcing and foreign direct investment. It also draws upon some of the environmental debates that have affected companies in the food business. Part (a) draws mainly on Section B of the syllabus (Risk and Internal Control). This part asks for the application of the CIMA risk management cycle to a significant overseas investment that will have the effect of exporting jobs from the home country. The focus is on the entitys reputation. This has been a common issue facing many successful businesses. The scenario raises questions of human resourcing, corporate social responsibility and press relations. Part (b) also draws mainly on Section B of the syllabus (Risk and Internal Control), but focuses more on dealing with risks rather than their identification. The question deals with the quality control over college courses. It is to be hoped that most CIMA candidates will have some familiarity with formal tuition for both their CIMA classes and any courses taken prior to CIMA and so they should be able to draw on those experiences. Failing that, the scenario deals with the provision of an important service and the need to ensure that the service provider delivers appropriate support. Part (c) draws on section E (Risk and Control in Information Systems). The entity plans to make a significant change to its business model and it requires major changes to the information system in order to support that. Those changes must be implemented and tested thoroughly and, ideally, in such a way that operations are not disrupted when the new factory is opened and the inventory management process changes. Part (d) focuses on section D (Management of Financial Risk). It asks candidates to consider the risks associated with two alternative funding strategies, one of which will offer security against government interference and expropriation. Candidates are expected to identify both the financial and non-financial risks and to deal with both.
Suggested Approach Part (a)(i) asks for a discussion of the risks using the framework provided by CIMAs Risk Management Cycle and part (a)(ii) requires a response to those risks. The expectation is that a practical set of suggestions will be provided, using a certain amount of common sense. Part (b) may well be familiar ground to many candidates who have taken an interest in the management of any courses taken. Regardless of that, it should be clear that F plc needs to ensure that the college courses are working properly. There are certain fairly visible signs that can be studied, such as the qualifications and experience of the teaching staff. Part (c) is a relatively straightforward discussion of a new information system. Answers should reflect the importance and sensitivity of the system because of the potential costs and scope for bad publicity. Part (d) requires the application of some fairly straightforward material on currency risk to a specific scenario.
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Marking Guide (a)(i) 1 mark per reasonable point; to a maximum of 4 for each of the bullet points. (a)(ii) 1 mark per reasonable point (upside and downside). (b) 1 mark per reasonable point: Governance Staffing Support facilities Course content
Marks Max 8 marks Max 8 marks
5 marks 5 marks 5 marks 5 marks Max 10 marks
(c) 1 mark per reasonable point: System design and specification Programming and documentation Testing Training
4 marks 2 marks 6 marks 1 mark Max 12 marks
(d) 1 mark per reasonable point: currency and non-currency up to 8 marks each Max 12 marks Maximum mark awarded 50 marks
Examiners Comments This question was done reasonably in parts but some parts were poor. Candidates did not seem to have read the question properly. In part (a) and part (c) it was clear that candidates had only skimmed through the question and had not read what was asked for. This unfortunately meant that these candidates got low marks. Part (b) was done quite well and part (d) was done reasonably. It is important that candidates answer what is asked, in part (a) it was expected that some reference would be made to the CIMA risk management cycle. If there was no mention of it then low marks were awarded. Part (c) was asking about the development and implementation of the IT system for managing inventory not asking for a list of issues to be considered in managing the actual inventory itself. Common Errors The main errors were in parts (a) and (c). In part (a) many candidates did not mention CIMAs risk management system at all. The question quite clearly asked for this to be discussed. Another problem was that many candidates ignored that the question asked about reputation risk and discussed many other risks which achieved no marks. In part (c) some candidates discussed problems with the existing system and some discussed the problems of physically dealing with inventory rather than the development and implementation of an IT system. The question was very clear so it was disappointing that some candidates did not answer what was asked. Part (d) the answers to this part were very mixed. The answers on currency risk were reasonable but the answers on non-currency risks were weaker. Some candidates had learned about financial risk and produced good answers but others gave very weak answers. It would be useful to candidates to learn this area of the syllabus as it will always be a part of question 1 and an optional question as well.
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SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY
Question 2
(a)
(i) Advise Hs board on the differences between managing value streams and managing departmental profits. (5 marks) Recommend, stating reasons, the changes that H should make to its management accounting systems and policies in order to improve the management of the value streams. (10 marks) (Total for part (a) = 15 marks)
(ii)
(b)
Advise Hs directors on the difficulties that are likely to be associated with implementing the changes that a move towards lean management accounting will create. Your advice should include recommendations as to how those difficulties might best be dealt with. (10 marks) (Total for Question Two = 25 marks)
Rationale This question draws mainly on section A (Management Control Systems). An entity has been unwittingly stifling itself because its heavy reliance on traditional management accounting practices has led to dysfunctional behaviour. The entity has been exploring lean management accounting and lean manufacturing techniques in order to explore ways to remedy matters. Part (a)(i) of the question sets the scene by asking candidates to consider the implications of a shift from creating value for the enterprise as opposed to maximising departmental profits. Part (a)(ii) builds on this by asking candidates to suggest changes to the reporting system in order to facilitate that changed mindset. Part (b) asks about the manner in which this change should be introduced, given that any change in the measurement of performance will create stresses and pressures and so the associated uncertainty may be quite harmful. Suggested Approach The most important thing about part (a) is the ability to relate management accounting systems to the commercial priorities associated with running a professional practice. Part (b) asks for consideration of the motivational aspects of changing a management accounting system.
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Marking Guide (a)(i) 1 mark per reasonable point (a)(ii) 1 mark per reasonable point: Marginal costing Overhead apportionment Client focus Media budget
Marks Max 5 marks
Max 4 marks Max 5 marks Max 5 marks Max 3 marks Max 10 marks Max 10 marks
(b) 1 mark per reasonable point Could include discussion between departments, uncertainty about new procedures, resistance to change etc. Maximum mark awarded Examiners Comments
25 marks
This question was the least popular of the optional question but was done very well by most of the candidates who chose it. Most candidates discussed value streams very well and were clear about the difference between adding value and profits. Part (c) was done well with most candidates giving good answers about the problems of change within organisations. Common Errors Although many candidates gave excellent answers to this question some candidates did not seem to know there was a difference between managing profits and managing value streams. Very few candidates mentioned overheads or changing to marginal costing or ABC. That was really one of the main points of the question so that was a little disappointing.
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Question 3
(a)
Recommend, giving reasons, the matters that the town councils internal audit department should study in order to evaluate the economy and efficiency of the beach cleaning activities. Your answer should include advice on how to obtain the necessary data and information. (10 marks)
(b)
Recommend, giving reasons, the matters that the town councils internal audit department should study in order to evaluate the effectiveness of the beach cleaning activities. Your answer should include advice on how to obtain the necessary data and information. (10 marks)
(c)
Explain why it is easier to investigate the economy and efficiency rather than the effectiveness of the cleaning activities. (5 marks) (Total for Question Three = 25 marks)
Rationale This question draws mainly on section C (Review and Audit of Control Systems). It relates to value for money audit in a local government setting. This is an important aspect of the syllabus. The question provides sufficient lead for candidates to consider the manner in which economy and efficiency and also effectiveness audits may be carried out and also asks for some discussion of their relative difficulty. Quite apart from the importance of value for money audit in itself, this question tests transferrable skills such as the ability to identify relevant performance measures that are appropriate to any management accounting scenario.
Suggested Approach The most important thing about parts (a) and (b) is the ability to identify meaningful performance measures. Part (c) requires some thought about the conflicts that can arise in measuring different aspects of performance.
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Marking Guide (a) 1 mark per reasonable point. Points must relate to economy and efficiency. Could include: Costs of other services , costs of other towns, costs of labour and machinery, time taken etc (b) 1 mark per reasonable point. Points must relate to effectiveness. Could include: How clean is the beach, any injuries, any complaints etc (c) 1 mark per reasonable point Maximum mark awarded Examiners Comments This question was not done very well.
Marks Max 10 marks
Max 10 marks
Candidates managed to give reasonable answers to part (a) but did less well on parts (b) and (c). This area requires some revision as it was clear that candidates did not really understand effectiveness. In general candidates had a good understanding of economy and efficiency which was good. They did not seem to understand the difference between efficiency and effectiveness and many of the answers given in part (a) included effectiveness. Common Errors This question was not done particularly well. Candidates did not seem to understand what effectiveness was in the context of an audit. Candidates did not seem to have enough knowledge to be able to suggest answers for part (b). The question was quite popular but was generally not well answered.
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Question 4
(a)
(i) Construct the transactions that K would have to undertake in order to create a money market hedge. Your answer should include calculations of all relevant figures, ignoring transaction costs. (5 marks) Advise K on the costs that are likely to be associated with this hedge and also the risks that will be involved. (8 marks)
(ii)
(b)
(i) Evaluate the suggestion that K should pay the P$2m immediately. Your evaluation should consider the risks and also the costs of doing so. (7 marks) (ii) Explain whether the manufacturer would be likely to accept payment of GBP1m in GBP, payable when the contract is signed instead of the current agreement. (5 marks) (Total for Question Four = 25 marks)
Rationale This question draws mainly on section D (Management of Financial Risk). It presents a situation in which an entity has to make a future payment in a foreign currency that cannot be purchased in advance using forward contracts or any of the traditional financial instruments. It is, however, possible to construct a money market hedge. The question raises important questions about the management of foreign currency exposures. The future payment can be fixed, but at what risk? Does a transaction or linked series of transactions that prevents currency risk make commercial sense? Does passing the risks to another party make sense?
Suggested Approach Part (a) requires the preparation of some simple calculations and the description of the transactions associated with creating a money market hedge. Part (b) requires the ability to link currency management to wider commercial considerations.
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Marking Guide (a)(i) calculation (a)(ii) 1 mark per reasonable point Could include: High fees, compliance , risks etc (b)(i) 1 mark per reasonable point Could include: Risks, bank charges, fixed costs etc. (b)(ii) 1 mark per reasonable point Could include: Risks passed to vendor, vendor may speculate etc Maximum mark awarded Examiners Comments
Max 5 marks
Max 8 marks
Max 7 marks
Parts of this question were done well. Part (a) was done well by many candidates. The calculation was done very well which was excellent. Part (b) was done badly. This area of financial risk still requires revision by candidates. It is 35% of the paper and yet candidates still do the question when they know very little about the subject. Common Errors Part (a) was done quite well so no common errors to report. Part (b) was poor. Many candidates failed to come up with any reasonable points. Revision of this topic is required. Candidates do not appear to have sufficient knowledge of this topic so cannot demonstrate understanding or apply knowledge to any situation.
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Question 1
(a)
(i) Evaluate the ethical AND commercial implications of Ns bribery of the government official. (9 marks) Advise M plcs board on an appropriate course of action with respect to the continuing bribery. (9 marks) In considering the ethical implications you may wish to reflect on the extent to which CIMAs Fundamental Principles of Integrity, Objectivity, Professional Competence and Due Care, Confidentiality and Professional Behaviour could be relevant.
(ii)
(b)
(i) Evaluate the implications for N of the duplication of the story about the charity and of the demand for an admission of guilt and a donation. (8 marks) (ii) Recommend ways in which M plc could utilise information technology across all of its newspapers to reduce the risk of journalists stealing or fabricating news stories in the future. (9 marks)
(c)
(i) Recommend a course of action for the board of M plc with respect to reducing the risk of N being nationalised in the event of a change of government. You should assume that M plc will not sell its investment to J. (9 marks) (ii) Discuss Js offer to buy M plcs equity in N. (6 marks) (Total for Question One = 50 marks)
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Rationale This question is based on both the common pre-seen scenario and the unseen scenario. It draws on themes revolving around the protection of an entity from corruption and unethical behaviour on the part of a number of stakeholders, including government, employees and a related party. This is in the overall context of the creation and expansion of an overseas subsidiary. Part (a) draws mainly on Section B of the syllabus (Risk and Internal Control). This part asks for the application of CIMAs ethical guidance, primarily in the form of the fundamental principles, to the question of whether a bribe should be paid in order to retain a permit that is required to continue in business. The matter was, perhaps, complicated by the fact that the request for the bribe was made by an official in a country where bribery and corruption are endemic. Thus, the payment of a bribe would be perfectly consistent with the countrys culture. Part (b)(i) also draws mainly on Section B of the syllabus (Risk and Internal Control). It asks for a discussion of the risks to a newspaper publishers reputation of one of its journalists being caught plagiarising and fabricating a news story. Part (b)(ii) draws mainly on section C (Review and Audit of Control Systems). It asks for some consideration of the ways in which IT might be used to deter the copying and distortion of news stories. Candidates are free to consider the ways in which evidence can be collated electronically and stolen copyright material may be traced back to its original owner. This could be familiar to some candidates given the prevalence of software in further and higher education that achieves similar objects, although there would be no need to have been exposed to such scrutiny to be able to attempt this question. Part (c) draws on section D (Management of Financial Risk). It asks candidates to consider the ways in which a newspaper company might be able to manage the risk of expropriation by a foreign government that has threatened to nationalise foreign businesses. In this case the nature of the business could have a direct bearing on the management of this risk. Suggested Approach Part (a)(i) asks for an evaluation of the ethical dilemma created by a corrupt officials request for a bribe. Part (a)(ii) requires advice on the actions that should be taken by the UK-based holding company in the face of this bribery. The expectation is that candidates will draw upon CIMAs ethical guidance in order to provide a basis for responding to this scenario, although it should be expected that some will use alternative approaches, such as the Bribery Act that has been gathering a great deal of attention in the UK press. Part (b) asks for a discussion of the risks associated with plagiarism by one newspaper of another newspapers published stories. Part (i) deals with the broad range of problems that such behaviour may create and part (ii) deals with the ways in which IT may be harnessed to address those risks. This part of the question is necessarily open-ended and marks would be awarded for relevant points that are not in the suggested answer. Part (c)(i) deals with a topic that does have some fairly well-defined material in the text. Candidates should be able to suggest ways in which the prospect of a change of government can be evaluated from a riskmanagement point of view. Part (ii) is a little more open ended because a local business partner has offered the holding company the opportunity to sell its stake and so address the risk of operating in that country and having capital committed there. This part of the question will require candidates to think about the underlying commercial risks and whether they require that the project should be abandoned.
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Marking Guide There are a number of approaches possible for parts of this question. Marks were awarded for reasonable arguments. (a)(i) 1 mark per reasonable point: integrity professional behaviour specific guidance on inducements no final resolution in rules
Marks
(a)(ii) 1 mark per reasonable point: local norms commercial implications Bribery Act 2010
(b)(i) 1 mark per reasonable point: credibility charity donation = admission almost worse than fabrication
(b)(ii) 1 mark per reasonable point: Plagiarism software History Checking sources Searches
(c)(i) 1 mark per reasonable point: borrow locally align Js interests with Ms harness media power develop links to new party other
3 marks 2 marks 3 marks 2 marks 4 marks Max 9 marks
(c)(ii) 1 mark per reasonable point: offer guarantees something loss of upside M boards credibility Js motives now suspect
2 marks 2 marks 1 mark 1 mark Max 6 marks
50 marks
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Examiners Comments Parts of this question were done well and other parts were poorer. Part (a)(i) was done well by many candidates. Part (a)(ii) was done badly with a number of candidates thinking bribery was fine and thinking of better ways to do it for the company. Part (b)(i) was done well by many candidates. Part (b)(ii) was poorer with some candidates thinking that restricting journalists access to the internet was the key to reducing plagiarism. Part (c)(i) and (c)(ii) were done reasonably well by most candidates. Overall question 1 was done quite well and better than in some previous exams. It was good to see most candidates answering what was asked and making a good attempt at all parts of the question. Common Errors Part (a)(ii) was done badly by many candidates, many candidates seemed to think that bribery was fine in most circumstances and even came up with helpful suggestions of how it could be carried out in a better way. This was a bit disturbing. Part (b)(ii) was not done very well with some candidates suggesting that journalists should be very closely monitored and some suggesting they should not have internet access. This would of course be impossible to enforce as they could access the internet from many locations and they would in fact benefit from reading other papers news stories. Candidates should always try and suggest practical solutions. The suggestion in (c)(i) and sometimes (c)(ii) which was made by many candidates was that a government official could sit on the Board, this would not be a good idea as it would change the balance of the Board.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide November 2011 Exam SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY
Question 2
(a)
(i) Explain why the introduction of ESOSs could motivate Vs executive directors to accept positive net present value (NPV) projects. (7 marks) (ii) Explain how an ESOS scheme could affect the actions taken by the directors (other than the project appraisal decision). (8 marks)
(b)
Evaluate the advantages AND disadvantages of rewarding executive directors by paying a bonus based on a simple and transparent measure such as profit. (10 marks) (Total for Question Two = 25 marks)
Rationale This question draws on section A (Management Control Systems). Part (a) deals with the agency/control issues arising from executive share option schemes. This links the material in this paper to concepts of risk and return and the manner in which executive directors may be motivated. Part (b) deals with the need for simple and unambiguous feedback in the process of exercising control over the boards performance and also the possibility of dysfunctional behaviour arising from rewarding executive directors with profit related bonuses. Suggested Approach This question is all about aligning the directors interests with those of the shareholders. That is clearly an important topic in the syllabus and also in corporate governance more generally. Part (a) requires an understanding of the basics of option valuation. Candidates need not be experts, but they must be aware that increasing volatility in the underlying share price will increase the value of the options and so motivate the directors to take a more realistic attitude towards risk. Part (b) asks candidates to think about a number of strands of the debate about executive compensation, including the possibility that simplicity may make it easier to understand the directors motives.
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Marking Guide (a)(i) 1 mark per reasonable point: Systematic v total risk Options encourage risk taking
Marks
3 marks 4 marks Max 7 marks
(a)(ii) 1 mark per reasonable point: Motive to increase share price Medium term Retain services Dividends
3 marks 1 mark 2 marks 2 marks Max 8 marks
(b) 1 mark per reasonable point: Feedback Spot dysfunctional behaviour Profits do not equal shareholder wealth Creative accounting Short term
3 marks 2 marks 3 marks 1 mark 3 marks Max 10 marks
25 marks
Examiners Comments This was a very popular question and it was done well by candidates. Many candidates achieved maximum marks for parts of the question especially part (b), which was excellent. Some of the answers to this question were very similar and clearly learned by rote. However, good marks were achieved in this question by many candidates. Common Errors The question was done reasonably well. A number of the answers to part (b) were clearly learned by rote as markers commented on the similarities between candidates answers. Candidates are reminded that they must apply their knowledge to the scenario provided in order to score highly. Part (a) was weaker with many candidates ignoring NPV and just talking about directors incentives and aligning them with shareholders interests. On the whole there were some high marks for this question.
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Question 3
(a)
Explain THREE factors that could have caused the head of internal audit to be concerned about the bidding process for the buses. (6 marks)
(b)
Recommend, with reasons, the work that the internal auditor should undertake if the bidding process for the buses is investigated. (11 marks)
(c)
Advise the chief executive about TWO advantages and TWO disadvantages of the internal auditor being actively involved in the investigation of suspected fraud. (8 marks) (Total for Question Three = 25 marks)
Rationale This question draws mainly on section C (Review and Audit of Control Systems). It relates to the possibility of dishonesty in the management of a tender for a contract to supply a major capital item. Part (a) asks for an explanation of the factors that could have prompted such suspicions. Part (b) develops this by asking about the work the internal audit department would undertake. Finally, part (c) asks about the role of the internal audit function in investigating this type of irregularity. The internal auditors responsibilities with respect to fraud require careful consideration and so there is some scope for developing an argument.
Suggested Approach This is essentially a question about the possibility of fraud. In this case there appears to have been some corrupt behaviour surrounding a sealed bid for a large contract. Candidates often confuse the possibility of fraud with a statement of fact. In this scenario, we dont actually know that the bidding process has been compromised. Part (a) requires the ability to spot the factors that may have aroused suspicion. Part (b) is looking for some realistic suggestions as to the work that the internal auditor might undertake. Part (c) requires candidates to think about the role of internal audit within the organisation.
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Marking Guide (a) 1 mark per reasonable point: General context of bidding process Winner had inside knowledge Lowest bid rejected Lack of security Internal auditor excluded Note: candidates were required to discuss THREE factors only. (b) 1 mark per reasonable point: Trace custody of sealed bids Examine documents Investigate relationships Justification re lowest bid
Marks
3 marks 4 marks 3 marks 3 marks 3 marks Max 6 marks 4 marks 2 marks 3 marks 3 marks Max 11 marks
(c) 1 mark per reasonable point, up to 3 marks per advantage or disadvantage Maximum marks awarded
Examiners Comments The results for this question were disappointing. Parts (a) and (c) were done quite well but part (b) was very poor. Many candidates did not answer part (b) well and just talked about the stages of an audit rather than an internal audit investigation. Candidates did not appear to have read the question properly or just wrote everything they could think of about internal audit. This approach did not achieve high marks. Common Errors Question 3(b) was done badly with candidates not answering what was asked. Many just listed stages in an audit such as planning, testing, reporting to the Board etc with no specifics relating to the scenario. These answers scored low marks. Candidates must read the question and answer what is asked. There were few marks available for writing about stages in an internal audit when the question was about an investigation into the bus tenders. Generally candidates must relate their answers to the scenarios to achieve high marks.
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Question 4
(a)
(i) Calculate the net payments that will be required in order to settle all inter-office balances, assuming that the process is managed by Ws London-based treasury department. (11 marks) Advise W of the advantages and disadvantages of offsetting balances using multilateral netting. (8 marks)
(ii)
(b)
Evaluate the suggestion that Ws London office should open a EUR bank account to deal with EUR receipts and payments. (6 marks) (Total for Question Four = 25 marks)
Rationale This question draws mainly on section D (Management of Financial Risk). It asks candidates to discuss two internal hedging techniques (multilateral hedging and the use of a foreign currency bank account, both in terms of their application and their specific advantages and disadvantages. Part (a)(i) tests the ability to apply netting of balances in a simple case and part (ii) asks candidates to consider the advantages and disadvantages of using this technique. Part (b) asks for a discussion of the advantages and disadvantages of opening a foreign currency bank account to deal with recurring transactions in a frequently used currency.
Suggested Approach Part (a)(i) requires the ability to apply a simple technique to reduce bank charges and avoid tying cash up in international bank transfers. Part (ii) asks candidates to spell out the advantages and disadvantages of doing this. Part (b) is looking for both advantages and disadvantages of this simple hedging strategy.
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Marking Guide (a)(i) Restating balances Netting off Any form of settlement that results in zero balances
(a)(ii) 1 mark per reasonable point: Transaction costs Hedging Tax problems Exchange rate issues
3 marks 1 mark 4 marks 1 mark Max 8 marks
(b) 1 mark per reasonable point: Internal hedge Need to retain positive balance Exposure restricted to net Reduce bank charges More cost effective to move to Eurozone
2 marks 1 mark 2 marks 1 mark 2 marks Max 6 marks
25 marks
Examiners Comments This question was done quite well by candidates who chose it. The question was not popular with UK candidates but was very popular with non-UK candidates who generally did well in this question. The calculations were done badly by some candidates. The theory parts of this question were done reasonably well. Common errors Many candidates did a bilateral netting calculation instead of multilateral netting. This was not what the question asked for and so high marks could not be given. The idea of multilateral netting is that the numbers of transactions are reduced to the minimum possible in the most efficient way. Bilateral netting does not do this. Most candidates translated everything to one currency so achieved some marks but did not net the transactions properly.
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Question 1
(a)
(i) Evaluate the risks to M plc associated with allowing subscribers to post comments and views on the newspaper website. (10 marks) Recommend, stating reasons, appropriate controls that might be put in place in future to minimise the risks to M plc associated with malicious and inaccurate posts. (10 marks)
(ii)
(b)
(i) Explain the importance of a robust control environment for M plc. (3 marks) (ii) Explain THREE ways in which weaknesses in the control environment appear to have contributed to the problems with journalists expense claims. (7 marks) (iii) Explain the difficulties that could arise from the boards directive that the internal audit department should carry out regular reviews of journalists expenses. (7 marks)
(c)
Discuss the THREE stated possible methods of managing M plcs exposure to movements of the USD against the GBP. Your answer should include an evaluation of the costs and risks associated with each of the three methods. (13 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 involving the business risks associated with providing customers with the ability to post comments on a corporate website, the implications of a weak control environment and the problems of managing currency risks when a significant cost is incurred in a particular countrys currency. Part (a) draws mainly on Section B of the syllabus (Risk and Internal Control). This part asks for an evaluation of risks that are created by the application of new technology in order to gain a market advantage. In this case, the entity has a particular business model that generates customer goodwill, but exposes the entity to the risk of publishing defamatory comments on its website. Such a situation requires the risks to be weighed against the potential benefits and also for those risks to be managed so that they are minimised, even if they cannot be eliminated.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide March 2012 Exam Part (b) draws mainly on Section C (Review and Audit of Control Systems). It asks for some consideration of the control environment in the context of a newspapers control of journalists expenses. The point of this question is that the newspaper must grant its staff considerable latitude in incurring and reclaiming expenses, otherwise it will be virtually impossible for them to do their jobs. At the same time, senior management does have a responsibility to manage those costs to the best of their ability and so it would be unacceptable to permit the expense claims to be left unmanaged. Part (c) draws on section D (Management of Financial Risk). It asks candidates to consider the ways in which an entity that is heavily exposed to movements in a critical exchange rate that governs the price of a vital and significant raw material can be managed. The approach that should be taken to the management of such ongoing expenses may be different to the management of large and infrequent receipts and payments.
Suggested Approach Part (a)(i) asks for an evaluation of the risks associated with permitting subscribers to post comments freely on a website that is open to a wide readership of subscribers. In practical terms there would be very little to prevent a subscriber from copying any of the material posted to the site on an open web page or to prevent a rival newspaper from subscribing and repeating allegations made on the website in order to create a news story. Candidates should consider the potential for damage to the newspapers credibility arising from such posts and also the risk that the entity may have to pay substantial compensation to any party who is defamed by such a post. Part (a)(ii) is looking for the ability to devise practical controls that could be applied in a cost-effective manner. Solutions should be realistic with respect to the question of completely eliminating the threat because it is unlikely to be possible to do so. However, there are ways in which the problem can be reduced to a manageable level. The unseen material contains some fairly clear prompts to reduce the likelihood of impractical suggestions, such as positive vetting of all posts before they go live. Part (b)(i) and (b)(ii) ask for a sensible discussion of the conflict inherent in preventing excessive expense claims while ensuring that journalists are free to do their jobs quickly and efficiently without being hampered by checks and authorisations. Candidates should recognise the need to allow staff some latitude in these circumstances while avoiding excessive claims. Part (b)(iii) introduces a dilemma associated with the involvement of the internal audit department. That would create a more stringent level of control but would risk diverting internal audit resources away from more traditional activities and would risk alienating the internal audit department from those who are being investigated in this way. Part (c) offers candidates three methods of dealing with ongoing, day-to-day currency risks associated with purchasing raw materials that are priced in USD. None of the three approaches is likely to be totally effective, but the reality of this situation is that the nature of the business will make it very difficult to deal with currency risks. The question requires candidates to demonstrate a degree of commercial awareness as well as an understanding of currency risk.
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Marking Guide Part (a)(i) 1 mark per reasonable point: Reputation Ms exposure to compensation claims Public opinion Competitors behaviour Part (a)(ii) 1 mark per reasonable point: Identify subscribers Make subscribers accountable Security Pursue offenders Flag offensive posts Part (b)(i) 1 mark per reasonable point: Staff perception Management attitude Tolerance encourages exceptions Part (b)(ii) 1 mark per reasonable point: Overspending tolerated Sense of entitlement Lack of support for supervisors Part (b)(iii) 1 mark per reasonable point: Compliance Resentment Provide guidance Avoid dysfunctional savings Part (c) 1 mark per reasonable point: UK supplier USD deposit Accept risk
Marks
1 mark 1 mark 1 mark Max 3 marks
5 marks 5 marks 5 marks Max 13 marks 50 marks
Examiners Comments Many parts of the question were done quite well. Parts (a)(i) and (ii) were answered well with candidates coming up with good suggestions. Part (b)(i) was poor with a number of candidates just repeating the information contained in the question and not answering the question requirements. Part (c) was poor with many candidates not demonstrating an understanding of financial risk. This is a large area of the syllabus and candidates will find it difficult to pass this subject if they do not understand financial risk. Some revision of this topic is required.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide March 2012 Exam Common Errors Part (b)(i) was poorly done but fortunately it was only worth 3 marks. As stated above, many candidates just copied out what was said in the question - this approach earned zero marks. Part (c) was also poorly done. Candidates could not distinguish between the three options and just repeated the same thing three times which was disappointing. Some revision of the area of financial risk is required by most candidates.
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Question 2
(a) The founder has decided that each of the divisional managers will be evaluated using a
balanced scorecard system. Recommend, with reasons, TWO measures that should appear under each perspective:
Financial Customer Learning and growth Internal business processes (16 marks)
(b)
(i) Evaluate the potential for dysfunctional behaviour arising from the transfer of trade-ins between dealerships and divisions. (6 marks) (ii) Explain how the problems identified in (i) might be overcome. (3 marks) (Total for Question Two = 25 marks)
Rationale This question draws on section A (Management Control Systems). Part (a) deals with the introduction of balanced scorecard to introduce accountability in an entity that plans to provide local managers with greater autonomy. Part (b) deals with the risks associated with internal transfers between profit centres and the threat of dysfunctional behaviour when centres work to maximise their own reported profits.
Suggested Approach Part (a) requires candidates to consider the facts that have been provided in the scenario. The entitys founder has tended to be authoritarian in the past and has decided to forego some of the day-to-day control over local activities. That requires some consideration of the information that could be reflected in a balanced scorecard in order to provide senior management with evidence that the local managers are working effectively and in the long-term interests of the business. Part (b) asks candidates to think about the ways in which local managers could work against one another in the context of the information provided in the scenario. That does not require any particular knowledge of the industry concerned, but it does require a common-sense understanding of the facts as provided.
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Marking Guide Part (a) 1 mark per reasonable point: Each recommendation Recommendations in total Part (b)(i) 1 mark per reasonable point: No incentive to bargain with customer Underspend on maintenance Part (b)(ii) 1 mark per reasonable point: Market rates Servicing by recipient Rectification
Marks
Max 3 marks Max 16 marks
2 marks 2 marks 1 mark Max 3 marks 25 marks
Examiners Comments This question was done reasonably well. It was pleasing to see that there were some very good answers which covered most of the points in the examiners answer. Part (b) was quite poor as many candidates did not seem to be able to think of how to stop the dysfunctional behaviour. Some candidates did well in part (a) but found the learning and growth perspective difficult and in many cases just missed it out. To gain a high mark, good points had to be made and developed under each heading. Some revision of this area is required. Common Errors Part (a) Lack of knowledge of the common perspectives used in the balanced scorecard was the most common error with candidates missing out some parts of the question. Some candidates had nonsensical measures which would have been of no use to the company. It is important that measures suggested are sensible and useful. Part (b) This part was weak. Few candidates had much to say in this part of the question. The area of balanced scorecards could do with some revision by all candidates as although the pass rate for the question was reasonable the marks were generally not very high.
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Question 3
(a)
(i) Discuss the advantages and disadvantages to H of running a disaster simulation. (8 marks) (ii) Discuss the weaknesses of the planned approach taken by H to its simulation. (7 marks)
(b)
Recommend, stating reasons, ways in which H could ensure that the remote centre would be fully staffed in the event that a genuine disaster occurs. (10 marks) (Total for Question Three = 25 marks)
Rationale This question draws mainly on section E (Risk and Control in Information Systems). It relates to the need to plan for contingencies when an entity is dependent upon IT systems for operations. Those contingencies must be effective and must be tested from time to time in order to prove that they are.
Suggested Approach The whole question requires candidates to think very carefully about the information provided in the scenario and to apply that reflection when thinking about the requirements. Part (a)(i) requires some thought about the costs of running a disaster-planning exercise and the risk that doing so may actually harm the business because of the need to bring back-up systems into operation. Part (a)(ii) requires some reflection on the quality of the assurances that will be obtained from a drill that has been planned and discussed in advance and that has been timed to minimise the disruption. Part (b) requires some thought about the practical consequences of asking staff to accept some disruption in their travel arrangements for the sake of the entity.
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Marking Guide Part (a)(i) 1 mark per reasonable point: Prove backup system can meet needs Training value Cost Less costly alternatives Part (a)(ii) 1 mark per reasonable point: Least robust test Staff warned Communication difficult in reality Backup offline Part (b) 1 mark per reasonable point: Condition of employment Medical evidence required Familiarisation Overtime Transportation Childcare Staff loyalty
Marks
2 marks 1 mark 2 marks 2 marks 3 marks 2 marks 1 mark Max 10 marks 25 marks
Examiners Comments Many candidates answered this question very well but a number did it badly. There were some very good answers which analysed everything in depth and gained a high mark. There were several hints in the question which should have helped candidates do well. Many candidates did not mention the cost of simulating the disaster plan, which was one of the important points. Common Errors In general some centres had very short answers. If candidates do not write much they cannot achieve a high mark. Few candidates mentioned the transport or childcare issues that employees would have trying to get into work two hours early. It is important for candidates to bring into their answers as many aspects as possible from the scenario in order to provide the fullest response to the question requirements. If the answer is incomplete the candidate will not get a high mark.
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Question 4
(a)
Explain THREE reasons why Q would wish to borrow in EUR in order to finance the proposed French subsidiary. (6 marks) Calculate an estimated LKR to EUR exchange rate at the date of repayment in six years. Note: your answer should include an explanation of your method. (4 marks) Calculate the net present value of Qs cash flows associated with financing if it accepts Ps swap arrangements, assuming a required discount rate of 9% and that the anticipated change in exchange rates will occur evenly over the six year period. (7 marks) Evaluate the risks to Q from Ps swap arrangement. (8 marks) (Total for Question Four = 25 marks)
(b)
(c)
(d)
Rationale This question draws mainly on section D (Management of Financial Risk). It asks candidates to consider the advantages of borrowing in a subsidiarys functional currency and also the workings of a swap that might be used in order to obtain such funding.
Suggested Approach Part (a) requires the ability to explain the advantages of borrowing locally in order to finance foreign operations. The question deals with the basic strategy of matching income and outgoings to the fullest possible extent. Part (b) tests understanding of the mechanisms that might explain the equilibrium relationships between currency values. It does so in the context of using a model to link rates. Parts (c) and (d) require calculations and explanation in support of the decision to use swap arrangements.
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Marking Guide Part (a) 1 mark per reasonable point: Hedging Cost Translation risk Insolvency issues Part (b) 1 mark per reasonable point: Explanation Calculation Part (c) Use of LKR throughout Initial outflow Interest annuity Repayment Part (d) 1 mark per reasonable point: Principal not exchanged Q can default on P if P defaults on Q Movement on principal Loss of hedge
3 marks 1 mark
1 mark 1 mark 3 marks 2 marks
2 marks 3 marks 2 marks 2 marks Max 8 marks 25 marks
Examiners Comments Overall, this question was not done well by most candidates who chose it. The calculations were very weak although the written parts, (a) and (d), were reasonably well done. The whole area of financial risk requires revision. It is difficult to pass this exam with no knowledge of financial risk. It is 35% of the syllabus so must be revised before the next attempt. Common errors Candidates must learn how to perform the finance calculations in this syllabus. Parts (b) and (c) were done very poorly by almost all candidates. Many candidates missed these two sections out altogether which meant they could not then obtain a pass mark for the question. There are only a few calculations within the P3 syllabus so it should not be too difficult for candidates to learn these. If candidates have not covered the whole syllabus then it is very difficult to pass this exam. All parts of the syllabus should be covered when revising in order to have the best chance of passing.
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Question 1
(a)
(i) Discuss TWO ways in which Bs investment in country A could adversely affect the relationship between Bs board and the shareholders of B. (8 marks) Evaluate the risk that Bs venture in country A will fail because of cultural differences. (8 marks)
(ii)
(b)
(i) Evaluate the risks for B arising from interest rate fluctuations. (6 marks) (ii) Discuss the potential risks and benefits that could arise from the swap arrangement with the major commercial bank. Your answer should be supported by calculations that show the effects of the swap a) assuming that EURIBOR remains constant and b) assuming that the rate increases to 2%. (6 marks) Evaluate the Finance Directors statement that there is no point in purchasing a sequence of short term instruments to lower exposure to interest rate risks over the remaining six years of the loan. (6 marks)
(iii)
(c)
(i) Evaluate the potential effectiveness of RFID technology for the identification and prevention of fraud by staff. (8 marks) Recommend tests that Bs internal audit department could conduct to evaluate the effectiveness of the RFID technology while the pilot programme is operating. (8 marks) (Total for Question One = 50 marks)
(ii)
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Rationale This question is based on both the common pre-seen scenario and the unseen scenario. It draws on themes involving the business risks associated with entering a foreign market, the risks associated with interest rate movements and the control risks associated with the implementation of new technology. Part (a) draws mainly on Section B of the syllabus (Risk and Internal Control). This part asks for an evaluation of risks associated with entry to a new foreign market. Two aspects are considered. Part (i) draws on the fact that the entity is a quoted company and the project is being promoted heavily as an indication that the board is taking the initiative to expand and create organic growth. That raises potential corporate governance issues because the directors may feel that their reputations are at stake and that the investment must appear to succeed. That could lead to misreporting or dysfunctional behaviour in the event of any problems. Part (ii) deals with the cultural risks associated with entry to a new market. These exist for most businesses, but are likely to be particularly acute for a supermarket that must promote itself and its products to consumers. Part (b) draws mainly on section D (Management of Financial Risk). The entity is affected by variations in interest rates both because it has variable rate debt and also because interest rates affect the spending power of the consumers who buy from the company. In addition to exploring those risks the question asks for a discussion of the use of swaps to convert variable rate borrowings to fixed and also the risks associated with entering into a succession of short-term loans in place of a single loan covering the entire term for which funding is required. Part (c) draws mainly on section E (Risk and Control in Information Systems). The entity wishes to evaluate the control risks arising from the introduction of new technology that should be of value in inventory management. Part (i) focuses on the opportunities created by this technology. Part (ii) deals with the implementation issues.
Suggested Approach Part (a)(i) asks for a discussion of two ways in which the expansion overseas could affect the relationship between the board and the shareholders. In order to consider this effectively, the starting point should be to think about the significance of the investment to the company and to the reputation of the board. This is only one store, which is not a material investment for a company of this size. The real significance of the project is that it may be seen as a reflection of the boards ability to identify new markets and exploit them successfully. The project may attract a disproportionate amount of attention from the business press both in the companys home country and in the new local market. In the event that this project falters then the board may be tempted to manipulate any reports of success and that could affect the directors credibility in the eyes of the shareholders. There is also a danger that the directors will be perceived as building a retail empire for the sake of their own reputations and career progression rather than creating wealth for the shareholders. The key to this part is to articulate the potential for conflict clearly so that the implications can be explored. Part (a)(ii) offers the opportunity to explore some of the risks arising from global expansion. Opening a supermarket chain in a new country creates the risk that consumers will be resistant to the promotional strategy and will remain loyal to existing suppliers. Overcoming that problem will be difficult because copying existing approaches to retailing will make it difficult to differentiate the new stores, while making the company seem too different may alienate them. There are also some very obvious risks associated with the possibility of causing offence to local customs or religious beliefs through the sale or promotion of products that could prove controversial. Part (b)(i) is looking for both the obvious point that a heavily geared company that has variable rate borrowing will have its cost of borrowing affected by movements in interest rates and the equally important fact that consumer demand is affected by the cost of interest. The latter issue arises from the impact of interest rates on mortgage payments and will be particularly acute for a supermarket business because consumers may be able to switch their buying habits very quickly in response to any reduction in their disposable income. Part (b)(ii) is looking for a reasoned explanation of the effects of a particular interest rate swap opportunity and requires some basic calculations in order to make sense of the impact. Part (b)(iii) asks for a basic understanding of the relationship between the buyers and sellers of derivative instruments and the extent to which the prices offered make it unlikely that the pricing of a succession of short-term instruments will make it possible to hedge a long-term risk.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2012 Exam Part (c)(i) asks candidates to consider the implications of a fairly mainstream technology for the automation of inventory management. In principle, the replacement of a physical count should reduce staff time and ought to enable more frequent checking. The only problem is that the technology is now one step removed from counting products and could be defeated by a trick as simple as removing the electronic tag and leaving it in place in order to overstate any electronic count. Part (c)(ii) requires some suggestions as to the manner in which this new system might be tested.
Marking Guide (a)(i) 1 mark per reasonable point: Reputation Discovery of fabrication of reported results Refusal to withdraw in the event of failure Directors career prospects tied to retailing Performance expressed in directors terms
Marks 2 marks 2 marks 2 marks 2 marks 3 marks Max 8 marks
(a)(ii) 1 mark per reasonable point: National identity Product range
(b)(i) 1 mark per reasonable point: Gearing ratio Interest receivable Consumer demand
(b)(ii) 1 mark per reasonable point: Calculations Implications of greater cost v lower risk Forecasting Counterparty risk
2 marks 3 marks 1 mark 1 mark Max 6 marks
(b)(iii) 1 mark per reasonable point: Risk accepted by borrower or lender Term structure (c)(i) 1 mark per reasonable point: More spot checks Less scope for manipulation Abuse of tags
4 marks 4 marks Max 6 marks 2 marks 4 marks 3 marks Max 8 marks
(c)(ii) 1 mark per reasonable point: Results of test counts Analytical procedures Discrepancies Observe a sample of counts Discussion with staff
2 marks 1 mark 3 marks 2 marks 1 mark Max 8 marks 50 marks
Maximum mark awarded
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Examiners Comments In general question 1 was not done particularly well. Part (a)(i) was poor with few candidates coming up with good points that answered the question. Part (a)(ii) was reasonable, most candidates picked up on the CEOs attitude as being a problem and to some extent the product risk but there were few really good answers that highlighted the danger of inadvertent PR disaster through for example, language misunderstanding in advertising and product labelling. Part (b)(i) most candidates scored above half marks. Part (b)(ii) was done reasonably well with half the candidates scoring good marks although the risks and benefits was not answered very well. Part (b)(iii) was very poor with few candidates giving good answers. Part (c)(i) was reasonable with candidates finding many benefits from the RFID system. Part (c)(ii) was very poor. Common Errors In part (a)(i) candidates demonstrated a lack of financial perspective with regard to the trial hypermarket. Many had this trial bringing the whole group to its knees! Many had the trial forcing the group into raised gearing, rights issues or, at the other extreme, liquidation. The better scripts managed to produce the sensible comment regarding shareholders reticence through risk of overseas entry barriers and lack of core focus by management but few candidates came up with responses similar to the model solution, that is, the dangers arising from management pride and credibility at the expense of shareholder wealth. In part (b)(i) the risks and benefits of the swap arrangement were given in a purely generic fashion with little reference to the case study. Responses to (b)(iii) were poor. Only a handful of candidates saw the problem of facing the current interest rate climate each and every time a short term instrument was renewed. The best that most candidates achieved was to mention the cost involved in renewal. In many cases answers bore no relevance whatsoever to the question set. In part (c)(i) the response was mixed. Many candidates again failed to read the question and discussed customer theft and general system efficiency rather than the relevance to theft by staff. In part (c)(ii) response was poor. Any of the tests given were either generic description, for example substantive testing, or very vague.
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Question 2
(a)
Advise Hs directors on the risks of using an expert system instead of legal staff at the call centre. (13 marks) Recommend, giving reasons, the procedures that should be in place to ensure the successful design and testing of the expert system. (12 marks) (Total for Question Two = 25 marks)
(b)
Rationale This question draws on section E (Risk and Control in Information Systems). Part (a) deals with the risks associated with relying upon an expert system for a delicate and complex decision-making process. Part (b) deals with the development of the expert system discussed in part (a). Suggested Approach Part (a) requires candidates to think about the nature of the task that is being automated. This is a complicated area and the implications of making an incorrect decision are serious. There is an upside risk in terms of reducing costs and also being able to recruit and train staff more quickly. There is a downside in that the company will lose revenue if it rejects winnable cases and will be exposed to significant costs if it accepts cases that are likely to be unsuccessful. Part (b) asks candidates to consider the difficulties of testing the output from this system, bearing in mind the fact that the various cases that are being considered will be unique in themselves and any decision will be based on the balance of conflicting concerns. There is, therefore, no correct decision that can be used as a benchmark when evaluating the outputs from the system. These problems offer candidates the opportunity to demonstrate the ability to develop relevant tests. Marking Guide (a) 1 mark per reasonable point: Upside risks Easier for applicants to mislead company Less responsive to specifics of cases Cost of accepting unwinnable cases Time needed for problems to emerge More difficult to update No fallback to human operators Marks 3 marks 3 marks 3 marks 2 marks 3 marks 4 marks 2 marks Max 13 marks
(b) 1 mark per reasonable point: Implementation Review of initial output Training Ongoing review
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Examiners Comments In general, part (a) produced a better response than part (b). Common Errors The main weakness in (a) was the limited number of risks identified. In (b) the main weakness was failure to read the question so that the response formed around a generic description of a full system development cycle and not just the design and testing stages. There was a major failing to relate answers to the case study, for example, by specifying the exact way the system could be tested by past cases won or lost.
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Question 3
(a)
Evaluate the respective arguments of Js Chief Executive and the bank manager about the rate offered by the bank on the forward contract. (9 marks) Evaluate the bank managers recommendation to appoint a corporate treasurer. (8 marks)
(b)
(c)
Recommend, stating reasons, the steps that the directors of J should take in the selection of a suitable person for the role of corporate treasurer. (8 marks) (Total for Question Three = 25 marks)
Rationale This question draws mainly on section D (Management of Financial Risk). It deals with the pricing of forward contracts and also the issues relating to the appointment of a corporate treasurer.
Suggested Approach Part (a) requires an understanding of the process by which forward rates are arrived at. The pricing mechanisms are relevant because they provide both parties to such an arrangement with a basis for deciding whether the costs outweigh the benefits. This question also requires some appreciation of the fact that the company concerned appears to be relatively small and it is faced with the decision as to whether to hedge a single large transaction. Parts (b) and (c) require some thought about whether it would be desirable for a small, but apparently growing, business to employ a corporate treasurer. In reaching that decision it may be worth considering the possibility of employing an accountant in a more general financial management role that would encompass treasury. The question also asks how the company would go about identifying a suitable appointment. Clearly, this requires an understanding of the treasurers role.
Marking Guide (a) 1 mark per reasonable point: Pricing of forward rates Risks of leaving receipt unhedged Relevance of hedge not costed into deal
Marks 5 marks 3 marks 2 marks Max 9 marks
(b) 1 mark per reasonable point: Need to strengthen management team Accountant v treasurer Cost v benefit
(c) 1 mark per reasonable point: Define role Agency Interview Check background
1 mark 2 marks 2 marks 3 marks Max 8 marks 25 marks

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Examiners Comments Part (a) was generally answered to pass standard. Part (b) also usually produced a pass. In part (c) the candidates who were not successful generally failed to answer the question requirement asked. Common Errors In part (a) the weaker answers failed to cover all aspects and angles of the statements made by the executive and bank manager. In part (b) a great deal of time was spent describing the general duties of a corporate treasurer rather than relating the role to this particular case. Although the better scripts recognised the likelihood of limited scope for such a post in the company virtually none saw the need for a more a more rounded financial skill base in the organisation, such as appointing an accountant instead. In part (c) many candidates failed badly in that they did not describe the steps to be taken in appointing a treasurer. Instead they concentrated on the desirable characteristics of such a person. This unfortunately did not answer the question which was asked.
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Question 4
(a)
(i) Advise Gs board on the shortcomings of the approach that it has taken to TQM. (8 marks) (ii) Recommend, stating reasons, the actions that Gs board should have taken in order to successfully introduce TQM within G.
(7 marks)
(b)
Advise Gs board on the risks associated with reducing the number of quality control staff in the factory. (10 marks) (Total for Question Four = 25 marks)
Rationale Part (a) draws mainly on section A (Management and Control Systems) and part (b) on section B (Risk and Internal Control). This question deals with a manufacturing company that wishes to reduce losses due to defects in the manufacturing process. The question explores the potential of TQM for dealing with this problem and also asks for an evaluation of the risks associated with reducing the emphasis on quality control.
Suggested Approach Part (a)(i) requires an appreciation of the fact that the company has adopted TQM in an inadequate and ineffective manner. Management has demonstrated no commitment to TQM and has not supported the initiative taken by supervisory staff in a partial attempt to experiment with the approach. Part (a)(ii) requires an explanation of the process for the introduction of TQM. This requires an understanding of the objectives and the philosophy of TQM. Part (c) asks for a discussion of the implications of reducing the emphasis on quality control in the event that TQM is introduced. While the fact that TQM should render quality control almost redundant, there are issues of legitimation. The fact that the company manufactures parts of car braking systems is also relevant.
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Marking Guide (a)(i)1 mark per reasonable point: Not TQM Rescheduling Moving staff Demotivation
(a)(ii) 1 mark per reasonable point: Investigate failures Review manufacturing process Quality circles 3 marks 4 marks 2 marks Max 7 marks
(b) 1 mark per reasonable point: Nature of product Problems overlooked Alleged negligence Reputation
Maximum mark awarded Examiners Comments This question was, on the whole, done well.
Part (a) produced the weakest response. Many scripts contained comment in part (a) that was more appropriate to Part (b). Part (b) often followed up the irrelevant points in part (a) with repetition which did have more relevance in this section. Nevertheless this section did tend to score well. The final part (c) also generally produced a pass for the average candidate yet generally insufficient points were made to convert a pass to a comfortable success. Common errors In part (a) time was spent in criticising the present manufacturing system rather than the attempt to introduce TQM. Too much time was spent in describing TQM in general terms.
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Question 1
(a)
(i) Advise Bs directors of TWO risks for the company associated with health and safety in Bs stores that could each be categorised as having both high impact and high likelihood. Your answer should include the reasons why you have categorised each of the risks as such. (8 marks) Discuss the reasons why the procedures stated in the health and safety manual may not have been followed by all employees throughout the B Group. (8 marks)
(ii)
(b)
(i) Discuss the factors that the Head of the Internal Audit department should consider when planning an audit of the extent to which all employees of Bs stores are complying with the rules and principles as stated in the health and safety manual. (10 marks)
The Head of the Internal Audit department recently sent a memo to all of the internal auditors in the B group that said: I would like to remind all members of the audit department, irrespective of the country in which they are based, that they should be careful to avoid causing resentment when dealing with other employees (ii) Discuss the memo sent by the Head of Bs Internal Audit department. (8 marks)
(c)
(i) Discuss the Group Treasurers view that the nature of Bs business creates a natural hedge against currency risk. (8 marks) Evaluate the potential risks and benefits to B of the counter-trade agreement with the South American supplier. (8 marks) (Total for Question One = 50 marks)
(ii)
The Chartered Institute of Management Accountants 2012
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Rationale This question is based on both the common pre-seen scenario and the unseen scenario. Parts (a) and (b) draw on the health and safety risks associated with running a large organisation that has widespread operations. Part (c) deals with the management of currency risk for an entity that has global operations. Part (a) draws mainly on Section B of the syllabus (Risk and Internal Control). This part asks for an evaluation of the health and safety risks associated with running a large retail organisation. Two aspects are considered. Part (i) focusses on the ability to identify and evaluate the risks to the entity. Candidates are required to focus on sources of high risk and to justify their selections to ensure that marks are awarded to material risks only. Part (ii) asks for an evaluation of the difficulties caused for management in terms of ensuring that health and safety matters are taken seriously. This reflects the paradox that arises whereby management is always responsible for health and safety even though one of the main sources of risk is staff indifference. Part (b) draws mainly on section C (Audit and Audit of Control Systems). The first part of the question asks how the internal audit department might assist senior management in ensuring that staff are complying with health and safety instructions. Setting the internal audit department the task of checking compliance will help ensure that management is seen to discharge its responsibilities in the event of an accident. The question goes on to reflect on the fact that the entity is a multinational corporation and that cultural differences may make it difficult for the internal audit department to enforce rules set by head office. Part (c) draws mainly on section D (Management of Financial Risk). The entity has widespread and complex currency issues and those may well lend themselves to natural hedging techniques that would avoid the cost and complexity of financial instruments.
Suggested Approach Part (a)(i) for the identification of two health and safety risks. The starting point is to consider two distinct risks that can be classified as having both a high impact and a high likelihood. There is no specific list of risks that will be accepted, but the risks must be sufficiently serious as to make them worth being concerned about. The suggested solution focusses on the risk of litigation and the risk of adverse publicity because both can be justified as both high impact and high likelihood. If candidates decide to focus on specific health and safety matters such as injuries associated with lifting and the risk of violent confrontation with a shoplifter then that will be accepted provided the reasons for those being potentially costly to the company are expressed. Part (a)(ii) offers the opportunity to discuss some of the difficulties associated with enforcing health and safety regulations. That is a difficult area for any employer because health and safety frequently creates some inconvenience to employees, such as the need to wear uncomfortable kit or the need to take care with work that may leave colleagues at risk. There is an added dimension because the company operates internationally and there may be cultural difficulties to be overcome in communicating the need to take health and safety seriously. Part (b)(i) is looking for recommendations concerning the planning of a work programme that the internal audit department should undertake in order to reassure the board that health and safety regulations are in effect and are being complied with. The key is to think about the areas where the risk of non-compliance is greatest and to concentrate resources on those. For example, something as basic as concentrating attention on the stores that have the highest accident rates could maximise the likelihood that exceptions are being uncovered. Part (b)(ii) is looking for an appreciation of the cultural aspects of conducting internal audit investigations across an international group. Local staff and management may feel somewhat isolated and remote from head office and may resent the implication that the groups values should be exported to their countries. Part (c)(i) asks candidates to consider the implications of the inflows and outflows of currencies from buying inventory and trading with customers. That raises questions about the extent to which there are net receipts or payments in any given currency. It is unlikely that the cash flows are perfectly hedged, but it may be that there is enough of an offset for the overall exposure to be ignored. Part (c)(ii) asks candidates to consider the possibility of counter-trade. The point of this question is more about asking candidates to demonstrate some understanding of the basics of currency risk and the ability to identify opportunities from unusual situations. Even if a candidate is unfamiliar with the details of counter-trade it should be possible to take into account the possibility of simplifying the currency risks by exchanging commodities.
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Marking Guide (a)(i) 1 mark per reasonable point: Identification of first risk Justification of first risk Identification of second risk Justification of second risk
Marks 1 mark 4 marks 1 mark 4 marks Max 8 marks
(a)(ii) 1 mark per reasonable point: Inconvenience Supervisors attitudes Communication problems Local culture
(b)(i) 1 mark per reasonable point: Widespread coverage Some focus based on analytical review Work programme for high risk stores Response to breaches
1 mark 2 marks 5 marks 3 marks Max 10 marks
(b)(ii) 1 mark per reasonable point: Audit as constructive service Independent audit may create conflict Cultural issues
(c)(i) 1 mark per reasonable point: Potential for offset Transactions risks short term Scope for shifting sources to hedge Treasury would help
(c)(ii) 1 mark per reasonable point: Exchange expressed in commodities Commodities can be generic Supplier loyalty Non-currency price changes Speculation
2 marks 1 mark 3 marks 3 marks 1 mark Max 8 marks 50 marks
Examiners Comments It was disappointing to see that candidates could not apply their knowledge on planning an audit to the scenario given. There will always be a part of question 1 which asks about financial risk and this paper was no exception. Financial risk is 35% of the syllabus so candidates must know it.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide September 2012 Exam Common Errors Part (b)(i) was not done very well with few candidates coming up with good points on how to plan this audit. Candidates made vague suggestions that risk could be considered but did not develop this point and almost no candidates suggested analytical review would help with the selection. Most candidates came up with very generic points on audit planning which gained very few marks. The answer had to be applied to the scenario. Short, bullet point answers did not gain many of the 10 marks available for this part. Part (c)(i) was done quite badly with very little knowledge being demonstrated by candidates. Hedging is a very common tool to reduce some financial risk and yet many candidates did not demonstrate a good understanding of the technique. It would be a very good idea if candidates who did not pass this paper learned more about financial risk and the basics of hedging. Part (c)(ii) was an interesting question on counter trade and was done reasonably well by many candidates, who understood the principle and applied it to the scenario. Some answers lacked detail and were very short and a few candidates simply missed out this section.
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Question 2
(a)
Calculate T Forges budgeted ROCE for the year ended 31 August 2013 if (i) (ii) the existing lathes are retained; and the new lathes were purchased on 1 September 2012.
Note: You should explain any adjustments that you make to the figures shown above in order to calculate ROCE. (9 marks)
(b)
Evaluate the use of ROCE by T Group (i) as a performance measure and (ii) as a tool for decision making. (6 marks) Recommend ways other than the investment in CNC lathes in which the management of T Forge could deal with the risk of rollers being rejected because of mistakes in customers quality control procedures. (10 marks) (Total for Question Two = 25 marks)
(c)
Rationale Question 2(a) draws on section A (Management and Control Systems). Part (a) deals with the calculation of a relevant ROCE figure that can be used to inform strategic decisions about a subsidiary. Part (b) asks for a discussion of the relevance of ROCE to the decisions that have to be taken in the management of the subsidiary. Part (c) draws on section B (Risk and Internal Control). The question deals with the risks created by the sale of a technical product to customers who are likely to reject perfect inventory because of their inability to distinguish good items from defective.
Suggested Approach Parts (a) and (b) requires candidates to think about the most relevant figures that should be incorporated into the calculation of ROCE. There are issues associated with the valuation of property and of plant and equipment that may lead to performance being massively overstated unless care is taken to adjust for information as necessary. Part (c) asks candidates to use their common sense in order to arrive at practical recommendations for dealing with incompetent quality control processes conducted by management.
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Marking Guide (a) 1 mark per part of calculation (b) 1 mark per reasonable point: Value of site Zero-value lathes overstates ROCE Figures not really comparable (c) 1 mark per reasonable point: Training Provide test equipment Independent tests Terms of trade
Marks Max 9 marks
3 marks 4 marks 2 marks Max 6 marks 3 marks 2 marks 4 marks 2 marks Max 10 marks 25 marks
Maximum mark awarded Examiners Comments This was the least popular question of the optional questions.
This question was very unpopular and yet ROCE appears in several subjects across the CIMA Professional Level syllabus. A surprising number of candidates missed the calculation out completely, which meant they usually failed as the calculation was worth 9 marks. Very few candidates attempted the question and responses were, on the whole, disappointing. Common Errors The calculation in (a) was not well done. Very few candidates got this right and many missed it out altogether. There were also very poor attempts by candidates to the written parts of this question. Almost no candidates discussed the value of the site and very few made correct adjustments for the value of the lathes or for depreciation. This was very disappointing. This syllabus area should be revised as ROCE is the most important measure of profitability in a company and should be understood by all candidates. Candidates knew the formula but did not show any understanding of how to apply it when in a slightly more complex setting. The discussion was also poor. Candidates did show an understanding of the quality issues in part (c) and marks were much better for this part.
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Question 3
(a)
Advise Us board on the weaknesses in both the control environment and the internal controls that led to this loss of data. (12 marks) Recommend, stating reasons, actions that Us board should take to restore the confidence of its existing and potential customers; (8 marks) to prevent similar problems occurring in the future. (5 marks) (Total for Question Three = 25 marks)
(b)
(i) (ii)
Rationale This question draws mainly on section E (Risk and Control in Information Systems). It deals with the implications of data security, with particular reference to the very typical real-world scenario of security being breached by a very low-tech means (in this case, data being taken home on a memory stick).
Suggested Approach Part (a) requires an understanding of the importance of the control environment and of the controls that should prevent data from being lost in the manner described. The emphasis is on the common sense understanding of control rather than detailed technical knowledge. Part (b)(i) continues this theme by asking candidates to recommend a practical response to deal with the threat of reputation loss arising from the lost files. Part (b)(ii) asks for controls that could be implemented to prevent a recurrence.
Marking Guide (a) 1 mark per reasonable point: Stress causes carelessness Unsupportive environment Training Personal copies not permitted Files restricted and encrypted
Marks 1 mark 2 marks 3 marks 4 marks 4 marks Max 12 marks
(b)(i) 1 mark per reasonable point: Public statement Close affected accounts Reimburse customer costs Publicise improvements Accept responsibility
(b)(ii) 1 mark per reasonable point: Threaten disciplinary action Secure custody of files
2 marks 3 marks Max 5 marks 25 marks
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Examiners Comments This question was done reasonably well and was the most popular optional question. Common Errors Very few candidates mentioned closing the accounts in part (b)(i) and many did not mention changing password but generally this question was well answered. Some answers did not go into much detail which meant they could not be awarded a high mark but the question had a very healthy pass rate.
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Question 4
(a)
Discuss the argument that purchasing power parity theory should prevent exporters from charging different prices in different countries. (5 marks) Discuss the potential risks and benefits to G of buying its inventory from intermediaries in the neighbouring countries. (10 marks)
(b)
(c)
Recommend actions that the Government in Gs home country could take in order to determine whether Gs competitor had been evading the tariff on imported clothing. (10 marks) (Total for Question Four = 25 marks)
Rationale Question 4 draws on section D (Management of Financial Risk). Part (a) deals with the theory of purchasing power parity and its relevance to exporters. Part (b) deals with the risk of buying using grey imports from a neighbouring country. Part (c) deals with the steps that the government might introduce in order to protect revenues from tariffs.
Suggested Approach Part (a) requires an appreciation of the logic behind purchasing power parity and the fairly obvious barriers that might affect the operation of PPP in practice. Part (b) deals with the risks that a retailer would run in buying from an indirect source via another country in order to exploit price differences. Part (c) asks about tariffs from the perspective of the government rather than the company. The question is looking for the ability to develop logical tests that might be applied in order to deal with avoidance in this area.
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Marking Guide Part (a) 1 mark per reasonable point: Logic of PPP Practical barriers Artificial barriers
2 marks 3 marks 1 mark Max 5 marks
Part (b) 1 mark per reasonable point: Reduce price Legality Quality of service Relationship with manufacturers
Part (c) 1 mark per reasonable point: Inspect accounting records Review purchase records Inspect vehicles Inspect deliveries Estimated charge
3 marks 3 marks 3 marks 2 marks 1 mark Max 10 marks 25 marks
Examiners Comments This question was not very well done, especially part (a). Parts (b) and (c) were slightly better but showed a lack of knowledge and understanding. This question is on the financial risk section of the syllabus and candidates must understand this area as it is 35% of the syllabus and therefore will be tested in more than one question in each examination paper. Purchasing power parity is a common concept and it was surprising how few candidates understood it. Some revision of this area would be useful as candidates will find it difficult to pass P3 without a good understanding of financial risk. Common errors Part (a) was often missed out which was surprising as it was one of the few parts of the paper which would have allowed candidates to demonstrate their knowledge of the subject area without having to apply the answer to the question scenario. Candidates must revise this area as it is asked frequently. Candidates that did answer it were often very confused and gave poor answers. Part (c) was not well done with some candidates writing only 3 or 4 lines on this topic. Some candidates gave excellent answers based on the scenario which was heartening. The candidates who thought about this question and applied their answer to the scenario achieved high marks.
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Question 1
(a)
(i) Explain why it is difficult for V to advise its customers properly with respect to the threats arising from civil unrest. (8 marks) (ii) Recommend, stating reasons, a set of procedures that V should have in place to deal with the possible outbreak of civil unrest in any of the countries to which it sends its customers. (9 marks) (iii) Evaluate the risks for V arising from the existence of law firms which advertise no win no fee services in the national press. (8 marks)
(b)
(i) Evaluate the risks to V arising from the companys existing online booking arrangements. (6 marks) (ii) Advise Vs IT Director on the steps that should be undertaken in order to upgrade Vs online booking system to offer a 24/7 connection to airline and hotel systems. (9 marks) Advise Vs directors on the difficulties associated with evaluating the impact of currency movements on demand for holidays. (10 marks)
(c)
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Rationale This question is based on both the common pre-seen scenario and the unseen scenario. Part (a) deals with the risks associated with a holiday company advising its customers to travel to foreign destinations where they may run the risk of becoming involved in a civil disturbance. Part (b) deals with the process of developing a new IT system that can communicate with suppliers systems. Part (c) deals with the difficulties of evaluating the effects of currency movements on consumer demand. Part (a) draws mainly on Section B of the syllabus (Risk and Internal Control). This part asks for an evaluation of the risks associated with advising individuals on the choice of a holiday destination, bearing in mind the possibility of unforeseen political turmoil. Part (i) focusses on the problems associated with identifying and evaluating risks. This is a topical area given the number of disturbances that have arisen across much of the world in the past few years. Part (ii) asks for recommendations concerning the procedures that the company could put in place to provide the basis for an effective response to any problems that arise once customers have travelled to their destination. Part (iii) asks for an evaluation of the implications of no win no fee legal services offered by law firms for potential defendants. Part (b) draws mainly on section E (Risk and Control in Information Systems). The first part of the question asks how the IT system creates risks for the company. This is a business that relies heavily on on-line sales and that reliance is likely to increase over time. Part (ii) asks for a discussion of the process of developing and upgrading the system so that it can communicate with suppliers systems more effectively. Part (c) draws mainly on section D (Management of Financial Risk). The entity sells foreign holidays and so its selling prices are affected by foreign currency movements. That may mean that the entity will face changing demand for its services because of currency movements.
Suggested Approach Part (a)(i) asks for an evaluation of the difficulties associated with a risk exposure that is difficult to measure. At any given time there is, in principle, the possibility that political unrest will break out in any given country. That creates a major dilemma for a holiday company because it cannot eliminate the risk to its customers unless it offers a very limited choice of destinations. However, there is also the risk that customers will claim that the company was reckless if they are caught up in a conflict because they will be able to point to the existence of warning signs prior to their date of travel. The starting point is to establish that this is a low probability high impact risk. The implications of both of these aspects, plus the likelihood that any adverse outcome will be reviewed with the benefit of hindsight, ought to be explored. Part (a)(ii) is looking for sensible and realistic suggestions as to how a travel company might prepare for the possibility of a disaster, whether natural or political, affecting its customers while they are on holiday. The main issue to bear in mind is that the travel company is likely to be working in conjunction with one or more governments in the event of such a disaster. The travel companys primary role would be to inform the government about the number of UK nationals in the country and also their locations. It is unlikely that the company will be asked to provide any more direct assistance than that and so suggestions should be restricted to steps that might actually be undertaken. Part (a)(iii) asks for some suggestions as to the threats created by lawyers who are prepared to operate on the basis that they will only charge a fee if any claim is successful. Commercial entities have generally been at an advantage in their dealings with customers with whom they are in dispute because very few people can afford to pay for legal advice or to take a case to court. Answers to this part should explore the implications for the defendants in such cases. Customers may be more aggressive and more inclined to push for a settlement. Claims may be encouraged by the advertising and publicity for these services. Management time may be taken up with defending spurious claims.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide November 2012 Exam Part (b)(i) is looking for a discussion concerning the commercial implications of an unreliable online booking system. There is an obvious risk that customers will be dissatisfied if their holiday bookings are cancelled. The charter airlines and hotels may also feel that the company is an unsuitable trading partner because of these systems problems. There is also an upside risk because the provision of an on-line booking facility will offer the opportunity to cut costs also stimulate demand (even a bad system will do so, although a good system would do so to a greater extent). Part (b)(ii) is looking for practical advice concerning the process of upgrading the system, bearing in mind the need for it to engage and interact with suppliers systems. Answers should reflect the reality of this business rather than simply seeking a checklist of bullet points about systems development. Part (c) is essentially about economic risk. Answers should focus on the main issues. The company does not operate in a vacuum. Competitors may be forced to raise their prices and suppliers may be forced to cut their margins in the event of adverse currency movements. There is also the possibility that certain currency movements may simply encourage customers to switch to unaffected destinations that are no less profitable. Finally, demand for holidays may not be particularly elastic.
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Marking Guide Part (a)(i) 1 mark per reasonable point: outbreaks unpredictable Outcomes difficult to predict Cost of errors significant Warning signs difficult to interpret Government advice unhelpful Failure to warn will appear reckless
Marks 2 marks 3 marks 1 mark 2 marks 1 mark 2 marks Max 8 marks
Part (a)(ii) 1 mark per reasonable point: Passenger contact details Nationalities and passport details Local contact details Duty manager Security adviser
Part (a)(iii) 1 mark per reasonable point: Traditional arrangement weakened customers position Customer has nothing to lose Management time Blame culture
Part (b)(i) 1 mark per reasonable point: Upside risks Customer concerns Security issues
Part (b)(ii) 1 mark per reasonable point: Select consultant Determine industry standards Study websites Testing
Part (c) 1 mark per reasonable point: Competitors response Passing on costs deters customers Short v long-term Change to alternatives
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Examiners Comments Some parts of question 1 were done extremely badly, part (c) being a disaster for many candidates. There was a noticeable failure of candidates to read the question paper and to answer what was asked. The other problem was vague general answers which did not draw on the scenario. Common errors In (a)(i) despite a bit of vague, general waffle most candidates managed to say enough to gain a pass mark. There was little in-depth analysis of the situation but many scripts recognised the uncertainty, the conflict of interest and the information angles. In (a)(ii) many candidates proceeded at a tangent and discussed what should have been done in the case of the recent civil unrest NOT what simple administrative procedures should be in place to deal with future situations. Some candidates demonstrated an outstanding naivety expecting the travel firm to have field hospitals and SWAT teams on 24 hour standby ready to be flown out in C130 transports to Athens or the Costa del Sol. At the other extreme some candidates thought this the place to demonstrate their academic knowledge of Risk Management systems. In (a)(iii) although there were some excellent answers, too many candidates concentrated purely on the consequence of legal risk, for example, compensation, damages, legal fees and reputation which are common in any litigation situation. They failed to discuss the additional problems arising from the NWNF law firms, for example, the fact that there are likely to be many more claims made in a much more collective and therefore powerful manner. In (b)(i) unsurprisingly candidates were able to identify sufficient risks to gain a pass and beyond since most of these risks were identified for them in the scenario. In (b)(ii) most scripts struggled to produce more than a purely generic response. This then generally capped their marks to 4 out of the 9 available. Little attempt was made to relate to the specifics of the case, for example they failed to recognise the need to work with the suppliers at the outset and throughout the process. Another example of failure to relate to the case study was the almost universal recommendation for parallel running in introducing the upgrade. Quite how this could be achieved in the circumstance of online bookings is hard to understand. Part (c) the final part of question 1 was a total disaster for the majority of candidates. This meant that the final 10 marks of the 50 available for question 1 were lost. Candidates simply failed to answer the question set. The words on demand were totally ignored. Candidates went to great lengths attempting to evaluate the effects of transaction risks regarding currency movements instead of economic risk.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide November 2012 Exam SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY
Question 2
(a)
Evaluate the respective arguments put forward by K and by the Production Director concerning the need for Hs full board to be forward looking rather than focussing on past performance. (8 marks)
(b)
Evaluate Ks argument that Hs board should review the companys strategic direction at its half-yearly meetings. (8 marks)
(c)
Evaluate the Production Directors argument that K should not comment on the manner in which H is run because of her background and lack of experience in a manufacturing company. (9 marks) (Total for Question Two = 25 marks)
Rationale Question 2(a) and (b) draw on section A (Management and Control Systems). Part (a) deals with the distinction between feedforward and feedback in the strategic direction of a company. Part (b) addresses the question of whether strategy ought to be updated frequently or put in place as a long-term goal for management. Part (c) draws on section B (Risk and Internal Control). The question deals with the role of the nonexecutive director who is not an industry expert.
Suggested Approach Part (a) requires candidates to think about the relevance of strategic management. Clearly, strategy requires the directors to be forward looking and responsive. Having said that, there may be an argument that forward looking direction requires an understanding of past performance if it is to be effective. Part (b) Similarly, frequent updates to corporate strategy may create the risk that management will become confused and frustrated in keeping abreast of the latest developments and their implementation in terms of day to day operations. Part (c) asks candidates to think about whether non-executive directors should have a voice. Again, this required some thought about the role of the board and the non-executive directors in particular. Nonexecutives coming in from a different background may challenge existing ideas and opinions. If that provides some fresh approaches to running the business then it will lead to improvement. If it is based on ignorance and misunderstanding then it will be a distraction. The nature of this business is that it makes fairly basic components for sale to other manufacturers. It should be borne in mind that this leaves the board with fairly limited scope for developing new strategies.
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Marking Guide Part (a) 1 mark per reasonable point: Forward looking more constructive Past performance informs planning Feedforward about corrective action Both approaches have value
Marks 2 marks 3 marks 3 marks 1 mark Max 8 marks
Part (b) 1 mark per reasonable point: Provide direction Strategy should be left in place Business does not lend itself to constant change
Part (c) 1 mark per reasonable point: New non-exec should be competent Some distance is desirable Fresh insights may stimulate new ideas Non-executives encouraged to express themselves
1 mark 3 marks 4 marks 2 marks Max 9 marks 25 marks
Examiners Comments Candidates that were put off question 3 seemed to be forced into doing this question. Their attempts were rather inglorious in many cases. Very few candidates gained a good pass unfortunately.
Common Errors In (a) some of the definitions of feedback, feedforward and strategy made one wonder just what text books they had been reading. The better scripts saw the need for historical information to aid in future action and strategy and the need for environmental awareness but generally speaking the response was poor. This area of the syllabus could do with some revision as the answers in far too many cases were very poor. In (b) The same mistake made in 1(c) reappeared. Many candidates failed to read the important words in the question set. The words at its half yearly meetings were key to a good response yet candidates ignored the short term span in terms of strategy and strategic implication. There was a strong lack of awareness between the strategic and the tactical. Candidates gave all sorts of reasons why the board should have 6 monthly meetings but in the main these reasons were tactical not strategic. There was a great deal of repetition and duplication in 2(a) and 2(b) some candidates giving almost identical answers to both parts of the question. In (c) the final part of question 2 a majority of candidates failed to identify the corporate governance angle in order to produce a quality response. There were a few good answers but in the main candidates concentrated on psycho analysis of the production director (anti feminist etc.) or discussed the differences between the respective industrial backgrounds of the PD and NED. Some candidates even went back to the arguments of about feedback, feedforward and strategy discussed in the previous 2 sections of the question.
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Question 3
(a)
(b)
(i)
Calculate the potential gain that could have been made by the company if it had borrowed GBP 10m in order to exploit the anomaly that she had identified. (6 marks)
Evaluate Us argument that the company could profit from this opportunity. (4 marks)
(ii)
Evaluate the treasurers argument that arbitrage is a risky commercial venture. (8 marks)
(c)
Evaluate the treasurers view that it is better for the companys treasury department to operate as a cost centre rather than as a profit centre. (7 marks) (Total for Question Three = 25 marks)
Rationale This question draws mainly on section D (Management of Financial Risk). It deals with the question of whether entities should take exchange rates as given or whether they should consider actively speculating on future rate changes. It uses the possibility of an arbitrage profit to explore the logic underlying pricing mechanisms.
Suggested Approach Part (a) requires the ability to make some calculations that demonstrate that a money market hedge would yield a guaranteed surplus because of some anomalies in the figures presented in the question. Part (b)(i) requires an explanation of the results. Part (b)(ii) requires the ability to recognise that arbitrage profits cannot be made with any consistency unless a substantial investment is made in data and trading infrastructure. These parts of the question are essentially looking for a common-sense understanding of the manner in which markets work. Part (c) asks for a discussion of the operation of the treasury as a cost centre rather than a profit centre. Again, this is a matter of using common sense to offer an opinion. There is not necessarily a correct answer to this issue and it would be acceptable to argue that there are opportunities to profit from speculation, although the suggested answer argues otherwise.
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Marking Guide Part (a) 1 mark per reasonable point: Principle Convert borrowed GBP at spot rate Deposit USD Sell USD forward at forward rate Interest Gain
Marks 1 mark 1 mark 1 mark 1 mark 1 mark 1 mark Max 6 marks
Part (b)(i) 1 mark per reasonable point: Profit from zero investment with zero risk Opportunity spotted through luck
Part (b)(ii) 1 mark per reasonable point: Opportunities fleeting Investment and fixed costs Anomalies small Opportunities rare
Part (c) 1 mark per reasonable point: Aim to minimise costs Speculation Expertise Risk Efficient markets
25 marks
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Examiners Comments The more numerate candidates were obviously attracted to this question. Unfortunately these numbers only provided 6 out of 25 marks available so after a good start many candidates fell away to a bare pass or fail because of a lack of understanding of the financial markets and arbitrage. Common Errors In (a) those scripts that attempted the numbers generally managed to gain a pass at least and many gained the maximum marks available. Nevertheless candidates often made silly mistakes such as converting currencies using an inverted exchange rate, transposing figures and calculating a full years interest instead of 3 months. Applying the own figure rule prevented total disaster for some such candidates. In (b)(i) response was often limited to stating that arbitrage profit was possible. Better candidates gave further comment that the potential for such profits would quickly disappear through market forces. In (b)(ii) it was very disappointing to see so many candidates gaining maximum marks in part (a) to then demonstrate their total lack of understanding of their calculations i.e. a risk free profit. Significant numbers of such candidates confused arbitrage with speculation and hence went on to agree with the treasurers argument because of the dangers from speculation NOT because of the time/manpower/technology costs involved, the likelihood of error, or the distraction from core activity that arbitrage hunting would inevitably create. In (c) the weaker candidates spent a great deal of effort in explaining the difference between cost centres, profit centres and investment centres in addition to identifying the role of the corporate treasury department. None of this answered the question set. The average candidate did identify the risk of speculation should a profit centre approach be taken. Better candidates scored well by picking up the motivation, efficiency and transfer pricing issues but overall there was a lack of depth and explanation in answers.
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Question 4
(a)
Evaluate the Head of Internal Audits assertion that F had not behaved in an independent manner. (7 marks) Discuss the implications of Fs behaviour for the governance of D. (8 marks)
(b)
(c)
The Head of Internal Audit wishes to conduct a thorough investigation into the level and frequency of the inspection of the companys delivery vans. Recommend the tests that the internal audit department could conduct to ensure that the depot mechanics are inspecting vehicles in accordance with company policy. You should explain the purpose of the tests that you have recommended. (10 marks) (Total for Question Four = 25 marks)
Rationale Question 4 draws on section C (Audit and Audit of Control Systems). Part (a) deals with the question of auditor independence. Part (b) deals with the implications of the internal auditor acting in a biased manner. Part (c) deals with the planning of an audit assignment.
Suggested Approach Part (a) requires an understanding of independence. In this case it is clear that the auditors bias is due to a natural inclination to feel some sympathy for the subject of the audit. Part (b) requires some thought about the problems that a lack of independence will create for the board. If the directors cannot trust internal audit staff then they have no way of telling whether the entity is acting in accordance with their expectations. Part (c) is looking for the ability to suggest specific and relevant audit tests for dealing with a specific matter.
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Marking Guide Part (a) 1 mark per reasonable point: Define independence Auditors sympathy Auditors responsibility Auditor not responsible for auditee
Part (b) 1 mark per reasonable point: Control environment Need for trust Staff perception
Part (c) 1 mark per reasonable point: Review records Analytical review Branch visits Spot checks
Examiners Comments Response to question 4 was not as good as expected, the last two parts being far worse than the first. Common errors In (a) although many scripts accepted that the Internal Auditor (IA) had not acted independently they found difficulty in explaining why. The ethical principles were regurgitated with little reference to the question set. There was a tendency to not recognise that independence and objectivity are interrelated. A good number thought the IA was independent because he had no relationship with the depot manager thus failing to see the broader understanding of the term. There were, however, some good answers. In (b) failure to read the question led to the downfall of many. For the governance of D was ignored by many candidates as was of auditor Fs behaviour thus answers went to great length to outline the consequences of the van accident on the company (litigation etc.) or how all internal controls were inadequate (not just the IA function). Better candidates picked up a pass mark by discussing the role of the IA within the corporate governance framework and the crucial nature of the IAs integrity and independence in the director/shareholder assurance function. In (c) it was clearly evident that audit is not the strong point of most P3 candidates. Many scripts showed no understanding as to what an audit test comprises. Answers were mainly dominated by describing new control systems that the company should now introduce. Many scripts merely gave generic audit descriptions such as control test, substantive test etc. Even when some sort of test was recognised candidates could not fully define what the auditor should do. Too often something like check maintenance log was given as a test when really the candidate should have said check maintenance log dates and managers signature to ascertain whether vehicle tests seemed to have been carried out at regular intervals under management supervision. There was also a strong fallacy that the IA should actually tell company staff what to do in terms of internal control and should actually introduce internal controls themselves.
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Question 1
(a)
(i) Recommend, stating reasons, the background and experience that should be sought when recruiting the Safety Manager. (6 marks) Discuss the reasons why it is important to have a Safety Manager who takes responsibility for the health and safety of adventure leaders. (7 marks) (iii) Recommend, stating reasons, the factors that the Safety Manager should take into account when writing safety rules to protect both the adventure leaders and customers on cycling holidays. (7 marks) (Total for part (a) = 20 marks)
(ii)
(b)
Discuss the risks and benefits that are likely to arise from the Operations Directors proposals to restructure the responsibility centres. (10 marks)
(c)
(i) Evaluate the risks that V will be taking with respect to its reliance on the Minister for Tourism if it proceeds with the proposed development on Js island. (10 marks) (ii) Recommend, stating reasons, some precautions that V could take to prevent losses arising from the withdrawal of support by the Minister for Tourism.
(10 marks) (Total for part (c) = 20 marks) (Total for Question One = 50 marks)
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Rationale This question is based on both the common pre-seen scenario and the unseen scenario. Part (a) deals with the benefits of mitigating staff health and safety risks by the appointment of a safety officer. Part (b) deals with the implications of restructuring senior management roles. Part (c) deals with the management of risks arising from operating in a foreign country. Part (a) draws mainly on Section B of the syllabus (Risk and Internal Control). This part asks for an understanding of the risks to staff who are responsible for leading adventure holidays. Part (i) focusses on the attributes that would be required of a Safety Manager, whose role would be to deal with these risks. This requires a realistic evaluation of the resources that can be invested in dealing with those risks. The fact that only one person will be appointed means that the company has to decide upon the priorities for this position and set a realistic set of criteria, otherwise the post will either be ineffective or impossible to fill. Part (ii) asks for a discussion of the benefits that this appointment will bring, which requires consideration of the risks themselves and the advantages to the company of addressing them. Part (iii) asks for a discussion of the factors that should be taken into account when developing safety rules for leading groups on a cycling holiday. Part (b) draws mainly on section A (Management and Control Systems). The companys operations are presently structured round three distinct product groups. It has been proposed to change the structure so that managers will have responsibility for functions that feed into the creation of all three products. This requires an understanding of the motives and motivations associated with corporate structure . Part (c) draws mainly on section D (Management of Financial Risk). The entity proposes a major investment in a country with which it has had no prior dealings. The support of the local government will be crucial to the success of this investment and the question asks for an evaluation of the risks (i) and a discussion of the possible responses (ii).
Suggested Approach Part (a)(i) asks for recommendations for the attributes that will be required of a safety officer for a specific role. The job is specialised and there may not be an existing pool of applicants with specific experience in this role. Candidates should consider the work that the safety officer will have to undertake and should then rank the areas where skill and experience will help. For example, a basic skill in the activities will be of some value, but it is more important that the Safety Manager should be aware of the risks created by leading groups of participants who are of a mixed ability. In other words, a professional cyclist may have relatively little concept of the risks associated with leading a group of amateurs who may have limited skill and fitness. Part (a)(ii) asks for a discussion of the benefits associated with this appointment. That requires a discussion of both the reduction of the risk of accident and the legitimation of the companys activities. The former is almost certainly more important than the latter. The company has a moral obligation to protect its staff and the safety officer will help the company to ensure that the risks are kept to the lowest possible level. There could be legal consequences in the event that the company is ever sued for negligence by an injured employee, although that threat is mitigated by the fact that an employee is unlikely to have the resources to mount a successful claim. Furthermore, any accident is likely to occur overseas and the question of jurisdiction will further complicate the employees problems. Part (a)(iii) requires a discussion of the factors that the safety officer should consider when writing about cycling holidays. That part of the question does not require candidates to be expert cyclists. It does require a certain amount of common sense concerning the risks associated with leading sporting activities in a foreign country, where factors such as climate and culture could affect the risks involved. The question asks for an intelligent discussion of those factors and so candidates are not required to offer specific solutions for dealing with, say, the risks of cycling long distances in a hot climate.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide March 2013 Exam Part (b) asks candidates to consider the implications of restructuring the company. At present the Operations Director oversees three operating departments, each of which is responsible for a designated product group. That creates the possibility that there will be competition between the three senior managers for resources, to the detriment of the company. The proposal is that future operations be structured according to three functional areas associated with creating holidays: airlines, hotels and marketing. The expectation is that candidates will consider the possibility of the same potential for dysfunctional behaviour changing form rather than being eliminated altogether. There are further strategic implications of the proposal and those should be discussed as well. Part (c) requires candidates to think about the problems associated with foreign direct investment. The company proposes to build a hotel in a country with which it has not had any prior dealings. The plans will create a great deal of environmental damage and so the host government may decide not to support the company in the event of a serious backlash from the protestors who are already active in the area. Part (c)(i) requires candidates to think about the risks arising from this investment. To an extent, those risks will also require an understanding of the implications of this investment for the government. Part (c)(ii) requires a discussion of the techniques that might be used to mitigate those risks. Candidates should be aware of some of the generic techniques that can be used to address the risks associated with dealing with host governments. Ideally, those generic techniques should be edited and structured in a manner that relates to the specific facts provided in the scenario.
Marking Guide Part (a)(i) 1 mark per reasonable point: knowledge of sport v relevant experience Sailing/ cycling may be most critical Nationality Part (a)(ii) 1 mark per reasonable point: Legal and moral risks Mitigating risks Different risks arising from leadership Complacency Part (a)(iii) 1 mark per reasonable point: Road conditions Climate Mechanical reliability Management time Fatigue
Marks 4 marks 2 marks 3 marks Max 6 marks 4 marks 2 marks 3 marks 3 marks Max 7 marks 7 marks 5 marks 4 marks 2 marks 3 marks Max 7 marks
Part (b) 1 mark per reasonable point: Competition for resources Greater focus Specialisation Risk of dysfunctional behaviour Part (c)(i) 1 mark per reasonable point: Sunk cost Projects visibility Protestors Part (c)(ii) 1 mark per reasonable point: Link with J Restructure deal Further investment in country Social responsibility
4 marks 4 marks 5 marks 4 marks Max 10 marks 4 marks 4 marks 6 marks Max 10 marks 4 marks 2 marks 4 marks 2 marks Max 10 marks 50 marks
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Examiners Comments Some parts of the questions were answered reasonably well, others were poor. Part (a) was answered quite well but many candidates gave very general unfocussed answers and did not score high marks. Part (c) was poor with candidates showing a lack of awareness of the issues. Some of the answers should have been obvious such as going into partnership with a local company or taking out loans with a local bank. Few candidates made these points, which was disappointing. Common errors Q1(a)(i) answers were often very general, with little thought about the question. Q1(a)(iii) Lots of failed to read the question answers nothing to do with Cycling, hardly any candidates considered obvious issues such as road conditions or traffic. Q1(c)(i) often general the answers had nothing to do with Minister for Tourism, very few candidates mentioned corruption, but many recognised local taxes! Many candidates talked about insuring against the risks, this is not at all possible and should have been obvious. Many answers showed a disappointing lack of commercial awareness.
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Question 2
(a)
Discuss the difficulties associated with proving that the Canteen Manager was fraudulent. (10 marks)
(b)
Critically evaluate the decision by the Chief Executive to pay the Canteen Manager to resign quietly. (7 marks)
(c)
Advise F on the ethical issues arising from destroying his notes and maintaining silence on this investigation. (8 marks) (Total for Question Two = 25 marks)
Rationale Question 2 draws on section C (Audit and Audit of Control Systems). Part (a) deals with the detection of fraud by a middle-ranking manager. Part (b) deals with the decision by the entity to pay the fraudulent member of staff to leave quietly. Part (c) deals with the possibility that the qualified accountant who discovered the fraud has an ethical duty to report the fraud to the authorities.
Suggested Approach Part (a) requires candidates to think about the information provided in the scenario. The question describes the evidence that is available to the entity. That evidence is persuasive, but it does not provide outright proof. Candidates are required to use their common sense to evaluate the problems that the entity would face in attempting to offer proof against the manager using the material that has been uncovered. This is a simple fraud, but it has been carefully designed and it will be difficult to prove anything unless any of the parties involved confesses. Part (b) deals with the fairly common practice of asking fraudulent members of staff to resign. This is a practical response to a difficult situation. The entity cannot trust the manager to remain in place, but it also has very little real justification for sacking him. Obtaining his cooperation by paying him to leave seems like a rather unjust outcome, but at least it removes the problem. Candidates should focus on the simple economics of this scenario rather than wasting time and energy on expressing anger at the managers behaviour. Part (c) asks candidates to consider the ethical response of the internal auditor to this dilemma. CIMAs ethical guidance is a good place to start. Candidates should consider whether the auditor has any real reason to breach the duty of confidence owed to the entity. On balance, the circumstances can be evaluated as providing very little justification for disregarding the directors instruction to let matters rest.
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Marking Guide Part (a) 1 mark per reasonable point: Burden of proof Interpreting facts Confession unlikely Computer tainted
Marks 2 marks 5 marks 5 marks 4 marks Max 10 marks
Part (b) 1 mark per reasonable point: Personal motives Saving cost New appointment possible Staff motivation Misuse of funds Part (c) 1 mark per reasonable point: Code of ethics Breaching confidence Integrity Maximum mark awarded
2 marks 4 marks 2 marks 2 marks 2 marks Max 7 marks 3 marks 5 marks 3 marks Max 8 marks 25 marks
Examiners Comments The answers were generally good but there was failure to grasp the reality of the economics of the situation and a need to move on. Lots of discussions of company resignations and internal auditor resignations none of which was appropriate. Question 2(c) was a problem as the ethical issues should have been clear and all candidates should have been aware which principles had been compromised. Generally the answers were very short and generic with poor discussion of the ethical principles. Common Errors The most common error was candidates who failed to grasp why the company did not involve the police. Then going on to discuss why the internal auditors should resign. That was not an issue in this question. The internal auditors had uncovered the fraud and the company had decided it did not want to press charges because of the laptop being a personal one and also it did not want publicity. Part (a) was not especially well done. There should have been a discussion on whether the proof was clear and unambiguous. In part (c) the ethical problems were discussed quite poorly in some cases with many candidates not even naming any of the ethical principles in their answer. The answers were very brief especially as eight marks were available for this part of the question.
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Question 3
(a)
Discuss the risks associated with Hs staff using their own equipment (for example tablets) instead of the laptops provided by H. (13 marks) Recommend, with explanations, the policies and procedures that H should adopt for the use and purchase of laptops and other devices used by the trainers. (12 marks) (Total for Question Three = 25 marks)
(b)
Rationale This question draws mainly on section E (Risk and Control in Information Systems). It deals with the increasingly commonplace tendency for employees to equip themselves with the latest IT equipment, despite the risks that this might create for their employers.
Suggested Approach Part (a) requires candidates to consider the needs of an entity that is heavily dependent upon its information systems. Staff have taken to spending their own money on non-standard hardware and, presumably, software. That means that the entity has no real control over the devices that are used to create and update vital software files. There is a risk that data will be lost or rendered useless because it cannot be opened. There are also risks of viruses and other payloads being introduced into the system. Part (b) asks candidates to think about a realistic response to the threats and opportunities created by developments in IT. Companies cannot afford to disregard new technology because they could lose competitive edge if they simply banned innovation. However, progress has to be managed and the risks dealt with at every stage.
Marking Guide Part (a) 1 mark per reasonable point: Security issues Customers open to threat Support Non-standard software Fragile hardware Software piracy Recovery of files from leavers Upside risks Part (b) 1 mark per reasonable point: No personal kit Evaluation of new products Checklist Software issues Justify changes Maximum mark awarded
Marks 3 marks 2 marks 3 marks 3 marks 2 marks 1 mark 1 mark 2 marks max 13 marks 2 marks 4 marks 3 marks 2 marks 2 marks max 12 marks 25 marks
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Examiners Comments Question 3 was a little disappointing. There was nothing really wrong with the answers to this question; they just lacked width and depth. There was also a disappointing lack of any attempt to put answers in the context of what was asked. Most candidates didnt consider the reality of managing a workforce and managing their Tools of the job and all that that entails. Common Errors Part (a) Most candidates came up with the risk of viruses but that was in many cases all they discussed. Some candidates wrote large amounts about the USB drive which was only a small part of the answer. Part (b) tended to be poor with candidates failing to think of the needs of the trainers and the training company. There were a lot of bullet point answers which could signal that candidates had run out of time and were scrambling to get some points down in the last few minutes. Candidates did not really discuss the needs of the company or the trainers and so failed to score high marks.
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Question 4
(a)
(i) Calculate the 30 day 95% value at risk on the U$ receivable. (5 marks) (ii) Calculate the probability that either of the two options will be exercised. (5 marks) (Total for part (a) = 10 marks)
(b)
Evaluate the implications for M of each of the two option arrangements. (8 marks)
(c)
Discuss the factors that M and the counterparties should take into account when negotiating the price of the options. (7 marks) (Total for Question Four = 25 marks)
Rationale Question 4 draws on section D (Management of Financial Risk). Part (a) deals with the VaR statistic. Part (b) deals with the effectiveness of an option strategy for hedging. Part (c) deals with the option pricing.
Suggested Approach Part (a)(i) requires the calculation of the value at risk statistic. Part (a)(ii) requires the manipulation of the formula for VaR to carry out a simple probability calculation. Part (b) requires candidates to think about the implications for buying a put option and selling a call when faced with the prospect of receiving a substantial payment of foreign currency. The logic amounts to accepting a curb on the upside risk in return for a contribution towards the cost of limiting the downside risk. Part (c) is looking for a discussion of the issues associated with options pricing.
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Marking Guide Part (a)(i) 1 mark per reasonable point: Calculate VaR Part (a)(ii) 1 mark per reasonable point: Calculate probability Part (b) 1 mark per reasonable point: Downside risk Upside risk Cost offset Counterparty risk
5 marks
5 marks
Part (c) 1 mark per reasonable point: Inherent risk Volatility Forecasts Maximum mark awarded
2 marks 4 marks 2 marks Max 7 marks 25 marks
Examiners Comments This question was answered very poorly by almost all candidates who attempted it. Many candidates got (a)(i) correct but then could not do a(ii) at all. Unfortunately the answers to part (b) were very poor and part (c) not much better. Many candidates missed out the calculations and attempted (b) and (c) and others just attempted the calculations. On the whole this question was extremely badly answered. Financial risk forms 35% of this syllabus and should be understood by all candidates; if this had been tested in question one, few candidates would have obtained a pass mark for the question. Common errors Some candidates had clearly done this question as they thought they could do part (a)(i), which was attempted reasonably well by many candidates. They then had no idea of how to tackle part (a)(ii) and then could not comment on pricing options. The poor level of knowledge demonstrated in the answers to this question was just dreadful. Part (b) was done badly as candidates could not discuss the risks associated with option pricing at all. Many got the risks completely confused. Part (c) was slightly better but still poor as candidates did not seem to understand what counterparties would be looking for and what might affect the option price. The majority of attempts at this question were just appalling. This whole area of the syllabus needs revision as very few of the small number of candidates who attempted this question had any idea at all of how to tackle it.
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Question 1
(a)
Evaluate the risks to TCLs reputation arising from the newspaper stories concerning the punctuality of its trains. (12 marks)
(b)
(i) Evaluate the control issues arising from the fact that T Railways has no direct access to the IT facility that processes long-distance revenue data. (11 marks) Advise the railway companies of the factors that they should consider when selecting an IT company to run the IT facility when the current contract expires. You should explain why the factors are important. (10 marks) (Total for part (b) = 21 marks)
(ii)
(c)
Evaluate possible actions that the Government of Country T might take in response to the proposal for Country Fs new railway line. (5 marks)
(d)
F-rail is concerned that the Government of Country T may not react favourably when it is announced that F-rail plans to build the high speed line. Recommend, with reasons, three possible strategies that F-rail might adopt when hearing that there could be adverse reactions by the Government of Country T. (12 marks) (Total for Question One = 50 marks)
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Rationale This question is based on both the common pre-seen scenario and the unseen scenario. Part (a) deals with the reputation risks arising from reporting inaccurate information concerning the quality of the companys service. Part (b) deals with the IT risks associated with shared service providers. Part (c) deals with the risks arising from the need to maintain satisfactory relationships with foreign governments. Part (a) draws mainly on Section B of the syllabus (Risk and Internal Control). This part discusses the risks arising from reports published in the national press that the company manipulates reports concerning the punctuality of its services. This is an important commercial and political matter because the operation of rail services has significant implications for customers, many of whom have no alternative means of travelling to work. Part (b) draws mainly on section E (Risk and Control in Information Systems). The company depends on a shared service provider to operate its IT function. As is common in such arrangements, the company is unable to conduct its own tests on the operation of the system and that will have implications for the ability of management to ensure that their responsibilities for safeguarding assets and accurate record keeping are discharged properly. Part (c) draws mainly on section D (Management of Financial Risk). A rail operator located in a neighbouring country plans to build a new line that will reduce T Railways revenue. The rail operator is concerned that Ts government will retaliate in some way, which could prove disruptive because the rail operator will still wish to route its services via T Railways lines.
Suggested Approach Part (a) asks candidates to think about the significance of the revelation that a railway company is not responsive to the needs of its customers, particularly commuters who depend on the rail service. The operation of public transport is a major political issue in most countries and so the implications of these reports will require careful consideration. There is, for example, a risk that the government will impose new regulations. Part (b) requires some thought about the implications of being unable to observe the operation of the IT system directly. That arises in both the context of checking on day to day operations and also the selection of a service provider (either retaining the same firm or finding a replacement) when the present contract comes to an end. Part (c) requires practical suggestions in order to defuse a potentially costly dispute before it gets out of hand. The railway operator must find some practical ways to prevent a dispute that will make it difficult to continue to operate through Country T. The key issue is to recognise that there is no need to harm T Railways and it may be possible to offer some concessions that will lead to a mutually advantageous outcome.
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Marking Guide Part (a) 1 mark per reasonable point: Importance of punctuality Perception that TCL does not care Cynical response Company using dysfunctional policies Need to whistleblow
Marks 2 marks 3 marks 3 marks 3 marks 2 marks Max 12 marks
Part (b)(i) 1 mark per reasonable point: Control environment T has different issues from others Customer data External auditor Favouring other rail companies
Part (b)(ii) 1 mark per reasonable point: Relevant experience Management expertise Staffing Financial security
Part (c) 1 mark per reasonable point: Retaliation Compromise Part (d) 1 mark per reasonable point: Consultation Cooperation Government support T more vulnerable Maximum mark awarded
2 marks 3 marks Max 5 marks 4 marks 4 marks 4 marks 1 mark Max 12 marks 50 marks
Examiners Comments In (a) most candidates managed to say something sensible in order to gain a pass. The better candidates discussed each individual newspaper story picking up on failure to meet objectives, lack of integrity etc. The weaker scripts concentrated on revenue loss and not much else. Part (b) caused serious problems for the average candidate who failed to understand the situation. The inability to verify the data provided by the other railway companies was key along with the validity of the audit function but only the better candidates picked up on this. The average script picked up on the inability to vet staff quality and input/output controls etc but wasted too much time on how T Railways could not ascertain whether the revenue formula was no longer appropriate or how it could not be ascertained whether it was being properly applied or that their ticket inspectors might make mistakes. There also seemed to be a belief that there would be no information available from the IT Company for resource planning and budgeting which seems highly unlikely. Part b (ii) was answered quite well but a sizeable minority failed to answer the question set, going into potential new IT systems rather than new outsourced management of systems. In part (c) most candidates gained a pass despite failure to apply common sense to the scenario and appreciate that if a small landlocked country takes strong action such as border closure and banning neighbouring countries trains there can only be one loser - the small landlocked country.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2013 Exam In (d) weaker candidates advocated a joint venture without specifying much detail and had not thought it through at all. Better candidates came up with appropriate sweeteners such as supplier contracts with T companies and employment provision to T workers to enable the HS link to be built. Common errors Part (b) was poor with candidates often writing only about the revenue formula. Part (b)(i) was also surprisingly poor with quite a few candidates writing about new IT systems rather than the problems of outsourced management of systems. Part (d) was a problem for some candidates as they did not really think about the specific question requirements and wasted lots of time discussing joint ventures instead of thinking of other ways of mitigating the risk.
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Question 2
(a)
Discuss the benefits that the dental practice may obtain from the risk mapping exercise described above. (5 marks) Critically evaluate the placing of each of the identified risks in the risk map, stating with reasons whether or not you agree with the placement. (20 marks 5 marks per risk) (Total for Question Two = 25 marks)
(b)
Rationale Question 2 draws on section B (Risk and Internal Control). Part (a) deals with the benefits that might be obtained from mapping risks using the TARA framework. Part (b) asks candidates to comment on the manner in which four risks have been mapped using TARA.
Suggested Approach Part (a) requires candidates to think about the benefits that can be obtained from a management team taking time to formally list and comment on the risks that are faced by the entity. it would be worth considering the nature of the risks faced by this particular type of entity. Part (b) asks candidates to consider the results of a mapping exercise and to comment on their agreement or disagreement with the placing of particular risks. It is perfectly acceptable to disagree with the suggestions that have been made provided that disagreement is justified by a sensible argument. Having said that, the risks are already classified in a credible and defensible manner. The fact that some of the risks cannot be reduced or avoided should be taken into account in this evaluation.
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Marking Guide Part (a) 1 mark per reasonable point: Subjective Identify risks Agreement on resolution Part (b) 1 mark per reasonable point: Each risk
Marks 1 mark 3 marks 3 marks Max 5 marks Max 5 marks per risk Max 20 marks 25 marks
Maximum mark awarded Examiners Comments This question was extremely popular and there were many good answers. Common Errors
The better scripts related the risk map to the dental practice stating for example that better risk prioritisation meant fewer compensation claims and fewer work hours lost through cross contamination. Weaker candidates answered textbook style on the objective/benefits of risk management with little reference to the question scenario. In (b) most candidates managed a comfortable pass with better scripts gaining high marks. There was some lack of clarity regarding gross and net risk situations with candidates assuming low probability because controls had been applied but this was perhaps acceptable.
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Question 3
(a) (b)
(i)
Discuss the possibility that Ms transfer pricing arrangements will cause dysfunctional behaviour. (10 marks)
Advise the board on the matters that it should cover when briefing the Head of Group Internal Audit in order to be certain that its requirements are met by the internal audit investigation into Ms transfer pricing practices. (7 marks) Discuss FOUR factors that the Head of Group Internal Audit should consider when assessing the possibility that a subsidiary could be investigated by its local tax authority. (8 marks) (Total for part (b) = 15 marks) (Total for Question Three = 25 marks)
(ii)
Rationale Part (a) of question 3 draws mainly on section A (Management and Control Systems). It deals with the motivational issues arising from intra-group transfer prices that lead to individual companies reporting artificially inflated or deflated profits. Part (b) draws on section C (Audit and Audit of Control Systems) asking how the internal audit department might pre-empt a tax investigation by reviewing transfer process for compliance with tax law.
Suggested Approach Part (a) requires some thought about the natural concerns that a management team might have when reporting very small profits. Even setting aside the possibility of profit-related pay and bonus, there is a natural tendency for managers to wish to report substantial profits. Local boards may be concerned that their role in the company is undervalued if they are required to manufacture parts for resale at little more than cost. Part (b) asks for some thought about the risks associated with the objectives of the audit. Auditors are generally keen to identify the areas which are most likely to have an impact on the audits findings. They counter those risks with the most cost-effective evidence that is available. All audits are planned on the basis of understanding the issues and then using common-sense to evaluate the possible responses.
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Marking Guide Part (a) 1 mark per reasonable point: Transfer prices imposed Little control over reported performance Sacrificing quality to cut costs Management time Demotivation Disrupt internal sales Improve system
Marks 3 marks 2 marks 3 marks 2 marks 2 marks 1 mark 3 marks Max 10 marks
Part (b)(i) 1 mark per reasonable point: Clear objective Evidence collection Confidentiality Timetable
Part (b)(ii) 1 mark per reasonable point: Tax rates Effective tax rates Past behaviour of tax authorities Nature of products and their market Maximum mark awarded
Examiners Comments The candidates found this question the most difficult to respond to. Problems evolved around failure to understand the question and failure to answer the question set. Common Errors In (a) even the better scripts spent far too much effort explaining how transfer pricing can cause dysfunctional behaviour. Candidates often ignored the requirement to explain why this companys specific transfer pricing policy (market value basis) could cause dysfunctional behaviour. Part (b) should have produced an easy 7 marks but it did not do so. The answers often could not be related to what had been asked. Very few scripts directly covered the requirement by specifying simple points such as objective, scope and timeline. In (c) the identical comment is applicable. The question was answered very badly with few candidates demonstrating any understanding of how transfer pricing could be used to manipulate taxation. Given the recent coverage in the press on companies doing just this, it was surprising. Answers were unrelated or too vague and brief to be intelligible, e.g. size of profit with no further development or transfer price and cost with no subsequent explanation.
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Question 4
(a)
Calculate the gain S will make writing a futures contract, assuming that she invests the maximum possible amount that she can afford in the initial margin and that her expectations turn out to be accurate. (8 marks) Discuss the risks that S will be taking if she enters into this contract. (10 marks)
(b)
(c)
Explain why S chose to use a futures contract as the basis for her speculation in the market. (7 marks) (Total for Question Four = 25 marks)
Rationale Question 4 draws on section D (Management of Financial Risk). Part (a) deals with the calculation of a speculative profit from the use of a forward contract to exploit an overpriced currency. Part (b) deals with the risks associated with such speculation. Part (c) deals with the advantages of using derivatives to gear up speculative investments.
Suggested Approach Part (a) requires some basic calculations, albeit in an unusual form. It is important to understand the operation of the main types of financial instrument listed in the syllabus. Part (b) requires some thought about the risks that this speculative investment might involve. The instrument is exchange traded and so there are no real counterparty risks. There is every chance that the investment will fail to show a profit. Part (c) is looking for the ability to explain the uses of derivatives for investment purposes.
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Marking Guide Part (a)(i) 1 mark per reasonable point: Calculate gain
Max 8 marks
Part (b) 1 mark per reasonable point: Upside risk Downside risk Worst case Margin call Counterparty
2 marks 4 marks 2 marks 2 marks 1 mark Max 10 marks
Part (c) 1 mark per reasonable point: Only practical way to profit Profits otherwise restricted Regulated market Limited downside
2 marks 3 marks 2 marks 2 marks Max 7 marks Total 25 marks 25 marks
Examiners Comments This was the least popular of the optional questions. Many candidates failed to understand margin payments and the use of such financial instruments for speculation. Common errors In (a) candidates did not grasp the significance of the margin payment and the leverage effect this could produce. Consequently most calculations were made on the basis of a single contract not six contracts. The vast majority of scripts gained an own figure single mark instead of the eight available. In (b) candidates generally gained marks for stating the obvious forex risks and the likelihood of future margin calls. Many wasted valuable effort in identifying all the elements contributing to exchange rate movement e.g. inflation risk, interest risk, political risk etc. In (c) the weaker candidates often missed the whole speculative nature of the proposed transaction and introduced arguments relative to hedging. Nevertheless, candidates gained marks for identifying that futures are market traded, easy to obtain, cheaper than options etc. Only the really good candidates picked up on the leveraging effect mentioned in (a) enabling greater potential return from the limited finance available.
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Question 1
(a)
Evaluate the Boards argument that the railway system will be easier to manage if it is privatised. Your answer should include a discussion of the conflicts that may arise from the use of multiple performance indicators. You should illustrate your points with examples taken from both the pre-seen case study and the information in the scenario about customer complaints. (14 marks)
(b)
(i) Discuss the risks associated with TCLs policy of requiring ticket inspectors to detain passengers who do not have valid tickets and who refuse to pay. (8 marks) (ii) Recommend, stating reasons, procedures that TCL could implement with respect to dealing with passengers who refuse to pay. (8 marks) (Total for part (b) = 16 marks)
(c)
(i) Evaluate the respective arguments put forward by the minister and the consultancy firm as to whether T Railways management team has been reckless with respect to borrowing risk. (8 marks) (ii) Evaluate the consultancy firms advice to restructure T Railways long term finance in advance of the privatisation. (6 marks) (iii) Evaluate the advice from the consultancy firm as to whether T Railways should use floating rate debt. (6 marks) (Total for part (c) = 20 marks) (Total for Question One = 50 marks)
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Rationale This question is based on both the common pre-seen scenario and the unseen scenario. Part (a) deals with the complications arising from the fact that T Railways is in public ownership, providing a vital utility in the form of public transport. That creates the possibility that the company will be subject to potentially conflicting aims and objectives. Part (b) deals with the risks associated with asking staff to apprehend criminals who steal from the company. Part (c) deals with the risks associated with different forms of borrowing that might be used by the company. Part (a) draws mainly on Section A of the syllabus (Management and Control Systems). This part discusses the fact that the entity in question is faced with a number of performance indicators that are potentially in conflict. The entity is in public ownership, which means that it cannot go back to first principles and determine which of the indicators is most consistent with maximising shareholders wealth. This is a common situation and one that can happen in both the commercial and not-for-profit sectors. Part (b) draws mainly on section B (Risk and Internal Controls). The company employs ticket inspectors who are required to apprehend passengers who are not in possession of a valid ticket until they can be arrested by the police. This has led to allegations that staff are being exposed both to the risk of injury and to accusations of assaulting those who have been detained. Part (c) draws mainly on section D (Management of Financial Risk). The company has to make important decisions concerning the choice of debt for long-term financing. Both fixed and variable rate instruments carry risks (the former potentially leaving the company uncompetitive if interest rates fall and competitors are on a variable rate).
Suggested Approach Part (a) asks candidates to think about the nature of the performance indicators and the possibility that they will lead to dysfunctional behaviour by the companys board. The fact that the indicators may be in conflict will make matters more complicated because management may feel that their decisions have to favour one stakeholder over another or that a suboptimal decision will have to be implemented in order to strike a balance between the effects on the different indicators. This can be contrasted with the relative simplicity of a profit-making entity whose primary duty will always be to maximise shareholder wealth. Part (b) requires some thought about the risks arising from a relatively simple and easily understood scenario. Staff who are forced to apprehend thieves are at risk of injury if the culprit resists arrest and may also be open to the threat of criminal proceedings themselves if a customer claims to have been injured. If fare-dodging passengers could leave the train without any action by the train staff then the company could lose significant revenue. Dealing with this risk requires a balanced and delicate response from the company. Part (c) requires an understanding of the risks associated with different forms of borrowing. At present the entity is financed largely with a very soft loan provided by government and so the directors have very little direct experience of having to manage relationships with lenders.
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Marking Guide Part (a) 1 mark per reasonable point: Public ownership usually implies conflicting objectives Companies can aim to maximise wealth Safety issues Freedom from public sector borrowing constraints Confusion when selecting strategy Need for safety could be compromised Juggling objectives Balanced scorecard
Marks 2 marks 2 marks 2 marks 2 marks 2 marks 3 marks 2 marks 2 marks Max 14 marks
Part (b)(i) 1 mark per reasonable point: High probability and high impact Violent response Claims of injury/reasonable force Demotivate staff Police may not be supportive
Part (b)(ii) 1 mark per reasonable point: Name and address and ID Inform staff at next station and deal with problem there Written and video evidence
Part (c)(i) 1 mark per reasonable point: Existing loan has soft conditions Loan undated All profit goes to government anyway Hidden reserves Part (c)(ii) 1 mark per reasonable point: Strategy clearer to stakeholders Replacement finance likely to be harder Equity looks better than debt Part (c)(iii) 1 mark per reasonable point: Volatile rates Consultants expectations Demand for rail travel inelastic No competition (in short term) Maximum mark awarded
3 marks 1 mark 2 marks 3 marks Max 8 marks 2 marks 1 mark 4 marks Max 6 marks 1 mark 1 mark 3 marks 2 marks Max 6 marks 50 marks
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Examiners Comments Part (a) This was generally answered well, with candidates realising that the entity has a complex set of objectives and constraints because of its role within the economy and because of the fact that it is in public ownership. Better answers demonstrated some thought about the differences between profit-making entities and those in the public sector. Part (b) Answers to part (i) were generally good, with a range of issues being highlighted as potential risks. Answers to part (ii) varied. Most candidates were capable of suggesting realistic responses to the threat, but a significant minority suggested impractical ideas that would have been unduly expensive to implement. Part (c) Answers to part (i) tended to focus on the competence of the minister to evaluate gearing. Even if the ministers views are totally incorrect, it is necessary to offer an explanation as to why that is so. Answers to parts (ii) and (iii) were generally stronger. Very few candidates picked up the points that the entity is in a very strong position to pass the cost of interest on to customers. Railway fares are generally not a discretionary purchase and so travellers will have to pay even if prices rise in response to increasing interest rates. Common Errors Part (c)(i) was the main area of difficulty. The answers concentrated on whether the minister was competent rather than why his views may be incorrect.
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Question 2
(a) (b)
Explain why it is necessary to improve Gs control environment. (4 marks) Evaluate the Chief Executives proposal to impose disciplinary measures on staff who are responsible for bookkeeping errors or delays. (8 marks) Recommend, stating reasons, the steps that the Chief Executive should take in order to create an effective internal audit department. (13 marks) (Total for Question Two = 25 marks)
(c)
Rationale Question 2 draws on section C (Audit and Audit of Control Systems). Parts (a) and (b) deal with the importance of the control environment. Part (c) asks candidates to discuss the creation of an internal audit department within an entity that has a weak control environment.
Suggested Approach Part (a) requires candidates to think about the importance of the control environment. It calls for a brief discussion in order to lead into part (b), which asks candidates to consider the common situation whereby employees are interested only in the actual business process and have little or no real interest in the underlying administration or accounting. While it is fair to argue that the business model is probably the driving force behind any profits, the company also has to ensure that transactions are properly accounted for or there could be serious repercussions, including a failure to collect revenues from customers. Part (c) asks candidates to consider the best way to introduce internal audit to this entity. The company has a successful business in place, but a slack attitude to control. Thus, there has to be some sensitivity, otherwise employees may feel disenchanted when the internal auditor is appointed. There is also a need for management to be assertive in order to deal with the fact that the audit department will have to be seen to be well supported, otherwise there will be no change.
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Marking Guide Part (a) 1 mark per reasonable point: Senior management attitude Costs from slack bookkeeping Part (b) 1 mark per reasonable point: Focus on quality Disciplinary action Motivate bookkeeping staff Part (c) 1 mark per reasonable point: Decide level of commitment Terms of reference Recruit head first Remainder of team Choice of location Powers of inspection Reports acted upon Maximum mark awarded
Marks 2 marks 3 marks Max 4 marks 4 marks 3 marks 2 marks Max 8 marks 2 marks 2 marks 3 marks 2 marks 2 marks 2 marks 3 marks Max 13 marks 25 marks
Examiners Comments Part (a) This part was intended to lead candidates into part (b). Most candidates were aware of the control environment. Part (b) Answers to part (b) could have been structured better. Many candidates failed to pick up on the idea that the proposal requires a major change of culture within the entity. The proposal to introduce penalties was intentionally extreme and there are arguments both for and against the proposal in this context. Many answers made a variety of sensible points, but they did not structure them well. Part (c) Answers were very variable in quality. Many candidates were aware of the role of the internal audit department and were capable of offering realistic suggestions as to how an effective department might be created. A significant minority was not aware of the nature of internal audit and simply offered lists of tests that internal auditors might carry out. Common Errors Many answers were unclear and not expressed in any logical format which made it more difficult to award marks. The answers to part (c) were extremely variable, many candidates demonstrated very little knowledge of internal audit.
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Question 3
(a)
Evaluate the Sales Directors belief that Ls competitors are at an advantage because of their superior information management systems. (9 marks)
(b)
(i) Advise Ls directors on the difficulties associated with quantifying the potential benefits that L would gain from improved information management systems. (8 marks) Recommend actions that L could take in order to overcome the difficulties identified in your answer to (b)(i) above. (8 marks) (Total for part (b) = 16 marks)
(ii)
(Total for Question Three = 25 marks)
Rationale Question 3 draws mainly on section E (Risk and Control in Information Systems). It deals with the potential competitive advantage that may be obtained from a sophisticated information management system that provides the board with suitable information that can be adapted and reorganised in order to meet the companys needs.
Suggested Approach Part (a) requires some thought about the nature of the business that the company finds itself in. It is a supermarket chain that sells virtually the same products as its competitors at similar or identical prices. The chains may be able to differentiate themselves in terms of product placement and through giving targeted discounts using voucher and cash-back schemes. The company in question does not have that facility and so its managers have to consider the extent to which this puts it at a significant disadvantage. Part (b)(i) deals with the problem that affects virtually every IT project appraisal, namely that the value of the resulting improvements in terms of better information may not be known until after the investment has been made. The new system could be purchased and there may be little or no improvement in sales. Part (b)(ii) asks for some practical suggestions to overcome the difficulties identified in (b)(i). The competitors business model is partly about merchandising through stores that are open to the public. It would cost relatively little to copy some of the competitors behaviour in the short term in a sample of stores to determine whether there is a real impact on sales.
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Marking Guide Part (a) 1 mark per reasonable point: L is competing with a simple system Competitors may understand customers better Loyalty cards Information from inventory system Part (b)(i) 1 mark per reasonable point: Difficult to predict benefits Focus groups suggest little benefit Customers may be fickle Biased advice from vendors Part (b)(ii) 1 mark per reasonable point: Market research Copy other stores Simple voucher scheme to gauge effect Copy other techniques Maximum mark awarded
Marks 2 marks 3 marks 3 marks 3 marks Max 9 marks 1 mark 2 marks 3 marks 2 marks Max 8 marks 3 marks 3 marks 3 marks 1 mark Max 8 marks 25 marks
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Examiners Comments Answers to this question varied in quality, depending on whether the candidate appeared to have thought about the nature of the entity. Candidates must be able to think about the risks associated with different types of entity and to apply knowledge to specific problems. Retailing is a major industry that is discussed widely in the business press. The scenario offered some issues that could be understood at a common sense level. Answers to this question often lacked realism. Part (a) The evaluation of this assertion is complicated because the entity in question has a simpler system that is potentially much cheaper to operate and may also provide management with all of the information that is required to operate successfully. Good answers picked up on the potential benefits that might be obtained from the various initiatives that the competition has introduced and also pointed out that L retains the ability to compete on the basis of the information that it already has. Part (b) The classic dilemma associated with any decision to invest in a new system is that it is rarely clear whether the information gathered will justify the cost. Ls competitors claim to benefit from their more sophisticated systems, but those claims will be difficult to support and they may be motivated by a desire to appease shareholders who wish to see evidence that their investments have been justified. In any event, consumer behaviour may be complicated and difficult to understand.
Common Errors Many answers were simply not feasible. Answers to part (b) tended to overlook some of the difficulties in this area. For example, customers claim to be irritated by changing supermarket layouts, but they may not realise that such changes make them spend more despite their irritation.
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Question 4
(a)
Calculate the effective swap rates for both Z and the counterparty. (7 marks)
(b)
Advise Zs board of the implications of entering into a 10 year swap in order to protect the cost of servicing a 14 year loan. (9 marks) Advise the counterparty on the risks associated with entering into the proposed swap with Z. (9 marks)
(c)
(Total for Question Four = 25 marks)
Rationale Question 4 draws on section D (Management of Financial Risk). Part (a) deals with the calculation of the effective swap rates enjoyed by two parties to an interest rate swap. Part (b) deals with the implications of agreeing to a swap that does not cover the whole period of the loan. Part (c) deals with the question of counterparty risk in this particular scenario.
Suggested Approach Part (a) requires some basic calculations, based on a common topic. Part (b) requires some thought about the impact of leaving the final 4 years of a 14 year loan unhedged. What risks will that create? Part (c) is looking for the ability to look at the basic information in the scenario to highlight the fact that the party seeking the swap is actually quite a poor credit risk.
Marking Guide Part (a) 1 mark per reasonable point: Calculate rates Part (b) 1 mark per reasonable point: Whole term would have been better Short term protection Hedge accounting No real choice of counterparty Part (c) 1 mark per reasonable point: Worst case Z poor credit risk Zs directors reckless Bank unwilling to commit to Z Maximum mark awarded
7 marks
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Examiners Comments This question posed a question about a swap in a slightly unusual context. Such changes are necessary to avoid questions on this topic from becoming a matter of rote learning. Part (a) Calculations were often badly presented and it was not always clear what the final answer actually was. Many scripts simply set out a standard set of workings, with no indication of what those workings had accomplished. Part (b) Very few candidates offered a reasoned argument concerning the implications of a swap that does not offer a precise match to the risk that is to be hedged. The basic question here is whether it is a serious matter that only the first ten years of a fourteen year loan can be protected. Part of that argument is that the short to medium term situation would be resolved by this arrangement and so it is not clear that the swap is a bad thing. Part (c) Answers tended to focus on the likelihood of Z defaulting, which is part of the answer but is not the key issue. Very few candidates reflected upon the costs to the counterparty of Zs default. That demonstrated a lack of understanding of what is involved in a swap.
Common errors Part (a) The calculation was often incomplete and the calculations were sometimes very badly laid out. Part (c) Candidates showed little understanding of the topic.
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Paper P3 Performance Strategy Post Exam Guide November 2013 Exam SECTION A 50 MARKS ANSWER THIS QUESTION
Question 1
Required:
(a)
(i) Evaluate THREE significant risks to GAMESCO arising from its dependence upon commercial sponsorship and brand leasing. (14 marks) (ii) Recommend, stating reasons, the actions that GAMESCO should take to persuade the major sponsors who are concerned about the possibility of adverse publicity not to withdraw their agreement to support the Games. (12 marks) (Total for part (a) = 26 marks)
(b)
Evaluate the structure, membership and operation of GAMESCOs Board of Directors as the basis for sound governance. (14 marks) Discuss the merits of the Boards decision not to hedge the value of the minibus contract unless it would be permitted to apply hedge accounting to the hedging instrument. (10 marks) (Total for Question One = 50 marks)
(c)
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Paper P3 Performance Strategy Post Exam Guide November 2013 Exam
Rationale This question is based on both the common pre-seen scenario and the unseen scenario. Part (a) deals with the reputational issues associated with the organisers of a sporting competition accepting sponsorship from a fast food company that sells unhealthy food and also from its decision to sell clothing that is sized for overweight customers. Part (b) deals with the governance of the entity that has been created to manage the games. Part (c) deals with the hedging of currency risks arising from the purchase of vehicles from a foreign supplier. Part (a) draws mainly on section B of the syllabus (Risk and Internal Controls). The entity in question is faced with the conflicting objectives of raising revenue from as many different sources as possible, despite the fact that some of its clients will not wish to be associated with others. This could lead to a significant loss of revenue. Part (b) draws mainly on section C of the syllabus (Audit and Audit of Control Systems). The paper provides a fairly detailed description of the entitys governance arrangements, focussing on the membership of the board and the backgrounds of those members, and asks candidates to express an opinion on the strengths and weaknesses of those arrangements. Part (c) draws mainly on section D (Management of Financial Risk). The entity has to make a substantial payment in the future and it is considering the availability of hedge accounting as a factor in deciding whether or not to hedge the payment.
Suggested Approach Part (a) asks candidates to think both about managing relationships with stakeholders and about the best way to resolve a public relations disaster. The entity in question has entered into some questionable transactions that undermine its credibility and candidates are asked to think about how best to manage the consequences. Suggestions have to be realistic and measured. Part (b) requires an understanding of how an effective governance system might be structured and organised. The scenario offers a model for consideration that has both strengths and weaknesses. Candidates must recognise those strengths and weaknesses, reflecting the needs of the entity. Part (c) focusses on the manner in which the reporting of risks may feed back into their management. Candidates should be aware of the reporting implications associated with currency risks and hedging because managers are often motivated almost as much by the perceptions of stakeholders concerning risks as they are by the risks themselves. Part (c) also requires some thought concerning the practicalities of applying hedge accounting. The question states the conditions that must be met, but candidates have to consider the work that would be undertaken in order to be certain that the conditions apply.
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Marking Guide
Marks
Part (a)(i) 1 mark per reasonable point: Three risks, each risk up to Up to 5 marks per risk Part (a)(ii) 1 mark per reasonable point: Encourage Foodfast to sell a range of healthy products Stress the fact that diet is a matter of consumer choice Convince sponsors that they may alienate consumers if they withdraw Argue that newspapers are mocking overweight readers Legal advice Maximum for part a(ii) Part (b) 1 mark per reasonable point: Lack of non-executives Emphasis on functional responsibilities Large board sporting bias Consensus Links to government Monthly meetings Maximum for part (b) Part (c) 1 mark per reasonable point: Risk more important than accounting Significance of hedge accounting Stakeholder expectations Could explain decision to accept risk Maximum for part (c) Maximum mark awarded
Max 14
2 marks 3 marks 3 marks 3 marks 2 marks 2 marks Max 14 marks
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Examiners Comments Part (a)(i) A substantial number of candidates failed to structure and coordinate valid comment under 3 sensible risk headings. Some candidates simply rambled on with no attempt to organise their response. There was an overall lack of in-depth ethical scrutiny and real world common sense was in UK scripts and this was almost non -existent in many overseas scripts. Part (a) (ii) was poor. Many candidates missed the point regarding the sports clothing. Many assumed that the adverse publicity was down to poor product design and size range and not simply the media manufacturing stories to sell newspapers. In consequence many scripts proposed redesign and grovelling apology. Comment regarding the food company was often more sensible but again lacked commercial sense. Getting rid of the sponsor Fast Food combined with grovelling apology was often the only specific response in addition to much general waffle on good communications etc. Part (b) was generally covered well by UK candidates but not done well by overseas candidates. Many overseas candidates had no idea whatsoever or simply listed the characteristics of good governance without any attempt to relate to the actual practice employed by the Gamesco board. The non-voting shareholders caused great misunderstanding and confusion and the representatives of the individual sports were often considered to be non-executive directors. In part (c) only a handful of candidates (mainly UK) had any idea what the question was about. Hedging and hedge accounting were assumed to be the same thing. Many candidates scored zero in this part of the question.
Common errors Very poor layout in part (a)(i). Candidates did not understand that it was the poor image portrayed by ill- fitting sports clothes that was the main problem in part (a)(ii). Part c was really poor. The question was about hedge accounting not about what is hedging. Candidates showed no knowledge whatsoever of this topic which was very disappointing.
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Paper P3 Performance Strategy Post Exam Guide November 2013 Exam SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY
Question 2
(a)
Evaluate the potential risks that might arise from Ls appointment of an account manager to deal with Hs business. (13 marks)
(b)
Recommend, stating reasons, the changes that Ls board should introduce in order to minimise the threats arising from having an autonomous account manager. (12 marks) (Total for Question Two = 25 marks)
Rationale Question 2 draws on section A (Management and Control Systems). The question deals with the advantages and disadvantages of the matrix structure of management, focussing on a relatively small company that has recently introduced this approach.
Suggested Approach Part (a) requires candidates to think about the implications of a management structure that does not necessarily offer the certainty associated with a clear-cut reporting structure. An account manager has been appointed to take charge of the companys relationship with its biggest customer. It is important to recognise that there is scope for conflict between that customers needs and the needs of the other customers, which continue to provide most of the companys revenue. Part (b) asks candidates to consider the best way to resolve the conflicts identified in (a). The whole point of the system that has been introduced is to ensure that there is recognition of competing and conflicting needs and opportunities. Clearly, there may be times when a priority has to be identified and that will require some commercial awareness.
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Marking Guide Part (a) 1 mark per reasonable point: Identification of matrix structure Upside risks Risks associated with major customer may not be justified Account managers dysfunctional behaviour Conflict with functional managers Confusing for junior staff
Marks
3 marks 3 marks 3 marks 4 marks 3 marks 2 marks Max 13 marks
Part (b) 1 mark per reasonable point: Clear communication Companys interests come first Subordinate staff can seek clarification Internal candidate for manager Policy for conflict resolution
Maximum mark awarded Examiners Comments
25 marks
Question Two was done well. The danger of fraud through familiarity and conflict of interest were often recognised though understanding could have been made with more clarity and depth. Sometimes the frauds envisaged were over-elaborate. In (b) although some candidates saw the need to restructure and reorganise most scripts merely advocated the inclusion of the account manager within the existing control systems by applying segregation of duty, approvals and authorisation, budgeting etc. Overseas candidates reproduced their answer to part (a). Sometimes controls recommended were too simplistic, vague and ill explained.
Common Errors Controls in part (b) were often very weak and simplistic and very badly explained.
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Question 3
(a)
Evaluate for each of the four possible actions identified by Rs chief accountant: (i) (ii) The associated risks The cost (as far as it is possible to do so from the information provided) (16 marks)
(b)
Discuss the risks to R associated with the need to obtain government licences and permits before the painting can be shipped from Country W (your answer should include how those risks can be reduced). (9 marks) (Total for Question Three = 25 marks)
Rationale Question 3 draws on section D (Management of Financial Risk). It deals with the implications of internal and external hedging techniques and also the need to maintain a good relationship with foreign governments.
Suggested Approach Part (a) focuses on the risks arising from four possible approaches for hedging two foreign currency balances. These include leading a payment as well as the more obvious financial instruments that might be used. Candidates also have to consider leaving the risk unhedged altogether. There is sometimes a tendency for candidates to focus too much attention on the purchase of financial instruments with which to hedge risks. It is important to consider whether the risk is worth hedging at all and whether there are any viable internal hedging techniques that may prove less complicated and less expensive. Part (b) deals with the need to manage relations with foreign governments. This is a slightly unusual case because it deals with the potentially emotive question of importing a valuable artwork from the country in question. In the past, questions have tended to deal more with the issues arising from foreign direct investment and so this question may offer a bit of a challenge, although the secret is basically to think in terms of ways in which the foreign governments interests may be used to exert some influence in order to prevent problems.
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Marking Guide Part (a) 1 mark per reasonable point:
Marks
Leave the transactions unhedged

Options Forward sale and purchase Leading Part (b) 1 mark per reasonable point: Cultural significance Loss of value if no export licence Talk to officials Make purchase conditional Publicise charitable aspect of sale
4 marks 5 marks 5 marks 6 marks Max 16 marks 3 mark 2 marks 2 marks 2 marks 2 marks Max 9 marks 25 marks
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Examiners Comments Question three was done by very few candidates and the marks were very poor. In part (a) most candidates failed to answer the question set and wasted valuable examination time. Instead of evaluating the cost of each option they attempted to calculate the exchange gain/loss under each option which was impossible because they did not have the spot rates at the contract settlement dates. Candidates wasted considerable time and energy for nothing. The effort should not have gone into the calculation but into the evaluation of the risks of each option. Despite this candidates did often manage to gain some marks through their understanding of the different options. Few candidates appreciated the natural hedging inherent in the 2 contracts. Answers to part (b) were often limited and shallow. Many overseas candidates had no idea as to what was required. Most scripts failed to appreciate that the painting had actually been purchased.
Common Errors Very few candidates actually answered what was asked in part (a) Candidates wasted time by doing long and impossible calculations of gains and losses which were not asked for in the question. Part (b) was also poor with very weak answers. Candidates did not answer as if the painting had been purchased which was very clear from the question.
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Question 4
(a)
Discuss the potential benefits for E that may come about from the introduction of smart meters.. (9 marks)
(b)
Evaluate FOUR risks that might arise from the introduction of smart meters and suggest how each might be dealt with. (16 marks) (Total for Question Four = 25 marks)
Rationale Question 4 draws on section E (Risk and Control in Information Systems). Part (a) effectively asks for some thought about the potential benefits to be had from big data and part (b) asks about the potential risks associated with investing in new data gathering technology
Suggested Approach Part (a) asks about the potential benefits that might be had from the introduction of electronic meters that permit an electricity supplier to track customers consumption in real time. That has potential implications for data gathering as well as the simplification of accounting for electricity billings. Part (b) requires some thought about the risks that will arise from the investment in this new technology. One of the motives for the investment has been the ability to enhance error checking and fraud detection. Having said that, recent history has suggested that new technologies are rarely impossible to hack as a host of devices, such as mobile phones, bank ATMs and DVDs have shown very clearly.
Marking Guide Part (a) 1 mark per reasonable point: Cost savings Reduce fraud Data mining Marketing information Part (b) 1 mark per reasonable point: Each of four risks, up to 4 marks per risk
3 marks 2 marks 4 marks 3 marks Max 9 marks Max 16 marks
25 marks
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Examiners Comments Part (a) produced a good response from home and overseas scripts although weaker overseas candidates often failed to completely identify the ultimate benefits of the project eg although no longer having to go to visit customers is a benefit, it is the customer satisfaction and the cost saving which are the real benefits to the company. In part (b) home candidates were usually able to generate sufficient comment on the risks involved in the project but there was often too much emphasis on generic IT risk eg hacking, viruses etc that would exist whether smart meters were installed or not. This over emphasis on generic IT problems was especially evident in the overseas scripts.
Common Errors Part (b) was a little weaker than part (a) as many candidates did not really answer what was asked but discussed generic IT risks.
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Paper P3 - Performance Strategy Post Exam Guide March 2014 Exam SECTION A 50 MARKS ANSWER THIS QUESTION
Question 1
Required: (a)
(i) Recommend, stating reasons, the procedures that GAMESCO should put in place in order to deter and detect the use of drugs by athletes. (12 marks) (ii) Advise the Games Co-ordinating Committee of the risks arising from athletes being caught using banned substances to enhance their performances at the Games. (10 marks) (Total for part (a) = 22 marks)
(b)
(i) Discuss the advantages and disadvantages to GAMESCO of conducting a post completion audit of the swimming pool project. (8 marks) (ii) Recommend, stating reasons, the major issues that should be investigated during the post completion audit of the swimming pool project. (8 marks) (Total for part (b) = 16 marks)
(c)
Recommend, stating reasons, the actions that GAMESCO should take to minimise the risks to the success of the Games associated with the threatened response by Ds government to the forthcoming documentary. (12 marks) (Total for Question One = 50 marks)
Rationale This question is based on both the common pre-seen scenario and the unseen scenario. Part (a) deals with the risks associated with making a public commitment to investigate and penalise the abuse of performance enhancing drugs in a sporting tournament. Part (b) deals with the conduct of a post-completion audit of a building project that has failed to an extent. Part (c) deals with the management of the political risks that could lead to the loss of a major competitor, thereby undermining the credibility of the Games. Part (a) draws mainly on section B of the syllabus (Risk and Internal Controls). Part (b) draws mainly on section C of the syllabus (Audit and Audit of Control Systems). Part (c) draws mainly on section D (Management of Financial Risk).
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Paper P3 - Performance Strategy Post Exam Guide March 2014 Exam
Suggested Approach Part (a) asks candidates to think about the threats associated with making a commitment to deal with the abuse of performance enhancing drugs. This is a topical area, with a number of high-profile cases having occurred in the recent past. The Games organisers are effectively committing themselves to dealing with an offence that is very difficult to detect. There is a risk that an offence will not be discovered during the Games, but will come to light when cheating is discovered during a later competition. There is also a conflict because the discovery of this type of abuse will almost certainly attract a great deal of adverse publicity. Furthermore, any undue focus on this form of cheating will also undermine the credibility of the Games. Part (b) requires some common sense about the management of a building project. Decisions were taken during the construction of a swimming pool that will ensure its readiness for the Games themselves, but that have also affected its suitability for conversion to a public amenity for the local community. As with any post-completion audit, there is a risk that managers may be deterred from acting in the future and that future decision-making will become defensive. Part (c) focusses on the threatened response to the broadcast of a critical television documentary. The concern is that the subject of the documentary will withdraw from the Games, thereby reducing their perceived success. The organisers of the Games face a delicate diplomatic challenge in persuading the government which claims to have been defamed to respond in some way other than banning its athletes from participating in the Games.
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Marking Guide Part (a)(i) 1 mark per reasonable point: Risk-based approach Suspicious performance investigated Some random testing Little point in testing losers Check identity Duplicate sample Document results
Marks 2 marks 2 marks 2 marks 1 mark 2 marks 2 marks 2 marks Max 12 marks 3 marks 2 marks 5 marks 1 mark Max 10 marks 1 mark 1 mark 2 marks 1 mark 1 mark 3 marks Max 8 marks
Part (a)(ii) 1 mark per reasonable point Possibility that failures will remain undiscovered Press coverage could focus on the athlete rather than the Games Cheating unlikely to be discovered prior to Events False positives Part (b)(i) 1 mark per reasonable point: Not working to plan May be other cases Recover costs from builder Press attention Too late to change Relationship with builder
Part (b)(ii) 1 mark per reasonable point: Correspondence and reports How was problem managed? Study plans and blueprints Site visits Contract Part (c) 1 mark per reasonable point: Contingency plans Seek local government support Lobby foreign government Promote importance of attending
4 marks 2 marks 2 marks 2 marks 1 mark Max 8 marks 3 marks 3 marks 3 marks 5 marks Max 12 marks Total 50 marks
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Marking Guide Part (a) 1 mark per reasonable point: Viewing figures could be misleading in isolation Upside risks Avoid repeat purchase of declining show Responses may not reflect opinions
Marks 3 marks 3 marks 2 marks 2 marks Max 6 marks 3 marks 2 marks 3 marks 2 marks Max 9 marks
Part (b) 1 mark per reasonable point: Dysfunctional behaviour Overpay for popular programmes Demotivate department Risk losing staff
Part (c) 1 mark per reasonable point: Consistent with business model Positive pursuit of success Lock in past success Encourage creativity Some role for negative
Examiners Comments This question was reasonably well done by candidates. The answers to part (c) were weaker than the answers to part (a) and part (b). Part (b) was done well as many candidates came up with the idea of demotivation and staff losses which was good to see. Common Errors Some candidates scored low marks for part (c). Many candidates thought that using positive feedback was not a good idea which was interesting. It would be a good idea in most organisations to praise positive things so getting positive feedback would be encouraging and motivating.
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Marking Guide Part (a) 1 mark per reasonable point: Programming time Processing time/slow system False positives Preserve evidence
Marks 3 marks 3 marks 2 marks 3 marks Max 10
Part (b) 1 mark per reasonable point: Dormant accounts by number and value Contact account holders
4 marks 4 marks Max 7 1 mark 4 marks 1 mark 3 marks 2 marks Max 8
Part (c) 1 mark per reasonable point: change software Flag transactions Deposits Report by branch and by clerk Publicity
Examiners Comments This question was done reasonably well. Part (c) was again the weakest part with candidates struggling to come up with practical ideas. Common Errors Part (c) was disappointing as candidates did not really answer the question. Many failed to score many marks at all for this section as their ideas were not practical. Some did not relate the answer to the scenario but discussed fraud detection in general terms which scored very few marks.
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Marking Guide Part (a)(i) 1 mark per reasonable point: Calculations Stating assumptions
6 marks 4 marks Max 9 3 marks 3 marks Max 6 2 marks 3 marks Max 4 4 marks 3 marks Max 6
Part (a)(ii) 1 mark per reasonable point: Inflation and wages Interest rate parity
Part (b) 1 mark per reasonable point: Raw materials Buying goods from a fellow sub
Part (c) 1 mark per reasonable point: Response to redundancies Developing country
Examiners Comments This was the least popular of the optional questions. Candidates in general did not do this well but there were some excellent answers. Part (b) was poor as was part c and in general the calculations were poor. Common errors Candidates were not good at the calculations, many scored very low marks. Financial risk is a major part of the syllabus so it really must be studied. It is very risky to enter this exam with very low ability in these types of question. Parts (b) and (c) were however also weak with candidates being unable to demonstrate the ability to think about transfer prices or currency implications of buying flax fibre. Candidates should study this topic in the future.
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Paper P3 Management Accounting Performance Strategy Post Exam Guide May 2010 Exam

The Chartered Institute of Management Accountants

Marks 2(a) max 10 marks

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

Marks 3a(i) max 8 marks

(ii) 1 mark for each part of calculation

3(a)(ii) max 4 marks

1 mark per relevant point

3b(i) max 4 marks

3b(ii) max 9 marks

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

Marks 4(a) max 15 marks

4(b) max 10 marks

The Chartered Institute of Management Accountants

Max 4 marks Max 4 marks Max 4 marks Max 4 marks

The Chartered Institute of Management Accountants

Max 2 marks per point

2 marks 2 marks 3 marks Max 5 marks

Max 2 marks per point Max 6 marks

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

Max 6 marks Max 9 marks Max 15 marks

PC - impact on network, copyright, unauthorised software, attitude etc

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

Entering into a joint venture with a company located in E Borrowing in E Pesos

The Chartered Institute of Management Accountants

Max 3 Max 2 Max 4

Max 4 Max 3 Max 9 marks

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

Calculate the impact on DEF Airports annual revenues of:

(Total for Question One = 50 marks)

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

Max 10 marks 1 mark per point

Max 7 marks 1 mark per point

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY

The Chartered Institute of Management Accountants

Marks 1 mark per point

5 marks 5 marks 5 marks Max 15 marks

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

Marks 1 mark per point Max 15 marks

1 mark per point Max 10 marks

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

Max 6 marks Max 5 marks

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

1 mark per relevant point on mission statement

(ii) 1 mark per relevant point relating to case material.

Maximum marks awarded

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants