CIMA p3 management accounting risk and control strategy solved past papers

MANAGEMENT ACCOUNTING PILLAR PAPER P3 – RISK AND CONTROL STRATEGY This is a Pilot Paper and is intended to be an indicative guide for tutors and students of the style and type of questions that are likely to appear in future examinations It does not seek to cover the full range of the syllabus learning outcomes for this subject Risk and Control Strategy will be a three hour paper with one compulsory section for 50 marks and one section with a choice of questions for 50 marks CONTENTS Pilot Question Paper  Section A: Case scenario Pages 2-3 Section B: Two scenario questions Pages 4-8 Indicative Maths Tables and Formulae Pages 9-11 Pilot Solutions Pages 12-26 The Chartered Institute of Management Accountants 2004 P3 – Risk and Control Strategy STRATEGIC LEVEL SECTION A – 50 MARKS ANSWER THIS QUESTION Question One Crashcarts IT Consultancy is a £100 million turnover business listed on the Stock Exchange with a reputation for providing world class IT consultancy services to blue chip clients, predominantly in the retail sector In 2000, Crashcarts acquired a new subsidiary for £2 million based on a P/E ratio of 8, which it renamed Crashcarts Call Centre The call centre subsidiary leased all of its hardware, software and telecommunications equipment over a five-year term The infrastructure provides the capacity to process three million orders and ten million line items per annum In addition, maintenance contracts were signed for the full five-year period These contracts include the provision of a daily backup facility in an off-site location Crashcarts Call Centre provides two major services for its clients First, it holds databases, primarily for large retail chains’ catalogue sales, connected in real time to clients’ inventory control systems Second, its call centre operation allows its clients’ customers to place orders by telephone The real-time system determines whether there is stock available and, if so, a shipment is requested The sophisticated technology in use by the call centre also incorporates a secure payment facility for credit and debit card payments, details of which are transferred to the retail stores’ own computer system The call centre charges each retail client a lump sum each year for the IT and communications infrastructure it provides There is a 12 month contract in place for each client In addition, Crashcarts earns a fixed sum for every order it processes, plus an additional amount for every line item If items are not in stock, Crashcarts earns no processing fee Crashcarts Call Centre is staffed by call centre operators (there were 70 in 2001 and 80 in each of 2002 and 2003) In addition, a management team, training staff and administrative personnel are employed Like other call centres, there is a high turnover of call centre operators (over 100% per annum) and this requires an almost continuous process of staff training and detailed supervision and monitoring A summary of Crashcarts Call Centre’s financial performance for the last three years: 2001 £000 2002 £000 2003 £000 Revenue Contract fixed fee Order processing fees Line item processing fees Total revenue 400 2,500 600 £3,500 385 3,025 480 £3,890 385 3,450 390 £4,225 Expenses Office rent & expenses Operator salaries & salary-related costs Management, administration & training salaries IT & telecomms lease & maintenance expenses Other expenses Total expenses 200 1,550 1,020 300 150 £3,220 205 1,920 1,070 310 200 £3,705 210 2,180 1,120 330 220 £4,060 £280 £185 £165 Operating profit P3 PILOT PAPER Non-financial performance information for the same period is as follows: Number of incoming calls received Number of orders processed Order strike rate (orders/calls) Number of line items processed Average number of line items per order Number of retail clients Fixed contract income per client Income per order processed Income per line item processed Average number of orders per operator Number of operators required Actual number of operators employed 2001 1,200,000 1,000,000 83⋅3% 3,000,000 3⋅0 £50,000 £2⋅50 £0⋅20 15,000 66⋅7 70⋅0 2002 1,300,000 1,100,000 84⋅6% 3,200,000 2⋅9 £55,000 £2⋅75 £0⋅15 15,000 73⋅3 80⋅0 2003 1,350,000 1,150,000 85⋅2% 3,250,000 2⋅8 £55,000 £3⋅00 £0⋅12 15,000 76⋅7 80⋅0 Required: (a) Discuss the increase in importance of risk management to all businesses (with an emphasis on listed ones) over the last few years and the role of management accountants in risk management (10 marks) (b) Advise the Crashcarts Call Centre on methods for analysing its risks (5 marks) (c) Apply appropriate methods to identify and quantify the major risks facing Crashcarts at both parent level and subsidiary level (20 marks) (d) Categorise the components of a management control system and recommend the main controls that would be appropriate for the Crashcarts Call Centre (15 marks) (Total = 50 marks) End of Section A P3 PILOT PAPER SECTION B – 50 MARKS ANSWER TWO QUESTIONS Question Two The Information Systems strategy within the MG organisation has been developed over a number of years However, the basic approach has always remained unchanged An IT budget is agreed by the board each year The budget is normally 5% to 10% higher than the previous year’s to allow for increases in prices and upgrades to computer systems Systems are upgraded in accordance with user requirements Most users see IT systems as tools for recording day-to-day transactions and providing access to accounting and other information as necessary There is no Enterprise Resource Planning System (ERPS) or Executive Information System (EIS) The board tends to rely on reports from junior managers to control the business While these reports generally provide the information requested by the board, they are focused at a tactical level and not contribute to strategy formulation or implementation Required: (a) Compare and contrast Information Systems strategy, Information Technology strategy and Information Management strategy and explain how these contribute to the business (10 marks) (b) Advise the board on how an ERPS and EIS could provide benefits over and above those provided by transaction processing systems (10 marks) (c) Recommend to the board how it should go about improving its budgetary allocations for IT and how it should evaluate the benefits of ERPS and EIS (5 marks) (Total = 25 marks) P3 PILOT PAPER Question Three A listed services group with a UK Head Office and subsidiaries throughout the world reports in Sterling and shows the following liabilities in its notes to the accounts: Liabilities: All figures are in £million Fixed rate liabilities Weighted average interest rate Weighted average years for which rate is fixed 33 7.25% Within 1-2 years Within 2-5 years Over years 73 18 74 19 41 46 Total liabilities Floating rate liabilities £Sterling $US Euro Total 98 41 143 98 110 Maturity: All figures are in £million £Sterling $US Euro Total Total Maturing within year 98 41 143 33 Interest rates are currently about 5% Required: (a) (b) (i) Evaluate the main sources of financial risk for this group (assuming there are no offsetting assets that might provide a hedge against the liabilities) (ii) Quantify the transaction risk faced by the group if Sterling was to depreciate against the $US and Euro by 10% (iii) Evaluate how transaction risk relates to translation risk and economic risk in this example (13 marks) Discuss the use of exchange traded and Over The Counter (OTC) derivatives for hedging and how they may be used to reduce the exchange rate and interest rate risks the group faces Illustrate your answer by comparing and contrasting the main features of appropriate derivatives (12 marks) (Total = 25 marks) P3 PILOT PAPER Question Four ZX is a UK-based retailer and manufacturer that also owns a limited number of outlets in the USA, but is anxious to expand internationally via the use of franchising agreements The enterprise plans to open five franchised shops in each of France, Italy, Germany, Belgium and Holland over the course of the next twelve months ZX will provide loan finance to assist individuals wishing to purchase a franchise, the average cost of which will be 100,000 Loans will also be available (up to a maximum of 50% of the purchase price) to cover the cost of the franchisee acquiring suitable freehold or leasehold premises The total sum required for the property loan facility is estimated by the treasurer of ZX to equal 4⋅8 million The opportunity cost of capital in the UK is 10% per annum but, in recognition of the lower rates of interest available in the Eurozone, ZX will only charge the franchisees a fixed rate of 7⋅0% each year on all loans Repayments will be made in equal Euro-denominated instalments ZX charges commission to the franchisees at a rate of 1% of sales revenue, and also earns a net margin of 12% (of retail value) on the products supplied to the outlets from its UK manufacturing plant Planned sales from the new European outlets equal 26 million over the next twelve months, but the enterprise recognises that its profits are dependent upon both sales revenue and the extent of loan defaults amongst franchisees (if any) Estimates of the likelihood of a range of scenarios are detailed below: Probability Sales 0⋅1 10% below plan Number of loan defaults Two 0⋅3 20% below plan Four 0⋅4 0⋅2 As per plan As per plan Zero One Comment Economic difficulties reduce sales and cause problems for some franchisees Severe economic problems lead to low sales and higher loan defaults “Base case” The weak German economy causes problems for one franchisee Loan default is assumed to mean total write-off and ZX expects 80% of the new franchisees to take full advantage of the loan facilities offered to them The current Euro : Sterling exchange rate is 1⋅3939/£ and the Euro is expected to strengthen against Sterling by 5% over the next twelve months In addition to the cash required to fund the foreign loan facility, a further £3⋅65 million of working capital will be required for the expansion project and the Treasury Department of ZX requires a minimum annualised return of 15% on all overseas projects P3 PILOT PAPER Required: (a) Use the table of possible scenarios given above to calculate the expected Sterling value of the additional profit that ZX will earn if all the store openings are completed as planned and the foreign exchange rate forecast is fulfilled (You should use the average exchange rate over the year for the calculation.) You should evaluate whether this profit yields the return required for international operations (7 marks) (b) Discuss the risks that ZX might face in choosing to expand into Europe via the use of franchising (8 marks) (c) Evaluate methods of managing/minimising the risks involved in granting Euro denominated loans to the franchisees (10 marks) (Total = 25 marks) P3 PILOT PAPER Question Five You have recently been appointed as Head of the Internal Audit function for a large UK listed company that trades internationally, having worked within its finance function for two years prior to your new appointment Your company has also appointed a new Chief Executive, headhunted from a large US corporation where she had held the post of Vice President, Finance Required: As part of the new Chief Executive’s orientation programme, you have been asked to prepare a detailed report which provides key information on the principles of good corporate governance for UK listed companies You should address the following in your report, remembering that her background is in US governance and procedures (a) The role and responsibilities of the Board of Directors (5 marks) (b) The role and responsibilities of the audit committee (10 marks) (c) Disclosure of corporate governance arrangements (10 marks) (Total = 25 marks) End of Question Paper Maths Tables and Formulae follow on pages 9-11 P3 PILOT PAPER P3 PILOT PAPER P3 PILOT PAPER 10 [this page is blank] P3 18 November 2008 LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper It is important that you answer the question according to the definition of the verb LEARNING OBJECTIVE KNOWLEDGE What you are expected to know COMPREHENSION What you are expected to understand APPLICATION How you are expected to apply your knowledge ANALYSIS How are you expected to analyse the detail of what you have learned EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations November 2008 VERBS USED DEFINITION List State Define Make a list of Express, fully or clearly, the details of/facts of Give the exact meaning of Describe Distinguish Explain Identify Illustrate Communicate the key features Highlight the differences between Make clear or intelligible/State the meaning of Recognise, establish or select after consideration Use an example to describe or explain something Apply Calculate/compute Demonstrate Prepare Reconcile Solve Tabulate To put to practical use To ascertain or reckon mathematically To prove with certainty or to exhibit by practical means To make or get ready for use To make or prove consistent/compatible Find an answer to Arrange in a table Analyse Categorise Compare and contrast Construct Discuss Interpret Produce Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between To build up or compile To examine in detail by argument To translate into intelligible or familiar terms To create or bring into existence Advise Evaluate Recommend To counsel, inform or notify To appraise or assess the value of To advise on a course of action 19 P3 Management Accounting Pillar Strategic Level Paper P3 – Management Accounting - Risk and Control Strategy November 2008 Thursday Morning Session P3 20 November 2008 Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam General Comments Overall, performance was poorer than expected 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 problem was a failure to relate the answers to the situation portrayed in the question Candidates who did this achieved high marks When information is given in the scenario candidates are expected to use it to illustrate the main issues in their answer 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 One of the main problems with candidates’ scripts this diet was a complete failure to answer what was asked There was evidence of time pressure in a number of scripts; this can be avoided by use of an answer plan and by using the reading time to plan answers One of the main problems in this sitting was that candidates failed Question which was the 50 mark compulsory question All parts of Question were done badly but part (c) was especially poor Part (c) was done badly by all candidates Questions and were not as popular as the other three questions It is very important that candidates prepare for the exam by learning all parts of the syllabus Numerical questions will always be a part of this exam and it narrows down candidates’ choice if the numerical topics have not been studied Question was very badly done, few candidates made a reasonable attempt at part 2(b)(i) and part (a)(i) was also very poor Question (b) was very poorly done as candidates struggled to think of the ethical issues which could be involved in the scenario 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 Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam SECTION A – 50 MARKS ANSWER THIS QUESTION Question Using the information provided in the above scenario you are required to: (a) Discuss the extent to which each of the following aspects of the operational and business environment of PLM creates potential risks for the group’s shareholders: (i) (ii) (iii) (iv) (v) Product development Environmental issues Market conditions Sales mix and profit margins Financial controls (20 marks) (b) Recommend, with reasons, a risk management control system that could be used by PLM as a mechanism for recording, prioritising and managing the group’s risks (20 marks) (c) Explain why the role of the Group Risk Controller extends beyond issues of insurance and conformance and is also concerned with performance against strategic objectives (10 marks) (Total for Question One = 50 marks) Rationale This case study is set in manufacturing company that supplies products for use in environmentally friendly construction Although based in Europe, the group has both manufacturing plants and distribution centres around the world, which are managed as either cost or profit centres The Group Risk Controller is risk averse, and the business faces challenges in terms of maintaining long term access to supplies and also ensuring sales growth The first part of the question requires candidates to use the information provided in the scenario to discuss the extent to which specific aspects of the business, such as product development and market conditions, create potential risks for the group’s shareholders Candidates are also asked to recommend a risk management control system that could be implemented by the case study business to record, prioritise and manage the group’s risks The last part of the question tests candidates’ understanding of the role of a risk controller by asking them to explain why risk management is concerned with performance against objectives as well as insurance and conformance The syllabus areas covered are B (i)define and identify risks facing an organisation, B (ii) explain ways of measuring and assessing risks facing an organisation, including the organisation’s ability to bear such risks, and C(v)Recommend action to improve the efficiency, effectiveness and control of activities The Chartered Institute of Management Accountants Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Suggested Approach Part (a) Candidates should read the scenario carefully then work through each of the aspects that is asked about in turn The question asks the extent to which each of the aspect creates risks for the shareholders, it is important that this is addressed in the answer Part (b) Candidates are asked to recommend with reasons a risk management control system In the answer, go through each stage in the risk management control system and write about it then give reasons for having that stage This is a very straightforward question Part (c) Candidates are being asked what other aspect of risk is the risk controller interested in He is interested in insurance to transfer the risk and conformance with internal control systems to cut down the risk but he is also interested in meeting the company’s strategic objectives In order to make profits some risk may be necessary, how does the controller deal with this is what is being asked Marking Guide 1(a) Five issues with a maximum of marks available for discussion of each one Marks Max of marks for each issue Product Development : Environmental Issues: Market conditions: Sales Mix and profit margins: Financial Controls: 1(b) Identification of the key components of a risk management system Detailed discussion of system for risk assessment Detailed discussion of system for risk reporting Comment on frequency (1 mark) and risk ownership (1 mark) essential to gain max score Risk response Residual risk reporting 1(c) Definition of the role of risk management Discussion of downside risks and conformance Discussion of upside risks and strategic objectives Explanation of how risk management and performance are linked Max for each recommendation 12 max for recommend with no reasons i.e a list of points 3 Examiner’s Comments The answers to Question were very mixed Part (a) was done reasonably well by many candidates Part (b) which should have been very straightforward was in fact done poorly by a number of candidates and part (c) was universally very poor The Chartered Institute of Management Accountants Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Common Errors In part (a) the main problem was that candidates did not discuss how the issues could create risks for the group’s shareholders The candidates did discuss some of the risks but then did not go on to answer the next part of the question This meant that candidates only achieved half the available marks The answers were also very general and not detailed enough Part (b) should have been very straightforward but many candidates did not give any reasons for the risk management control system suggested Very few candidates mentioned residual risk reporting which would form an important part of such a system in any organisation Many candidates did not discuss risk assessment or risk response in any depth and so could not be rewarded with a good mark The answers to this part of the question were very disappointing Part (c) was very poor Very few candidates passed this part of the question Candidates did not seem to know what was being asked Few candidates mentioned upside risk at all and therefore could not get marks SECTION B – 50 MARKS ANSWER TWO QUESTIONS ONLY Question (a) The shift towards fair value accounting has potentially increased the financial risks faced by companies that own high volumes of financial assets (i) Discuss the above statement (6 marks) (ii) Explain the tools that might be used to monitor such risks (4 marks) (Total for requirement (a) = 10 marks) (b) (i) Calculate, ignoring transaction costs, the profit or loss arising from the decision to use futures contracts to hedge fuel costs (10 marks) (ii) Discuss the risks associated with hedging fuel prices via the purchase of crude oil futures (5 marks) (Total for requirement (b) = 15 marks) (Total for Question Two = 25 marks) The Chartered Institute of Management Accountants Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Rationale Question Two covers two different aspects relating to the management of financial risk Part (a) requires candidates to discuss the impact of fair value accounting on the financial risk level of a company that holds high levels of financial assets, and to explain the tools that might be used to monitor financial risk exposure The question does not require detailed knowledge of the financial accounting rules, but does require knowledge of the relative risks of different types of financial asset, and the potential for volatility in their values arising from the use of fair value accounting Media coverage of such issues has been very extensive over the last six months In explaining the tools for management of financial risk, candidates need to display an understanding that different asset types require the application of different tools of control The syllabus areas covered in part (a) are Section D (i)Identify and evaluate financial risks facing an organisation, and part (b) covers Section D (ii) Identify and evaluate appropriate methods for managing financial risks Suggested Approach This question is broken down into parts which should have made it easier to answer Candidates should have discussed fair value accounting and the volatility in asset values and how the financial statements might be affected by this The next part required candidates to discuss the tools that could be used to monitor the resultant financial risk This should have included Value at Risk (VAR), scenario planning and sensitivity analysis The next part is a calculation of the profits which could be gained by hedging against a possible price increase in fuel This should have started with a calculation of the number of contracts needed to make the hedge and then a calculation of the possible profits The final part of the question is a discussion of the risks associated with the hedging strategy Marking Guide 2(a) (i) Marks Examples of types of financial asset Explanation of levels of fair value accounting Main risk is market risk 2(a) (ii) Possible tools for control (1 mark for identification and up to a max of marks for each) (b) (i) Sterling cost per gallon of the future Number of contracts purchased Sterling costs of the futures purchase Profit on sale of the contracts Overall principle 2 2 2 (b) (ii) Mismatch between crude and refined price movements Foreign exchange risk Fixed contract dates Fixed contract size 1 The Chartered Institute of Management Accountants Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Examiner’s Comments This question was by far the least popular question Fair value accounting is a reasonably topical issue and yet many candidates did not seem to have any idea what it was The next part was done very poorly and should have been fairly straightforward as it was asking candidates to demonstrate their knowledge and not to apply it The candidates could have quoted the paragraph from the study text and achieved a high mark The calculation was done very badly starting with the calculation of the number of contracts required for the hedge Candidates who persisted and finished the question usually did well in the final part Common Errors Part (a) (i) was poor, very few candidates had any idea of the financial risks which fair value accounting could increase This was disappointing given that interest in fair value has increased over the past few years and it is a topical issue in accounting Part (a) (ii) was also very poor Few candidates mentioned Value at Risk, scenario planning or sensitivity analysis which formed the basis of the examiner’s answer Many candidates missed out this part of the question which lost valuable marks Part (b) (i) was done poorly Candidates should try to learn the calculations in this subject There are not many and they are examined at each diet Most candidates calculated the number of contracts needed for the hedge based on volume which was incorrect Had they gone on and done the rest of the calculation correctly they would still have passed the question Many candidates just gave up after calculating the number of contracts Part (b) (ii) was done reasonably well Most candidates knew some of the main points and achieved a reasonable mark for this part of the question The Chartered Institute of Management Accountants Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Question (a) Recommend the controls that could be implemented by a business unit like FDS25 to mitigate against risk at each stage of information system design and implementation (15 marks) (b) From the perspective of FDS25, identify the risk management advantages and disadvantages of each of (i) utilising the shared service centre; and (ii) outsourcing for the design and implementation of a new information system (10 marks) (Total for Question Three = 25 marks) Rationale Question Three is a business unit of a diversified company which needs to introduce new business systems Candidates are asked to recommend the controls that could mitigate risk in system design and implementation Candidates are also asked to compare a shared services centre with outsourcing of the design and implementation process The question requires candidates to relate the scenario to a commonly accepted standard such as the Systems Development Lifecycle Candidates should also be able to compare and contrast the advantages and disadvantages of shared service centres with outsourcing The syllabus areas covered are A (iv) improving management accounting and control; B (ii) and B (iv) risk assessment Suggested Approach Candidates had to go through the various stages involved in project planning and recommend controls at each stage In the next part of the question candidates had to discuss the advantages and disadvantages of shared service centres and outsourcing The Chartered Institute of Management Accountants Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Marking Guide 3(a) Marks Any controls in relation to the following areas: • Feasibility study • Systems analysis • Systems design • Implementation (incl testing and conversion) • Operation & maintenance (incl post-impl review) • Steering committee mark per point Max 15 marks 3(b) Identification of risk – marks for risks of not satisfying functionality, cost and time mark for each advantage of SSCs mark for each disadvantage of SSCs mark for each advantage of outsourcing mark for each disadvantage of outsourcing Max marks for SSC Max marks for outsourcing Total 10 marks Examiner’s Comments This question was popular with candidates and many candidates achieved a high mark for this question One of the problems noted was that candidates could have laid out the answer to part (b) in a more logical way Some candidates did use a table for this which worked well This made it easy to see the points the candidates were making in relation to the two alternatives Some revision of this area would help as some candidates did not seem to know what a shared service centre was Many candidates did achieve a good mark for this question Common Errors Part (a) Some candidates did not read the question and did not mention controls but just went through the various stages of project management The majority of candidates did well in this question Part (b) This part was done well by the majority of candidates Those who did badly often stated the risks and benefits of outsourcing were the opposite of those for the shared service centre This approach did not achieve a high mark Some candidates had a poor layout which made it difficult to see whether they were referring to outsourcing or the shared service centre This was problematic where it was not clear that the candidate understood what a shared service centre was The Chartered Institute of Management Accountants Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Question (a) Recommend how HFD’s board should be restructured to comply with the principles of good corporate governance (16 marks) (b) Explain the aspects of CIMA’s ethical principles and the conceptual framework underlying those principles which you would consider relevant to continuing in your role as an independent member of HFD’s board (9 marks) (Total for Question Four = 25 marks) Rationale Question Four contains the scenario of a charity and the role of governance in that charity Candidates are asked to recommend improvements to governance through restructuring the Board Candidates are also asked to relate CIMA’s ethical principles and the conceptual framework underlying those principles to the hypothetical situation of their role as an independent Board member Candidates should be able to relate the scenario to the applicable elements of good governance as identified in the Combined Code on Corporate Governance, as well as explain the applicable ethical principles The syllabus areas covered are B (vii) principles of corporate governance, and C (vii) CIMA ethical principles Suggested Approach There were several areas where the charity had weak corporate governance The candidates had to discuss ways that the board could be restructured to improve corporate governance Recommend does not just mean identify areas of weakness but also explain how the restructuring would help Part (b) called for a discussion of which ethical principles you should consider when carrying out your role as an independent member of the board The candidate should have selected which principles were relevant and then discussed them in depth Marking Guide 4(a) 4(b) marks for each recommendation in relation to principles of corporate governance Explaining any ethical issues related to scenario Marks Max for each point max 16 Max for each issue related to scenario max The Chartered Institute of Management Accountants Page Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Examiner’s Comments Part (a) was done quite well by many candidates Most candidates could identify areas where restructuring of the board was needed to comply with corporate governance guidelines Some candidates did not go on to explain why the restructuring was required Part (b) was done very poorly A CIMA member should always follow the ethical principles even when not acting as an accountant Any areas considered relevant by the candidate could be discussed in this part Integrity, confidentiality, objectivity and due care were the ones most likely to be of relevance Common Errors The most common error was candidates not explaining why they were suggesting restructuring These candidates could only achieve half marks In part (b) some candidates had very weak answers Some missed this part out altogether Some candidates just discussed all the ethical principles and did not even mention the scenario; this did not achieve a high mark Candidates should always relate their answer to the scenario The scenario is there to test candidates' application of knowledge The ethics question was done badly in the previous diet also Some revision of the ethics part of the syllabus would be advisable The Chartered Institute of Management Accountants Page 10 Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Question (a) Identify the risks of fraud and theft faced by SRN in relation to its employees (6 marks) (b) Recommend (with reasons) the policies and internal controls that SRN could implement to prevent employee fraud and theft In making your recommendations, you should consider both (i) working conditions and the role of the Human Resource function; and (ii) operational internal controls (19 marks) (Total for Question Five = 25 marks) Rationale Question Five is based on a retail chain where there is a risk of fraud and theft Candidates are asked to identify the risks of employee fraud and recommend policies and controls to prevent employee fraud and theft This question requires an understanding of the role of the Human Resources function in supporting an anti-fraud culture as well as the specific internal controls to reduce fraud The syllabus areas covered are A (i) management control systems; B (i) identifying risks; and E (ii) IT systems Suggested Approach There were a number of risks of fraud and theft which could have been mentioned Candidates are only asked to identify these so no explanation is required A brief discussion of risks of fraud and theft is all that is required In part (b) candidates are required to discuss the recommendations in relation to two aspects of the business Candidates should have made recommendations in relation to both of these or they would not achieve a good mark They are also required to give reasons for the recommendation There are many issues that could be discussed so there is plenty of scope to get a high mark Marking Guide (a) 5(b) (i) and (ii) marks for each type of fraud Discussion of anti-fraud culture, risk awareness, whistle-blowing policy and sound internal controls Marks for each of pre-requisites of fraud: dishonesty of employees, reducing opportunities for fraud, and reducing the motive for fraud and controls Marks max amrks Up to marks for each point (1 for description and for reason) Examiner’s Comments This question was very well done by many candidates This was the most popular of the optional questions The Chartered Institute of Management Accountants Page 11 Paper P3 – Management Accounting – Risk and Control Strategy Post Exam Guide November 2008 Exam Common Errors Most of the candidates who chose this question scored a high mark The Chartered Institute of Management Accountants Page 12 ... me P3 PILOT PAPER 26 P3 PILOT PAPER 27 P3 PILOT PAPER 28 Strategic Level Paper P3 – Management Accounting – Risk and Control Strategy 26 May 2005 – Thursday Morning Session Instructions to candidates... r% per annum: PV = P3 14 r −g May 2005 [this page is blank] May 2005 15 P3 Management Accounting Pillar Strategic Level Paper P3 – Management Accounting - Risk and Control Strategy May 2005 Thursday... P3 – Management Accounting – Risk and Control Strategy Post Exam Guide May 2005 Exam Marking Guide Marks Part (a) Discussion of main categories of risk Advantages of risk categorisation for control