The finance director of Blod Co, Uma Thorton, has requested that your firm type the financial statements in the form

to be presented to shareholders at the forthcoming company general meeting. Uma has also commented that the

previous auditors did not use a liability disclaimer in their audit report, and would like more information about the use

of liability disclaimer paragraphs.

Required:

(b) Discuss the ethical issues raised by the request for your firm to type the financial statements of Blod Co.

(3 marks)

5 Financial statements have seen an increasing move towards the use of fair values in accounting. Advocates of ‘fair

value accounting’ believe that fair value is the most relevant measure for financial reporting whilst others believe that

historical cost provides a more useful measure.

Issues have been raised over the reliability and measurement of fair values, and over the nature of the current level

of disclosure in financial statements in this area.

Required:

(a) Discuss the problems associated with the reliability and measurement of fair values and the nature of any

additional disclosures which may be required if fair value accounting is to be used exclusively in corporate

reporting. (13 marks)

4 The country of Europia has an extensive historical and industrial heritage. It has many tourist sites (such as castles,

palaces, temples, houses and factories) which attract visitors from home and abroad. Most of these tourist sites have

gift shops where visitors can buy mementos and souvenirs of their visit. These souvenirs often include cups, saucers,

plates and other items which feature a printed image of the particular tourist site.

The Universal Pottery Company (UPC) is the main supplier of these pottery souvenir items to the tourist trade. It

produces the items in its potteries and then applies the appropriate image using specialised image printing machines.

UPC also supplies other organisations that require personalised products. For example, it recently won the right to

produce souvenirs for the Eurasian Games, which are being held in Europia in two years time. UPC currently ships

about 250,000 items of pottery out of its factory every month. Most of these items are shipped in relatively small

packages. All collections from the factory and deliveries to customers are made by a nationwide courier company.

In the last two years there has been a noticeable increase in the number of complaints about the quality of these

items. The complaints, from gift shop owners, concentrate on two main issues:

(i) The physical condition of goods when they arrive at the gift shop. Initial evidence suggests that ‘a significant

number of products are now arriving broken, chipped or cracked’. These items are unusable and they have to be

returned to UPC. UPC management are convinced that the increased breakages are due to packers not following

the correct packing method.

(ii) Incorrect alignment of the image of the tourist site on the selected item. For example, a recent batch of 100 cups

for Carish Castle included 10 cups where the image of the castle sloped significantly from left to right. These

were returned by the customer and destroyed by UPC.

The image problem was investigated in more depth and it was discovered that approximately 500 items were

delivered every month with misaligned images. Each item costs, on average, $20 to produce.

As a result of these complaints, UPC appointed a small quality inspection team who were asked to inspect one in

every 20 packages for correct packaging and correct image alignment. However, although some problems have been

found, a significant number of defective products have still been delivered to customers. A director of UPC used this

evidence to support his assertion that the ‘quality inspection team is just not working’.

The payment system for packers has also been such an issue. It was established ten years ago as an attempt to boost

productivity. Packers receive a bonus for packing more than a target number of packages per hour. Hence, packers

are more concerned with the speed of packing rather than its quality.

Finally, there is also evidence that to achieve agreed customer deadlines, certain managers have asked the quality

inspection team to overlook defective items so that order deadlines could be met.

The company has decided to review the quality issue again. The director who claimed that the quality inspection team

is not working has suggested using a Six Sigma approach to the company’s quality problems.

Required:

(a) Analyse the current and potential role of quality, quality control and quality assurance at UPC. (15 marks)

(b) ‘Strategic positioning’ is about the way that a company as a whole is placed in its environment and concerns its

‘fit’ with the factors in its environment.

With reference to the case as appropriate, explain how a code of ethics can be used as part of a company’s

overall strategic positioning. (7 marks)

(b) (i) Explain the matters you should consider, and the evidence you would expect to find in respect of the

carrying value of the cost of investment of Dylan Co in the financial statements of Rosie Co; and

(7 marks)

2 Ramon Silva is a Spanish property developer, who has made a considerable fortune from the increasing numbers of

Europeans looking to buy new homes and apartments in the coastal regions of Mediterranean Spain. His frequent

contact with property buyers has made him aware of their need for low cost hotel accommodation during the lengthy

period between finding a property to buy and when they actually move into their new home. These would-be property

owners are looking for inexpensive hotels in the same locations as tourists looking for cheap holiday accommodation.

Closer investigation of the market for inexpensive or budget hotel accommodation has convinced Ramon of the

opportunity to offer something really different to his potential customers. He has the advantage of having no

preconceived idea of what his chain of hotels might look like. The overall picture for the budget hotel industry is not

encouraging with the industry suffering from low growth and consequent overcapacity. There are two distinct market

segments in the budget hotel industry; firstly, no-star and one-star hotels, whose average price per room is between

30 and 45 euros. Customers are simply attracted by the low price. The second segment is the service provided by

two-star hotels with an average price of 100 euros a night. These more expensive hotels attract customers by offering

a better sleeping environment than the no-star and one-star hotels. Customers therefore have to choose between low

prices and getting a poor night’s sleep owing to noise and inferior beds or paying more for an untroubled night’s sleep.

Ramon quickly deduced that a hotel chain that can offer a better price/quality combination could be a winner.

The two-star hotels typically offer a full range of services including restaurants, bars and lounges, all of which are

costly to operate. The low price budget hotels offer simple overnight accommodation with cheaply furnished rooms

and staffed by part-time receptionists. Ramon is convinced that considerable cost savings are available through better

room design, construction and furniture and a more effective use of hotel staff. He feels that through offering hotel

franchises under the ‘La Familia Amable’ (‘The Friendly Family’) group name, he could recruit husband and wife teams

to own and operate them. The couples, with suitable training, could offer most of the services provided in a two-star

hotel, and create a friendly, family atmosphere – hence the company name. He is sure he can offer the customer twostar

hotel value at budget prices. He is confident that the value-for-money option he offers would need little marketing

promotion to launch it and achieve rapid growth.

Required:

(a) Provide Ramon with a brief report, using strategic models where appropriate, showing where his proposed

hotel service can add value to the customer’s experience. (12 marks)

(iii) delegation. (3 marks)

(b) Criticise the internal control and internal audit arrangements at Gluck and Goodman as described in the case

scenario. (10 marks)

(ii) Explain why the disclosure of voluntary information in annual reports can enhance the company’s

accountability to equity investors. (4 marks)