(ii) consignment inventory; and (3 marks)

5 (a) ‘In the case of an assurance engagement it is in the public interest and, therefore, required by this Code of Ethics,

that members of assurance teams … be independent of assurance clients’.

IFAC Code of Ethics for Professional Accountants

Required:

Define the term ‘assurance team’. (3 marks)

This information was taken from an internal newsletter of The Knowledge Partnership LLP (TKP), a company which offers project and software consultancy work for clients based in Zeeland. The newsletter was dated 2 November 2014 and describes two projects currently being undertaken by the partnership.

Project One

In this project, one of our clients was just about to place a contract for a time recording system to help them monitor and estimate construction contracts when we were called in by the Finance Director. He was concerned about the company supplying the software package. ‘They only have an annual revenue of $5m’, he said, ‘and that worries me.’ TKP analysed software companies operating in Zeeland. It found that 200 software companies were registered in Zeeland with annual revenues of between $3m and $10m. Of these, 20 went out of business last year. This compared to a 1% failure rate for software companies with revenues of more than $100m per year. We presented this information to the client and suggested that this could cause a short-term support problem. The client immediately re-opened the procurement process. Eventually they bought a solution from a much larger well-known software supplier. It is a popular software solution, used in many larger companies.

The client has now asked us to help with the implementation of the package. A budget for the project has been agreed and has been documented in an agreed, signed-off, business case. The client has a policy of never re-visiting its business cases once they have been accepted; they see this as essential for effective cost control. We are currently working with the primary users of the software – account managers (using time and cost data to monitor contracts) and the project support office (using time and cost data to improve contract estimating) – to ensure that they can use the software effectively when it is implemented. We have also given ‘drop in’ briefing sessions for the client’s employees who are entering the time and cost data analysed by the software. They already record this information on a legacy system and so all they will see is a bright new user interface, but we need to keep them informed about our implementation. We are also looking at data migration from the current legacy system. We think some of the current data might be of poor quality, so we have established a strategy for data cleansing (through offshore data input) if this problem materialises. We currently estimate that the project will go live in May 2015.

Project Two

In this project, the client is the developer of the iProjector, a tiny phone-size projector which is portable, easy to use and offers high definition projection. The client was concerned that their product is completely dependent on a specialist image-enhancing chip designed and produced by a small start-up technology company. They asked TKP to investigate this company. We confirmed their fears. The company has been trading for less than three years and it has a very inexperienced management team. We suggested that the client should establish an escrow agreement for design details of the chip and suggested a suitable third party to hold this agreement. We also suggested that significant stocks of the chip should be maintained. The client also asked TKP to look at establishing patents for the iProjector throughout the world. Again, using our customer contacts, we put them in touch with a company which specialises in this. We are currently engaged with the client in examining the risk that a major telephone producer will launch a competitive product with functionality and features similar to the iProjector.

The iProjector is due to be launched on 1 May 2015 and we have been engaged to give advice on the launch of the product. The launch has been heavily publicised, a prestigious venue booked and over 400 attendees are expected. TKP have arranged for many newspaper journalists to attend. The product is not quite finished, so although orders will be taken at the launch, the product is not expected to ship until June 2015.

Further information:

TKP only undertakes projects in the business culture which it understands and where it feels comfortable. Consequently, it does not undertake assignments outside Zeeland.

TKP has $10,000,000 of consultant’s liability insurance underwritten by Zeeland Insurance Group (ZIG).

Required:

(a) Analyse how TKP itself and the two projects described in the scenario demonstrate the principles of effective risk management. (15 marks)

(b) Describe the principle of the triple constraint (scope, time and cost) on projects and discuss its implications in the two projects described in the scenario. (10 marks)

Churchill Ice Cream has to date made two unsuccessful attempts to become an international company.

(d) What reasons would you suggest to explain this failure of Churchill Ice Cream to become an international

company? (5 marks)

(c) Explain the term ‘target costing’ and how it may be applied by GWCC. Briefly discuss any potential

limitations in its application. (8 marks)

4 Ryder, a public limited company, is reviewing certain events which have occurred since its year end of 31 October

2005. The financial statements were authorised on 12 December 2005. The following events are relevant to the

financial statements for the year ended 31 October 2005:

(i) Ryder has a good record of ordinary dividend payments and has adopted a recent strategy of increasing its

dividend per share annually. For the last three years the dividend per share has increased by 5% per annum.

On 20 November 2005, the board of directors proposed a dividend of 10c per share for the year ended

31 October 2005. The shareholders are expected to approve it at a meeting on 10 January 2006, and a

dividend amount of $20 million will be paid on 20 February 2006 having been provided for in the financial

statements at 31 October 2005. The directors feel that a provision should be made because a ‘valid expectation’

has been created through the company’s dividend record. (3 marks)

(ii) Ryder disposed of a wholly owned subsidiary, Krup, a public limited company, on 10 December 2005 and made

a loss of $9 million on the transaction in the group financial statements. As at 31 October 2005, Ryder had no

intention of selling the subsidiary which was material to the group. The directors of Ryder have stated that there

were no significant events which have occurred since 31 October 2005 which could have resulted in a reduction

in the value of Krup. The carrying value of the net assets and purchased goodwill of Krup at 31 October 2005

were $20 million and $12 million respectively. Krup had made a loss of $2 million in the period 1 November

2005 to 10 December 2005. (5 marks)

(iii) Ryder acquired a wholly owned subsidiary, Metalic, a public limited company, on 21 January 2004. The

consideration payable in respect of the acquisition of Metalic was 2 million ordinary shares of $1 of Ryder plus

a further 300,000 ordinary shares if the profit of Metalic exceeded $6 million for the year ended 31 October

2005. The profit for the year of Metalic was $7 million and the ordinary shares were issued on 12 November

2005. The annual profits of Metalic had averaged $7 million over the last few years and, therefore, Ryder had

included an estimate of the contingent consideration in the cost of the acquisition at 21 January 2004. The fair

value used for the ordinary shares of Ryder at this date including the contingent consideration was $10 per share.

The fair value of the ordinary shares on 12 November 2005 was $11 per share. Ryder also made a one for four

bonus issue on 13 November 2005 which was applicable to the contingent shares issued. The directors are

unsure of the impact of the above on earnings per share and the accounting for the acquisition. (7 marks)

(iv) The company acquired a property on 1 November 2004 which it intended to sell. The property was obtained

as a result of a default on a loan agreement by a third party and was valued at $20 million on that date for

accounting purposes which exactly offset the defaulted loan. The property is in a state of disrepair and Ryder

intends to complete the repairs before it sells the property. The repairs were completed on 30 November 2005.

The property was sold after costs for $27 million on 9 December 2005. The property was classified as ‘held for

sale’ at the year end under IFRS5 ‘Non-current Assets Held for Sale and Discontinued Operations’ but shown at

the net sale proceeds of $27 million. Property is depreciated at 5% per annum on the straight-line basis and no

depreciation has been charged in the year. (5 marks)

(v) The company granted share appreciation rights (SARs) to its employees on 1 November 2003 based on ten

million shares. The SARs provide employees at the date the rights are exercised with the right to receive cash

equal to the appreciation in the company’s share price since the grant date. The rights vested on 31 October

2005 and payment was made on schedule on 1 December 2005. The fair value of the SARs per share at

31 October 2004 was $6, at 31 October 2005 was $8 and at 1 December 2005 was $9. The company has

recognised a liability for the SARs as at 31 October 2004 based upon IFRS2 ‘Share-based Payment’ but the

liability was stated at the same amount at 31 October 2005. (5 marks)

Required:

Discuss the accounting treatment of the above events in the financial statements of the Ryder Group for the year

ended 31 October 2005, taking into account the implications of events occurring after the balance sheet date.

(The mark allocations are set out after each paragraph above.)

(25 marks)

5 GE Railways plc (GER) operates a passenger train service in Holtland. The directors have always focused solely on

the use of traditional financial measures in order to assess the performance of GER since it commenced operations

in 1992. The Managing Director of GER has asked you, as a management accountant, for assistance with regard to

the adoption of a balanced scorecard approach to performance measurement within GER.

Required:

(a) Prepare a memorandum explaining the potential benefits and limitations that may arise from the adoption of

a balanced scorecard approach to performance measurement within GER. (8 marks)

2 John Dixon is the recently appointed Chief of Police for a major city in the UK. He has inherited a major problem in

that its residents are very concerned with various forms of antisocial behaviour and minor crimes carried out by a

small number of people, which makes living, working, travelling and socialising in the city centre unpleasant rather

than life threatening. The city’s residents have recently voted for it being one of the five worst cities in the UK in which

to live. There is little or no contact between the police and these residents.

The city is split into a number of police districts, each with its own senior officer in charge. Their focus is on the

response to emergency calls and solving serious crimes in their district rather than the less urgent crimes affecting

everyday living in the city. Response times and serious crime solution rates are the traditional measures by which their

performance is measured and leave them open to criticism of simply reacting to events. There is little sense of being

part of a city police force and, consequently, little sharing of information and experience between the different districts.

The failure in policing antisocial behaviour in the city is seen as being largely the result of a shortage of resources.

There are also important internal and external groups varying in their support or resistance to any necessary change

in policing strategy. Key players include the mayor of the city anxious to improve the reputation of the city, the city’s

press, traditionally used to highlighting police failures rather than successes and finally the courts of justice, which

are reluctant to take on the increased workload that any moves towards reducing antisocial behaviour would produce.

John is aware of the complexity of the problem he faces in changing the way the city is policed to improve the quality

of life of its citizens. He has, however, an impressive track record as a change agent in previous appointments and is

confident that he can bring about the necessary change.

Required:

(a) Using change management models where appropriate, provide John with a brief report on the nature of

change needed in the way the city is policed in order to improve the city’s quality of life. (12 marks)

(b) Explain why making sales of Sabals in North America will have no effect on Nikau Ltd’s ability to recover its

input tax. (3 marks)

Notes: – you should assume that the corporation tax rates and allowances for the financial year to 31 March 2007

will continue to apply for the foreseeable future.

– you should ignore indexation allowance.

(b) Describe the potential benefits for Hugh Co in choosing to have a financial statement audit. (4 marks)