Question 1 was answered reasonably in parts. Parts (c)(i) and (c)(ii) were not answered well.

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1 General Comments Overall, performance was good. Well-prepared candidates were capable of obtaining clear passes. Weaker candidates tended to avoid the requirements of the question, either through a failure to grasp what was required or as an attempt to obtain marks for repetition of memorised facts and information. Generally, where candidates did not achieve a pass, the main problems were a failure to apply their knowledge to the scenario and/or missing out parts of the questions. When information is given in the scenario candidates are expected to use it to illustrate the main issues in their answer. It is very important that all parts of the syllabus are revised as there is limited choice in Section B of the paper so only one question can be missed out. Also the financial risk part of the syllabus is 35%. This means that Question 1 will contain some financial risk. Many candidates missed out these parts of question one and part (a) of question 4. Using the reading time wisely can be of huge benefit; candidates should always plan their answers and ensure they read the questions carefully before starting the paper. Candidates who answer the specific question asked could achieve high marks. Candidates waste valuable time if they fail to be specific in their answer, as only the points which answer the question will get marks. Question 1 was answered reasonably in parts. Parts (c)(i) and (c)(ii) were not answered well. Question 2 was about ROCE and quality management and this was answered very badly. It was the least popular of the optional questions and was attempted by very few candidates. Question 3 was about IT and was the most popular question and was generally done well by candidates. Question 4 was an interesting question about financial risks and was done reasonably well. Note that the attached marking scheme often makes more marks available than indicated on the question paper. This reflects the fact that questions at this level can often be approached in more than one way and that there is no single perfect answer. In applying this marking scheme, marks are always restricted to the total offered by the question and so there is no advantage to be gained from over-developing the answer to one question at the expense of another that may appear more difficult. The Chartered Institute of Management Accountants 2012 Page 1

2 SECTION A 50 MARKS ANSWER THIS QUESTION Question 1 (a) (i) (ii) Advise B s directors of TWO risks for the company associated with health and safety in B s 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. 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. (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 B s 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) (c) Discuss the memo sent by the Head of B s Internal Audit department. (i) (ii) Discuss the Group Treasurer s view that the nature of B s business creates a natural hedge against currency risk. Evaluate the potential risks and benefits to B of the counter-trade agreement with the South American supplier. (Total for Question One = 50 marks) The Chartered Institute of Management Accountants 2012 Page 2

3 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 group s 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. The Chartered Institute of Management Accountants 2012 Page 3

4 Marking Guide (a)(i) per reasonable point: Identification of first risk Justification of first risk Identification of second risk Justification of second risk (a)(ii) per reasonable point: Inconvenience Supervisors attitudes Communication problems Local culture (b)(i) per reasonable point: Widespread coverage Some focus based on analytical review Work programme for high risk stores Response to breaches (b)(ii) per reasonable point: Audit as constructive service Independent audit may create conflict Cultural issues (c)(i) per reasonable point: Potential for offset Transactions risks short term Scope for shifting sources to hedge Treasury would help (c)(ii) per reasonable point: Exchange expressed in commodities Commodities can be generic Supplier loyalty Non-currency price changes Speculation Maximum mark awarded Marks 5 marks Max 10 marks s 50 marks Examiner s 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. The Chartered Institute of Management Accountants 2012 Page 4

5 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. The Chartered Institute of Management Accountants 2012 Page 5

6 SECTION B 50 MARKS ANSWER TWO QUESTIONS ONLY Question 2 (a) Calculate T Forge s budgeted ROCE for the year ended 31 August 2013 if (i) the existing lathes are retained; and (ii) the new lathes were purchased on 1 September Note: You should explain any adjustments that you make to the figures shown above in order to calculate ROCE. (9 marks) (b) (c) 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) 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. The Chartered Institute of Management Accountants 2012 Page 6

7 Marking Guide (a) per part of calculation (b) per reasonable point: Value of site Zero-value lathes overstates ROCE Figures not really comparable (c) per reasonable point: Training Provide test equipment Independent tests Terms of trade Maximum mark awarded Marks Max 9 marks Max 6 marks Max 10 marks 25 marks Examiner s 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. The Chartered Institute of Management Accountants 2012 Page 7

8 Question 3 (a) (b) Advise U s board on the weaknesses in both the control environment and the internal controls that led to this loss of data. (1) Recommend, stating reasons, actions that U s board should take (i) (ii) to restore the confidence of its existing and potential customers; to prevent similar problems occurring in the future. (5 marks) (Total for Question Three = 25 marks) 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) per reasonable point: Stress causes carelessness Unsupportive environment Training Personal copies not permitted Files restricted and encrypted (b)(i) per reasonable point: Public statement Close affected accounts Reimburse customer costs Publicise improvements Accept responsibility (b)(ii) per reasonable point: Threaten disciplinary action Secure custody of files Maximum mark awarded Marks Max 1 Max 5 marks 25 marks The Chartered Institute of Management Accountants 2012 Page 8

9 Examiner s 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. The Chartered Institute of Management Accountants 2012 Page 9

10 Question 4 (a) Discuss the argument that purchasing power parity theory should prevent exporters from charging different prices in different countries. (5 marks) (b) Discuss the potential risks and benefits to G of buying its inventory from intermediaries in the neighbouring countries. (10 marks) (c) Recommend actions that the Government in G s home country could take in order to determine whether G s 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. The Chartered Institute of Management Accountants 2012 Page 10

11 Marking Guide Part (a) per reasonable point: Logic of PPP Practical barriers Artificial barriers Part (b) per reasonable point: Reduce price Legality Quality of service Relationship with manufacturers Part (c) per reasonable point: Inspect accounting records Review purchase records Inspect vehicles Inspect deliveries Estimated charge Maximum mark awarded Max 5 marks Max 10 marks Max 10 marks 25 marks Examiner s 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. The Chartered Institute of Management Accountants 2012 Page 11