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(ii) The development of IFRSs for SMEs as a modification of existing IFRSs
Most SMEs have a narrower range of users than listed entities. The main groups of users are likely to be the owners,
suppliers and lenders. In deciding upon the modifications to make to IFRS, the needs of the users will need to be taken
into account as well as the costs and other burdens imposed upon SMEs by the IFRS. There will have to be a relaxation
of some of the measurement and recognition criteria in IFRS in order to achieve the reduction in the costs and the
burdens. Some disclosure requirements, such as segmental reports and earnings per share, are intended to meet the
needs of listed entities, or to assist users in making forecasts of the future. Users of financial statements of SMEs often
do not make such kinds of forecasts. Thus these disclosures may not be relevant to SMEs, and a review of all of the
disclosure requirements in IFRS will be required to assess their appropriateness for SMEs.
The difficulty is determining which information is relevant to SMEs without making the information disclosed
meaningless or too narrow/restricted. It may mean that measurement requirements of a complex nature may have to be
omitted.
There are, however, rational grounds for justifying different treatments because of the different nature of the entities and
the existence of established practices at the time of the issue of an IFRS.

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(b) There are several benefits for Hugh Co in choosing a voluntary financial statement audit.
An annual audit will ensure that any material mistakes made by the part-qualified accountant in preparing the year end
financial statements will be detected. This is important as the directors will be using the year end accounts to review their
progress in the first year of trading and will need reliable figures to assess performance. An audit will give the directors comfort
that the financial statements are a sound basis for making business decisions.
Accurate first year figures will also enable more effective budgeting and forecasting, which will be crucial if rapid growth is to
be achieved.
The auditors are likely to use the quarterly management accounts as part of normal audit procedures. The auditors will be
able to advise Monty Parkes of any improvements that could be made to the management accounts, for example, increased
level of detail, more frequent reporting. Better quality management accounts will help the day-to-day running of the business
and enable a speedier response to any problems arising during the year.
As a by-product of the audit, a management letter (report to those charged with governance) will be produced, identifying
weaknesses and making recommendations on areas such as systems and controls which will improve the smooth running of
the business.
It is likely that Hugh Co will require more bank funding in order to expand, and it is likely that the bank would like to see
audited figures for review, before deciding on further finance. It will be easier and potentially cheaper to raise finance from
other providers with an audited set of financial statements.
As the business deals in cash sales, and retails small, luxury items there is a high risk of theft of assets. The external audit
can act as both a deterrent and a detective control, thus reducing the risk of fraud and resultant detrimental impact on the
financial statements.
Accurate financial statements will be the best basis for tax assessment and tax planning. An audit opinion will enhance the
credibility of the figures.
If the business grows rapidly, then it is likely that at some point in the future, the audit exemption limit will be exceeded and
thus an audit will become mandatory.
Choosing to have an audit from the first year of incorporation will reduce potential errors carried down to subsequent periods
and thus avoid qualifications of opening balances.

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5 (a) Objectives may be viewed as profit and market share in a profit-oriented organisation or the achievement of ‘value for money’
in a not-for-profit organisation (NFP). The overall objective of an organisation may be expressed in the wording of its mission
statement.
In order to achieve the objectives, long-term strategies will be required. In a profit-oriented organisation, this may incorporate
the evaluation of strategies that might include price reductions, product design changes, advertising campaign, product mix
change and methods changes, embracing change techniques such as BPR, JIT, TQM and ABM. In NFP situations, strategies
might address the need to achieve ‘economy’ through reduction in average cost per unit; ‘efficiency’ through maximisation of
the input:output ratio, whilst checking on ‘effectiveness’ through monitoring whether the objectives are achieved.
The annual budget will quantify the short-term results anticipated of the strategies. These results may be seen as the level of
financial performance and competitiveness achieved. This quantification may be compared with previous years and with
actual performance on an ongoing basis. Financial performance may be measured in terms of profit, liquidity, capital structure
and a range of ratios. Competitiveness may be measured by sales growth, market share and the number of new customers.
In a not-for-profit organisation, the results may be monitored by checking on the effectiveness of actions aimed at the
achievement of the objectives. For instance, the effectiveness of a University may be measured by the number of degrees
awarded and the grades achieved. The level of student ‘drop-outs’ each year may also be seen as a measure of ineffectiveness.
The determinants of results may consist of a number of measures. These may include the level of quality, customer
satisfaction, resource utilisation, innovation and flexibility that are achieved. Such determinants may focus on a range of nonfinancial
measures that may be monitored on an ongoing basis, as part of the feedback information in conjunction with
financial data.
A range of business change techniques may be used to enhance performance management.
Techniques may include:
Business process re-engineering (BPR) which involves the examination of business processes with a view to improving the
way in which each is implemented. A major focus may be on the production cycle, but it will also be applicable in areas such
as the accounting department.
Just-in-time (JIT) which requires commitment to the pursuit of ‘excellence’ in all aspects of an organisation.
Total quality management (TQM) which aims for continuous quality improvement in all aspects of the operation of an
organisation.
Activity based management systems (ABM) which focus on activities that are required in an organisation and the cost drivers
for such activities, with a view to identifying and improving activities that add value and eliminating those activities that do
not add value.
Long-term performance management is likely to embrace elements of BPR, JIT, TQM and ABM. All of these will be reflected
in the annual budget on an ongoing basis.

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