ACCA Study Guide

study guide

professional schemeJUNE AND DECEMBER 2006

If you have any queries concerning the new study guide, please direct them to:

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The Association of Chartered Certified Accountants

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No part of this publication may be reproduced in any format, without prior written permission of ACCA.

© October 2005

ACCA is the largest and fastest-growing

international accountancy body, with over

345,000 students and members in 170

countries. ACCA's reputation is grounded

in 100 years of providing quality

accounting and financial qualifications.

With a predominantly young and dynamic

membership, ACCA aims to create value

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community.

PAGE 3

Objectives of the Study Guide

This Study Guide is designed to help you

plan your studies and to provide a more

detailed interpretation of the syllabus for

ACCA’s professional examinations. It

contains both the Syllabus and Study

Sessions for each paper, which you can

follow when preparing for the examination.

The Syllabus outlines the content of the

paper and how that content is examined.

The Study Sessions take the syllabus

content and expand it into study sessions of

similar length. These sessions indicate

what the examiner expects of candidates

for each part of the syllabus, and therefore

gives you guidance in the skills you are

expected to demonstrate in the

examinations. The time to complete each

session will vary according to your

individual capabilities and the time you

have available to study. However, repeated

coverage of the material is vital to ensure

your understanding and recall of the

subject. Be sure to practice questions from

your textbook or past examination papers

to consolidate your knowledge.

RELEVANT STUDY MATERIAL

There are a number of sources from which

you can obtain a series of materials written

for the ACCA examinations. These are

listed below:

FTC Foulks Lynch – ACCA’s official

publisher

Contact number:

+44 (0)118 989 0629

Website: www.financial-training.com/new/

foulkslynch

Accountancy Tuition Centre (ATC)

International

Contact number:

+44 (0)141 880 6469

Website: www.ptc-global.com

BPP

Contact number:

+44 (0)20 8740 2222

Website: www.bpp.com

Details of textbooks relevant to particular

subjects are included in the syllabus for

each paper. Wider reading is also

desirable, especially regular study of

relevant articles in ACCA’s student

accountant.

Any changes to the Syllabus, Study

Sessions and examination rules will be

published in ACCA’s student accountant.

LEARNING HOURS

These are recommended hours and are for

guidance only.

Part 1 – 35 credits per paper (350 learning

hours per paper)


hours per paper)


hours per paper)

Each paper is divided into 28 study

sessions. Tuition providers offering face-to-

face tuition are recommended to design

courses with a minimum of 3 hours tuition

per study session for ACCA Professional

Scheme papers. Many tuition providers

condense these hours for part-time and

revision courses, in which case students

should be offered clear guidance on the

study session areas to be covered by self-

study.

PAGE 3

PAGE 4

Contents

Objectives

PART 1

1.1 Preparing Financial Statements (INT)

1.1 Preparing Financial Statements (GBR)

1.2 Financial Information for Management

1.3 Managing People

PART 2

2.1 Information Systems

2.2 Corporate and Business Law

2.3 Business Taxation (GBR)

2.4 Financial Management and Control

2.5 Financial Reporting (INT)

2.5 Financial Reporting (GBR)

2.6 Audit and Internal Review (INT)

2.6 Audit and Internal Review (GBR)

PART 3

3.1 Audit and Assurance Services (INT)

3.1 Audit and Assurance Services (GBR)

3.2 Advanced Taxation (GBR)

3.3 Performance Management

3.4 Business Information Management

3.5 Strategic Business Planning and Development

3.6 Advanced Corporate Reporting (INT)

3.6 Advanced Corporate Reporting (GBR)

3.7 Strategic Financial Management

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PAGE 166

PAGE 173

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Please note that this book contains the 2005 examination syllabus. ACCA continually updates its syllabuses to reflect the rapidly changing

accounting environment. If you are sitting exams in 2004, please refer to the ACCA website for the relevant syllabus details.

Contents

PAGE 4

PAGE 5PAGE 5

This section contains the syllabus

and study sessions for each paper

within Part 1 of the ACCA

Professional Syllabus.

1.1 Preparing Financial

Statements

1.2 Financial Information for

Management

1.3 Managing People

THE OBJECTIVE OF PART 1

This stage sets the scene for the

accountancy profession. The

examinations concentrate on basic

knowledge and skills which form

the platform from which

professional competence can be

developed. The knowledge and

skills will be tested separately by

subject and will be limited to

straight-forward examples of

application required as a prelude

to more complex problems in

Part 2.

SKILLS TO BE TESTED IN

PART 1

Candidates should be able to

demonstrate the ability to:

• identify and retrieve information

requested

• make basic judgements on the

value of an item of information

• use and apply concepts and

techniques in a straightforward

practical context

• identify the components of a

basic problem and provide a

solution

• present information requested in

a logical format

and

• communicate information

clearly and succinctly.

1

PAGE 7

AIM

To develop knowledge and understanding

of the techniques used to prepare financial

statements, including necessary underlying

records, and the interpretation of financial

statements for incorporated enterprises,

partnerships and sole traders.

OBJECTIVES

On completion of this paper candidates

should be able to:

• describe the role and function of

external financial reports and identify

their users

• explain the accounting concepts and

conventions used in preparing financial

statements

• record and summarise accounting data

• maintain records relating to non-current

asset acquisition and disposal

• prepare basic financial statements for

sole traders, partnerships, incorporated

enterprises and simple groups

• appraise financial performance and the

position of an organisation through the

calculation and review of basic ratios

• demonstrate the skills expected in Part 1.

POSITION OF THE PAPER IN THE

OVERALL SYLLABUS

No prior knowledge is required before

commencing study for Paper 1.1.

The basic financial accounting in Paper 1.1

is developed in Paper 2.5 Financial

Reporting and Paper 3.6 Advanced

Corporate Reporting. Knowledge from

Preparing Financial Statements (INT)

3.6 Advanced Corporate Reporting 3.1 Audit and Assurance Services

2.5 Financial Reporting

1.1 Preparing Financial Statements

2.6 Audit and Internal Review

Paper 1.1 provides the background to

Paper 2.6 Audit and Internal Review.

SYLLABUS CONTENT

Note: The extent to which accounting

standards are examinable is indicated half-

yearly in student accountant - in February

for the June examination and in September

for the December examination.

1 General framework

(a) Types of business entity – incorporated

entities, partnerships and sole traders.

(b) Forms of capital and capital

structures in incorporated entities.

(c) The roles of the International

Accounting Standards Board (IASB),

the Standards Advisory Council

(SAC) and the International Financial

Reporting Interpretations Committee

(IFRIC).

(d) Application of International Accounting

Standards (IASs) and International

Financial Reporting Standards (IFRSs)

to the preparation and presentation of

financial statements.

(e) The IASB’s Framework for the

Preparation and Presentation of

Financial Statements (paragraphs 1

to 46 only).

2 Accounting concepts and principles

(a) Basic accounting concepts and

principles as stated in the IASB’s

Framework for the Preparation and

Presentation of Financial Statements

and relevant International

Accounting Standards

(b) Other accounting concepts

(i) historical cost

(ii) money measurement

(iii) entity

(iv) dual aspect

3 Double-entry bookkeeping and

accounting systems

(a) Double-entry bookkeeping and

accounting systems

Paper 1.1

PAGE 8

(i) form and content of accounting

records (manual and computerised)

(ii) books of original entry, including

journals

(iii) accounts receivable and

accounts payable ledgers

(iv) cash book

(v) general ledger

(vi) trial balance

(vii) accruals, prepayments and

adjustments

(viii) asset registers

(ix) petty cash.

(b) Confirming and correcting mechanisms

(i) control accounts

(ii) bank reconciliations

(iii) suspense accounts and the

correction of errors.

(c) General principles of the operation of

a sales tax.

(d) Computerised accounting systems.

4 Accounting treatments

(a) Non-current assets, tangible and

intangible

(i) distinction between capital and

revenue expenditure

(ii) accounting for acquisitions and

disposals

(iii) depreciation – definition,

reasons for and methods,

including straight line, reducing

balance and sum of digits

(iv)research and development

(v) elementary treatment of goodwill.

(b) Current assets

(i) inventory

(ii) accounts receivable, including

accounting for irrecoverable debts

and allowances for receivables

(iii) cash.

(c) Current liabilities and accruals.

(d) Shareholders’ equity.

(e) Events after the balance sheet date.

(f) Contingencies.

5 Financial statements

(a) Objectives of financial statements.

(b) Users and their information needs.

(c) Key features of financial statements

(i) balance sheet

(ii) income statement

(iii) cash flow statement

(iv) notes to the financial statements

(examined to a limited extent –

see d (iii) below).

(d) Preparation of financial statements for:

(i) sole traders, including incomplete

records techniques

(ii) partnerships

(iii) limited liability companies,

including income statements and

balance sheets for internal purposes

and for external purposes and

preparation of basic cash flow

statements for limited liability

companies (excluding group cash

flow statements), all in accordance

with International Accounting

Standards. The following notes

to the financial statements will be

examinable:

– Statement of changes in equity

– Non-current assets

– Events after the balance sheet

date

– Contingent liabilities and

contingent assets

– Research and development

expenditure

(iv) groups of companies –

preparation of a basic

consolidated balance sheet for a

company with one subsidiary.

6 Interpretation

(a) Ratio analysis of accounting

information and basic interpretation.

EXCLUDED TOPICS

The syllabus content outlines the areas for

assessment. No questions will be asked

on: clubs and societies, or goodwill arising

on change of personnel in partnerships.

KEY AREAS OF THE SYLLABUS

The objective of Paper 1.1, Preparing

Financial Statements, is to ensure that

candidates have the necessary basic

accounting knowledge and skill to progress

to the more advanced work of Paper 2.5

Financial Reporting. The two main skills

required are:

• The ability to prepare basic financial

statements and the underlying accounting

records on which they are based.

• An understanding of the principles on

which accounting is based.

Preparing Financial Statements (INT) (Continued)

PAGE 9


The key topic areas are as follows:

• preparation of financial statements for

limited liability companies for internal

purposes or for publication


partnerships and sole traders (including

incomplete records)

• basic group accounts – consolidated

balance sheet for a company with one

subsidiary

• basic bookkeeping and accounting

procedures

• accounting conventions and concepts

• interpretation of financial statements

• cash flow statements

• accounting standards (as listed in the

exam notes)

APPROACH TO EXAMINING THE SYLLABUS

The paper based examination is a three

hour paper constructed in two sections.

Both sections will draw from all parts of

the syllabus and will contain both

computational and non-computational

elements.

Number

of Marks

Section A: 25 compulsory multiple

choice questions (2 marks each) 50

Section B: 5 compulsory

questions (8 – 12 marks each) 50

100

Paper 1.1 can also be taken as a three

hour computer based examination.

ADDITIONAL INFORMATION

Candidates need to be aware that questions

involving knowledge of new examinable

regulations will not be set until at least six

months after the last day of the month in

which the regulation was issued.

The Study Guide provides more detailed

guidance on the syllabus. Examinable

documents are listed in the ‘Exam Notes’

section of the student accountant, in

February for the June examination and in

September for the December examination.

RELEVANT TEXTS




listed below:

FTC Foulks Lynch – ACCA's official

publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222


These publications are based on

international terminologies and accounting

standards.

Candidates may also find the following

texts useful. However, these publications

are based on UK terminology and

accounting standards.

Texts covering the whole syllabus:

F Wood and A Sangster Business

Accounting 1 (9th Edition) Pitman ISBN

0273655523 (excluding chapters 21, 36,

37, 38, 40, 42, 43, 44, 45, 46, 48) plus

chapters 3, 8, 10, 11, 12, 13, 14, 16, 17,

18, 27, 28, and 29 of Business


0273693107

Wider reading is also desirable, especially

regular study of relevant articles in ACCA's

monthly magazine student accountant.

PAGE 10

STUDY SESSIONS

1 Introduction to Accounting

(a) Define accounting – recording,

analysing and summarising

transaction data.

(b) Explain types of business entity

(i) sole trader

(ii) partnership

(iii) limited liability company.

(c) Explain users of financial statements

and their information needs.

(d) Explain the main elements of

financial statements:

(i) balance sheet

(ii) income statement.

(e) Explain the purpose of each of the

main statements.

(f) Explain the nature, principles and

scope of accounting.

(g) Explain the regulatory system:

International Accounting

Standards Board (IASB), the

Standards Advisory Council (SAC)

and the International Financial

Reporting Interpretations

Committee (IFRIC).

(h) Explain the difference between

capital and revenue items.

2 Basic balance sheet and income

statement

(a) Explain how the balance sheet

equation and business entity

convention underlie the balance sheet.

(b) Define assets and liabilities.

(c) Explain how and why assets and

liabilities are disclosed in the

balance sheet.

(d) Draft a simple balance sheet in

vertical format.

(e) Explain the matching convention and

how it applies to revenue and expenses.

(f) Explain how and why revenue and

expenses are disclosed in the income

statement.

(g) Illustrate how the balance sheet and

income statement are interrelated.

(h) Draft a simple income statement in

vertical format.

(i) Explain the significance of gross

profit and gross profit as a

percentage of sales.

3 & 4 Bookkeeping Principles

(a) Identify the main data sources and

records in an accounting system.

(b) Explain the functions of each data

source and record.

(c) Explain the concept of double entry and

the duality concept.

(d) Outline the form of accounting records

in a typical manual system.

(e) Outline the form of accounting records

in a typical computerised system.

(f) Explain debit and credit.

(g) Distinguish between asset, liability,

revenue and expense accounts.

(h) Explain the meaning of the balance on

each type of account.

(i) Illustrate how to balance a ledger account.

(j) Record cash transactions in ledger

accounts.

(k) Record credit sale and purchase

transactions in ledger accounts.

(l) Explain the division of the ledger into

sections.

(m) Record credit sale and purchase

transactions using day books.

(n) Explain sales and purchases returns and

demonstrate their recording.

(o) Explain the general principles of the

operation of a sales tax and prepare the

consequent accounting entries.

(p) Explain the need for a record of petty

cash transactions.

(q) Illustrate the typical format of the petty

cash book.

(r) Explain the importance of using the

imprest system to control petty cash.

(s) Extract the ledger balances into a trial

balance.

(t) Prepare a simple income statement and

balance sheet from a trial balance.

(u) Explain and illustrate the process of

closing the ledger accounts in the

accounting records when the financial

statements have been completed.


PAGE 11

5 The journal; ledger control accounts;

bank reconciliations

(a) Explain the uses of the journal.

(b) Illustrate the use of the journal and

the posting of journal entries into

ledger accounts.

(c) Explain the types of error which may

occur in bookkeeping systems,

identifying those which can and

those which cannot be detected by

preparing a trial balance.

(d) Illustrate the use of the journal in

correcting errors, including the use

of a suspense account.

(e) Prepare statements correcting profit

for errors discovered.

(f) Explain the nature and purpose of

control accounts for the accounts

receivable and accounts payable

ledgers.

(g) Explain how control accounts relate

to the double entry system.

(h) Construct and agree a ledger control

account from given information.

(i) Explain and prepare bank

reconciliation statements including

the need for entries in the cash book

when reconciling.

6 Computerised accounting systems

(a) Compare manual and computerised

accounting systems.

(b) Identify the advantages and

disadvantages of computerised

systems.

(c) Describe the main elements of a

computerised accounting system.

(d) Describe typical data processing work.

(e) Explain the use of integrated

accounting packages.

(f) Explain the nature and use of micro-

computers.

(g) Explain other business uses of

computers.

(h) Explain the nature and purpose of

spreadsheets.

(i) Explain the nature and purpose of

database systems.

7 The financial statements of a sole

trader 1: inventory, accruals and

prepayments

(a) Revise the format of the income

statement and balance sheet from

Sessions 1 and 2.

(b) Explain the need for adjustments for

inventory in preparing financial

statements.

(c) Illustrate income statements with

opening and closing inventory.

(d) Explain and demonstrate how

opening and closing inventory are

recorded in the inventory account.

(e) Discuss alternative methods of

valuing inventory.

(f) Explain IASB requirements for

inventories.

(g) Explain the use of continuous and

period end inventory records.

(h) Explain the need for adjustments for

accruals and prepayments in

preparing financial statements.

(i) Illustrate the process of adjusting for

accruals and prepayments in preparing


(j) Prepare financial statements for a sole

trader including adjustments for

inventory, accruals and prepayments.

(k) Explain and demonstrate how to

calculate the value of closing

inventory from given movements in

inventory levels, using FIFO (first in

first out) and AVCO (average cost).


trader 2: depreciation, irrecoverable

debts and allowances for receivables

(a) Revise the difference between non-

current assets and current assets.

(b) Define and explain the purpose of

depreciation.

(c) Explain the advantages and

disadvantages of the straight line,

reducing balance and sum of the digits

methods of depreciation and make

necessary calculations.

(d) Explain the relevance of consistency

and subjectivity in accounting for

depreciation.

(e) Explain and illustrate how

depreciation is presented in the

income statement and balance

sheet.

(f) Explain and illustrate how

depreciation expense and

accumulated depreciation are

recorded in ledger accounts.

(g) Explain the inevitability of

irrecoverable debts in most

businesses.

(h) Illustrate the bookkeeping entries to


PAGE 12

write off an irrecoverable debt and

the effect on the income statement

and balance sheet.

(i) Illustrate the bookkeeping entries to

record irrecoverable debts recovered.

(j) Explain the difference between

writing off an irrecoverable debt and

making an allowance for receivables.

(k) Explain and illustrate the bookkeeping

entries to create and adjust an

allowance for receivables.

(l) Illustrate how to include movements

in the allowance for receivables in

the income statement and how the

closing balance of the allowance

may appear in the balance sheet.

(m) Prepare a set of financial

statements for a sole trader from a

trial balance, after allowing for

accruals and prepayments,

depreciation, irrecoverable debts and

allowances for receivables.

9 & 10 Incomplete records

(a) Explain techniques used in incomplete

record situations:

(i) Calculation of opening capital

(ii) Use of ledger accounts to calculate

missing figures

(iii) Use of cash and/or bank summaries

(iv)Use of given gross profit percentage

to calculate missing figures.

(b) Explain and illustrate the calculation of

profit or loss as the difference between

opening and closing net assets.

11 Revise all work to date

12 & 13 Partnership Accounts

(a) Define the circumstances creating a

partnership.

(b) Explain the advantages and

disadvantages of operating as a

partnership, compared with

operating as a sole trader or limited

liability company.

(c) Explain the typical contents of a

partnership agreement, including

profit-sharing terms.

(d) Explain the accounting differences

between partnerships and sole

traders:

(i) Capital accounts

(ii) Current accounts

(iii) Division of profits.

(e) Explain and illustrate how to record

partners’ shares of profits / losses

and their drawings in the accounting

records and financial statements.

(f) Explain and illustrate how to account

for guaranteed minimum profit

share.

(g) Explain and illustrate how to

account for interest on drawings.

(h) Draft the income statement,

including division of profit, and

balance sheet of a partnership from

a given trial balance.

Note: Goodwill arising on the

admission and retirement of partners,

amalgamation and dissolution are not

examinable. However, questions on

partnership income statements may

include the effect of the admission of

new partners and the retirement of

partners on the profit-sharing

arrangements.

14 Accounting concepts and conventions;

the IASB’s ‘Framework for the


Financial Statements’ (the Framework)

and the IASB standard on the

presentation of financial statements

(a) Explain the need for an agreed

conceptual framework for financial

accounting.

(b) Explain the importance of the

following accounting conventions

(not mentioned in the Framework):

(i) Business entity

(ii) Money measurement

(iii) Duality

(iv) Historical cost

(v) Realisation

(vi)Time interval.

(c) Revise the users of financial

statements from Session 1.

(d) Explain the qualitative

characteristics of financial

statements as described in paras. 24

to 46 of the Framework (Revision

from Session 1).

(e) Explain the IASB requirements

relating to accounting policies.


PAGE 13

(f) Explain the advantages and

disadvantages of historical cost

accounting (HCA) in times of

changing prices.

(g) Explain in principle the main

alternatives to HCA:

(i) Current purchasing power

accounting (CPP)

(ii) Current cost accounting (CCA)

Note: computational questions on

CPP and CCA will not be set.

(h) Explain the IASB requirements

governing revenue recognition

15 Accounting for limited liability

companies 1 – basics

Note: The inclusion of an introductory

coverage of company accounts at this

point is to enable students to practise

the work so far on financial statements

using questions on limited liability

companies, and also to facilitate

understanding of reserves referred to in

the next Session.

(a) Explain the differences between a

sole trader and a limited liability

company.



limited liability company rather than

as a sole trader.

(c) Explain the capital structure of a

limited liability company including:

(i) Authorised share capital

(ii) Issued share capital

(iii) Called up share capital

(iv) Paid up share capital

(v) Ordinary shares

(vi)Preference shares

(vii) Loan notes.

(d) Explain and illustrate the share

premium account

(e) Explain and illustrate the other reserves

which may appear in a company

balance sheet.

(f) Explain why the heading retained

earnings appears in a company

balance sheet.

(g) Explain and illustrate the recording

of dividends

(h) Explain the impact of income tax on

company profits and illustrate the

ledger account required to record it.

(i) Record income tax in the income

statement and balance sheet of a

company.

(j) Draft an income statement and

balance sheet for a company for

internal purposes.

16 Recording and presentation of

transactions in non-current

assets; liabilities and provisions

(a) Explain and illustrate the ledger

entries to record the acquisition and

disposal of non-current assets, using

separate accounts for non-current

asset cost and accumulated

depreciation.

(b) Explain and illustrate the inclusion of

profits or losses on disposal in the

income statement.

(c) Explain and record the revaluation of

a non-current asset in ledger

accounts and in the balance sheet.

(d) Explain why, after an upward

revaluation, depreciation must be

based on the revised figure, and for

revalued assets sold, the consequent

transfer from revaluation reserve to

retained earnings as revaluation

surplus becomes realised.

(e) Make the adjustments necessary if

changes are made in the estimated

useful life and/or residual value of a

non-current asset.

(f) Explain and illustrate how non-

current asset balances and

movements are disclosed in

company financial statements.

(g) Explain the distinction between

current and non-current liabilities.


liabilities and provisions.

(i) Explain the requirements of

International Accounting Standards

as regards current assets and current

liabilities.

17 Goodwill, Research and Development

(a) Define goodwill.

(b) Explain the factors leading to the

creation of non-purchased goodwill.

(c) Explain the difference between

purchased and non-purchased

Preparing Financial Statements (INT) – (Continued)

PAGE 14

goodwill.

(d) Explain why non-purchased goodwill

is not normally recognised in


(e) Explain how purchased goodwill

arises and is reflected in financial

statements.

(f) Adjust the value of purchased

goodwill to reflect impairment.

(g) Define “research” and “development”.

(h) Classify expenditure as research or

development.

(i) Calculate amounts to be capitalised

as development expenditure from

given information.

(j) Disclose research and development

expenditure in the financial statements.

18 Events after the Balance Sheet Date

and Contingencies

(a) Define an event after the balance

sheet date.

(b) Distinguish between adjusting and

non-adjusting events and explain the

methods of including them in


(c) Classify events as adjusting or non-

adjusting.

(d) Draft notes to company financial

statements including requisite details

of events after the balance sheet date.

(e) Define ‘contingent liability’ and

‘contingent asset’.

(f) Explain the different ways of

accounting for contingent liabilities

and contingent assets according to

their degree of probability.

(g) Draft notes to company financial


of contingent liabilities and

contingent assets.

19, 20 & 21 Accounting for Limited

Liability Companies 2 – Advanced

(a) Revise the work of Session 15 and

the preparation of financial


companies for internal purposes

including the treatment of income

tax and dividends.

(b) Revise the work of Session 15 on

company capital structure, including

equity shares, preference shares and

loan notes.

(c) Outline the advantages and

disadvantages of raising finance by

borrowing rather than

by the issue of ordinary or preference

shares.

(d) Define and illustrate gearing (leverage).

(e) Define a bonus (capitalisation) issue

and its advantages and disadvantages.

(f) Record a bonus (capitalisation) issue in

ledger accounts and show the effect in

the balance sheet.

(g) Define a rights issue and its advantages

and disadvantages.

(h) Record a rights issue in ledger accounts

and show the effect in the balance sheet.

(i) Revise the definition of reserves and the

different types of reserves.

(j) Explain the need for regulation of

companies in accounting standards.

(k) Explain the requirements of International

Accounting Standards governing financial

statements (excluding group aspects):

(i) Presentation of Financial

Statements

(ii) Accounting policies, changes in

accounting estimates and errors

(iii) Non-current assets held for sale and

discontinued operations (basic

definitions and disclosure

requirements only)

(l) Explain and prepare the notes to

financial statements required for the

syllabus:

(i) Statement of changes in equity

(ii) Details of non-current assets

(iii) Details of events after the balance

sheet date

(iv)Details of contingent liabilities and

contingent assets

(v) Details of research and development

expenditure.

(m) Prepare financial statements for

publication complying with relevant

accounting standards as detailed above.


23 Cash flow statements

(a) Explain the differences between

profit and cash flow.

(b) Explain the need for management to

control cash flow.

(c) Explain the value to users of

financial statements of a cash flow

statement.

(d) Explain the IASB requirements for

cash flow statements (excluding


PAGE 15

group aspects).

(e) Explain the inward and outward

flows of cash in a typical company.

(f) Calculate the figures needed for the

cash flow statement including

among others:

(i) Cash flows from operating

activities (indirect method)

(ii) Cash flows from investing

activities.

(g) Calculate cash flow from operating

activities using the direct method.

(h) Review of information to be derived

by users from the cash flow

statement (see also Sessions 26 –

27).

(i) Prepare cash flow statements from

given balance sheets with or without

an income statement.

24 & 25 Basic consolidated accounts

(a) Define a parent company, subsidiary

company and group.

(b) Explain the IASB requirements

defining which companies must be

consolidated.

(c) Prepare a consolidated balance

sheet for a parent with one wholly-

owned subsidiary (no goodwill

arising).

(d) Explain how to calculate the retained

earnings balance for the

consolidated balance sheet.

(e) Explain how other reserves (share

premium account and revaluation

reserve) are dealt with on

consolidation.

(f) Introduce the concept of goodwill on

acquisition and illustrate the effect

on the consolidated balance sheet.

(g) Adjust the value of goodwill on

aquisition to reflect impairment.

(h) Explain and illustrate a methodical

approach to calculating the

necessary figures for the

consolidated balance sheet.

(i) Introduce the concept of minority

interests in subsidiaries and illustrate

the effect on the consolidated

balance sheet.

(j) Explain and illustrate how the

calculation of the minority interest is

made.

26 & 27 Interpretation of Financial

Statements

(a) Revise users of financial statements



disadvantages of interpretation

based on financial statements.

(c) Explain the factors forming the

environment in which the business

operates.

(d) Explain the uses of ratio analysis.

(e) Explain and calculate the main ratios

to be used in interpreting financial

statements to appraise:

(i) Profitability

(ii) Liquidity

(iii) Working capital efficiency

(iv) Financial risk

(v) Performance from an investor’s

point of view.

(f) Explain the working capital

cycle (or cash operating cycle)

(g) Explain normal levels of certain

ratios.

(h) Formulate comments on

movements in ratios between one

period and another or on

differences between ratios for

different businesses.

(i) Explain the factors which may

distort ratios, leading to unreliable

conclusions.

(j) Prepare and comment on a

comprehensive range of ratios for a

business.

28 Revision


PAGE 16

AIM


of the techniques used to prepare financial

statements, including necessary underlying

records, and the interpretation of financial

statements for incorporated enterprises,

partnerships and sole traders.

OBJECTIVES


should be able to:

• describe the role and function of

external financial reports and identify

their users

• explain the accounting concepts and

conventions used in preparing financial

statements

• record and summarise accounting data

• maintain records relating to fixed asset

acquisition and disposal

• prepare basic financial statements for

sole traders, partnerships, incorporated

enterprises and simple groups

• appraise financial performance and the

position of an organisation through the

calculation and review of basic ratios



OVERALL SYLLABUS


commencing study for Paper 1.1.

The basic financial accounting in Paper 1.1

is developed in Paper 2.5 Financial

Reporting and Paper 3.6 Advanced

Corporate Reporting. Knowledge from

Paper 1.1 provides the background to

Paper 2.6 Audit and Internal Review.

SYLLABUS CONTENT

Note: The extent to which accounting

standards are examinable is indicated half-

yearly in student accountant - in February



1 General framework

(a) Types of business entity – limited

companies, partnerships and sole

traders.

(b) Forms of capital and capital

structures in limited companies.

(c) The roles of the Financial Reporting

Council (FRC), the Financial

Reporting Review Panel (FRRP),

Accounting Standards Board (ASB)

and the Urgent Issues Task Force

(UITF).

(d) Application of Financial Reporting

Standards (FRSs), Statements of

Standard Accounting Practice (SSAPs)

Preparing Financial Statements (GBR)

and Companies Act requirements to

the preparation and presentation of


(e) The ASB’s Statement of Principles

for Financial Reporting (chapters 1,

2 and 3 only).

2 Accounting concepts and principles

(a) Basic accounting concepts and

principles as stated in the ASB’s

Statement of Principles for Financial

Reporting.

(b) Other accounting concepts

(i) historical cost

(ii) money measurement

(iii) entity

(iv) dual aspect

3 Double-entry bookkeeping and

accounting systems

(a) Double-entry bookkeeping and

accounting systems

Paper 1.1





Paper 1.1

PAGE 17

(i) form and content of accounting

records (manual and

computerised)

(ii) books of original entry, including

journals

(iii) sales and purchases ledgers

(iv) cash book

(v) nominal ledger

(vi) trial balance

(vii) accruals, prepayments and

adjustments

(viii) asset registers

(ix) petty cash.

(b) Confirming and correcting mechanisms

(i) control accounts

(ii) bank reconciliations

(iii) suspense accounts and the

correction of errors.

(c) General principles of the operation of

value added tax.

(d) Computerised accounting systems.

4 Accounting treatments

(a) Fixed assets, tangible and intangible

(i) distinction between capital and

revenue expenditure

(ii) accounting for acquisitions and

disposals

(iii) depreciation – definition,

reasons for and methods,

including straight line, reducing

balance and sum of digits

(iv) research and development

(v) elementary treatment of goodwill.

(b) Current assets

(i) stock (excluding long-term

contracts)

(ii) debtors, including accounting for

irrecoverable debts and

allowances for debtors

(iii) cash.

(c) Current liabilities and accruals.

(d) Shareholders’ equity.

(e) Events after the balance sheet date.

(f) Contingencies.

5 Financial statements

(a) Objectives of financial statements.

(b) Users and their information needs.

(c) Key features of financial statements

(i) balance sheet

(ii) profit and loss account

(iii) cash flow statement

(iv) notes to the financial statements

(examined to a limited extent –

see d (iii) below).

(d) Preparation of financial statements for:

(i) sole traders, including incomplete

records techniques

(ii) partnerships

(iii) limited companies, including

profit and loss accounts and

balance sheets for internal

purposes and for external purposes

in accordance with Companies

Act 1985 formats and

preparation of basic cash flow


companies (excluding group cash

flow statements). The following

additional statements and notes

to the financial statements

are examinable:

– The ASB requirements

governing reporting financial

performance including the

analysed profit and loss account

and the additional statements

and notes required by

standards.

– Statement of movements in

reserves

– Fixed assets

– Exceptional and extraordinary

items

– Events after the balance sheet

date

– Contingent liabilities and

contingent assets

– Research and development

expenditure

(iv)groups of companies –

preparation of a basic

consolidated balance sheet for a

company with one subsidiary.

6 Interpretation

(a) Ratio analysis of accounting

information and basic interpretation.

EXCLUDED TOPICS


assessment. No questions will be asked on

clubs and societies, or goodwill arising on

change of personnel in partnerships.


The objective of Paper 1.1, Preparing

Financial Statements, is to ensure that

candidates have the necessary basic

accounting knowledge and skill to

Preparing Financial Statements (GBR) (Continued)

PAGE 18

progress to the more advanced work of

Paper 2.5 Financial Reporting. The two

main skills required are:

• the ability to prepare basic financial

statements and the underlying

accounting records on which they are

based

• an understanding of the principles on

which accounting is based.



limited companies for internal purposes

or for publication


partnerships and sole traders (including

incomplete records)

• basic group accounts – consolidated

balance sheet for a company with one

subsidiary

• basic bookkeeping and accounting

procedures

• accounting conventions and concepts

• interpretation of financial statements

• cash flow statements

• accounting standards (as listed in the

exam notes).

APPROACH TO EXAMINING THE

SYLLABUS

The paper based examination is a three

hour paper constructed in two sections.

Both sections will draw from all parts of

the syllabus and will contain both

computational and non-computational

elements.

Number

of Marks



Section B: 5 compulsory

questions (8 – 12 marks each) 50

100












section of student accountant, in February



RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44(0)20 8740 2222.



texts useful:

Texts covering the whole syllabus:

F Wood and A Sangster Business


0273655523 (excluding chapters 21, 36,

37, 38, 40, 42, 43, 44, 45, 46, 48) plus

chapters 3, 8, 10, 11, 12, 13, 14, 16, 17,

18, 27, 28, and 29 of Business


0273693107



monthly magazine student accountant.


PAGE 19

STUDY SESSIONS

1 Introduction to Accounting

(a) Define accounting – recording,

analysing and summarising

transaction data.

(b) Explain types of business entity

(i) sole trader

(ii) partnership

(iii) limited company

(c) Explain users of financial statements


(d) Explain the main elements of

financial statements:

(i) balance sheet

(ii) profit and loss account

(e) Explain the purpose of each of the

main statements.

(f) Explain the nature, principles and

scope of accounting.

(g) Explain the regulatory system:

(i) Financial Reporting Council

(FRC), Financial Reporting

Review Panel (FRRP),

Accounting Standards Board

(ASB), Urgent Issues Task Force

(UITF), Companies legislation.


capital and revenue items.

2 Basic balance sheet and profit and loss

account

(a) Explain how the balance sheet

equation and business entity

convention underlie the balance

sheet.

(b) Define assets and liabilities.

(c) Explain how and why assets and

liabilities are disclosed in the

balance sheet.

(d) Draft a simple balance sheet in

vertical format.

(e) Explain the matching convention and

how it applies to revenue and

expenses.

(f) Explain how and why revenue and

expenses are disclosed in the trading

and profit and loss account.

(g) Illustrate how the balance sheet and

trading and profit and loss account

are interrelated.

(h) Draft a simple trading and profit and

loss account in vertical format.

(i) Explain the significance of gross

profit and gross profit as a

percentage of sales.

3 & 4 Bookkeeping Principles

(a) Identify the main data sources and

records in an accounting system

(b) Explain the functions of each data

source and record

(c) Explain the concept of double entry

and the duality concept

(d) Outline the form of accounting

records in a typical manual system

(e) Outline the form of accounting

records in a typical computerised

system

(f) Explain debit and credit

(g) Distinguish between asset, liability,

revenue and expense accounts

(h) Explain the meaning of the balance

on each type of account

(i) Illustrate how to balance a ledger

account

(j) Record cash transactions in ledger

accounts

(k) Record credit sale and purchase

transactions in ledger accounts

(l) Explain the division of the ledger

into sections

(m) Record credit sale and purchase

transactions using day books

(n) Explain sales and purchases returns

and demonstrate their recording

(o) Explain the general principles of the

operation of value added tax and

prepare the consequent accounting

entries

(p) Explain the need for a record of petty

cash transactions

(q) Illustrate the typical format of the

petty cash book

(r) Explain the importance of using the

imprest system to control petty cash

(s) Extract the ledger balances into a

trial balance

(t) Prepare a simple profit and loss

account and balance sheet from a

trial balance

(u) Explain and illustrate the process of

closing the ledger accounts in the

accounting records when the

financial statements have been

completed.


PAGE 20

5 The journal; ledger control

accounts; bank reconciliations

(a) Explain the uses of the journal

(b) Illustrate the use of the journal and

the posting of journal entries into

ledger accounts

(c) Explain the types of error which may

occur in bookkeeping systems,

identifying those which can and

those which cannot be detected by

preparing a trial balance

(d) Illustrate the use of the journal in

correcting errors, including the use

of a suspense account

(e) Prepare statements correcting profit

for errors discovered

(f) Explain the nature and purpose of

control accounts for the sales and

purchases ledgers

(g) Explain how control accounts relate

to the double entry system

(h) Construct and agree a ledger control

account from given information

(i) Explain and prepare bank

reconciliation statements, including

the need for entries in the cash book

when reconciling.

6 Computerised accounting systems

(a) Compare manual and computerised

accounting systems

(b) Identify the advantages and

disadvantages of computerised

systems

(c) Describe the main elements of a

computerised accounting system

(d) Describe typical data processing work

accounting packages

(e) Explain the use of integrated

(f) Explain the nature and use of micro-

computers

(g) Explain other business uses of

computers

(h) Explain the nature and purpose of

spreadsheets

(i) Explain the nature and purpose of

database systems.


trader 1: stock, accruals and

prepayments

(a) Revise the format of the trading and

profit and loss account and balance

sheet from Sessions 1 and 2.

(b) Explain the need for adjustments for

stock in preparing financial

statements

(c) Illustrate trading accounts with

opening and closing stock

(d) Explain and demonstrate how

opening and closing stock are

recorded in the stock account

(e) Discuss alternative methods of

valuing stock

(f) Explain the ASB requirements for

stocks

(g) Explain the use of continuous and

period end stock records

(h) Explain the need for adjustments for


preparing financial statements

(i) Illustrate the process of adjusting for


preparing financial statements

(j) Prepare financial statements for a

sole trader including adjustments for

stock, accruals and prepayments

(k) Explain and demonstrate how to

calculate the value of closing stock

from given movements in stock

levels, using FIFO (first in first out),

and AVCO (average cost).


trader 2: depreciation, irrecoverable

debts and allowances for debtors

(a) Revise the difference between fixed

assets and current assets

(b) Define and explain the purpose of

depreciation

(c) Explain the advantages and

disadvantages of the straight line,

reducing balance and sum of the

digits methods of depreciation and

make necessary calculations

(d) Explain the relevance of consistency

and subjectivity in accounting for

depreciation

(e) Explain and illustrate how

depreciation is presented in the

profit and loss account and balance

sheet

(f) Explain and illustrate how

depreciation expense and

accumulated depreciation are

recorded in ledger accounts

(g) Explain the inevitability of

irrecoverable debts in most

businesses

(h) Illustrate the bookkeeping entries to


PAGE 21

balance sheet

(i) Illustrate the bookkeeping entries to

record irrecoverable debts recovered

(j) Explain the difference between

writing off an irrecoverable debt and

making an allowance for debtors

(k) Explain and illustrate the

bookkeeping entries to create and

adjust an allowance for debtors

(l) Illustrate how to include movements

in the allowance for debtors in the

profit and loss account and how the

closing balance of the allowance

may appear in the balance sheet

(m) Prepare a set of financial

statements for a sole trader from a

trial balance, after allowing for

accruals and prepayments,

depreciation, irrecoverable debts and

allowances for debtors

9 & 10 Incomplete records

(a) Explain techniques used in

incomplete record situations:

(i) Calculation of opening capital

(ii) Use of ledger total accounts to

calculate missing figures

(iii) Use of cash and/or bank

summaries

(iv)Use of given gross profit

percentage to calculate missing

figures.

(b) Explain and illustrate the calculation

of profit or loss as the difference

between opening and closing net

assets.


12 & 13 Partnership Accounts

(a) Define the circumstances creating a

partnership



partnership, compared with

operating as a sole trader or limited

company

(c) Explain the typical contents of a

partnership agreement, including

profit-sharing terms

(d) Explain the accounting differences

between partnerships and sole

traders:

(i) Capital accounts

(ii) Current accounts

(iii) Division of profits.

(e) Explain and illustrate how to record

partners’ shares of profits / losses

and their drawings in the accounting

records and financial statements

(f) Explain and illustrate how to account

for guaranteed minimum profit

share

(g) Explain and illustrate how to account

for interest on drawings

(h) Draft the profit and loss account,

including division of profit, and

balance sheet of a partnership from

a given trial balance.

Note: Goodwill arising on the admission

and retirement of partners, amalgamation

and dissolution are not examinable.

However, questions on partnership profit

and loss accounts may include the effect of

the admission of new partners and the

retirement of partners on the profit-sharing

arrangements.

14 Accounting concepts and conventions;

the ASB’s ‘Statement of Principles for

Financial Reporting’ (the Statement)

(a) Explain the need for an agreed

conceptual framework for financial

accounting.

(b) Explain the importance of the

following accounting conventions

(not mentioned in the Statement):

(i) Business entity

(ii) Money measurement

(iii) Duality

(iv) Historical cost

(v) Realisation

(vi)Time interval.

(c) Revise the users of financial

statements from Session 1.

(d) Explain the qualitative characteristics

of financial statements as described

in chapter 3 of the Statement (Revision

from Session 1).

(e) Explain the ASB requirements

relating to accounting policies

(f) Explain the advantages and

disadvantages of historical cost

accounting (HCA) in times of

changing prices

(g) Explain in principle the main


PAGE 22

accounting (CPP)

(ii) Current cost accounting (CCA).

Note: computational questions on

CPP and CCA will not be set.

(h) Explain the ASB requirements

governing revenue recognition

15 Accounting for limited companies 1 –

basics

Note: The inclusion of an introductory

coverage of company accounts at this

point is to enable students to practise

the work so far on financial statements

using questions on limited companies,

and also to facilitate understanding of

reserves referred to in the next Session.

(a) Explain the legal and other

differences between a sole trader

and a limited company



limited company rather than as a

sole trader

(c) Explain the capital structure of a

limited company including:

(i) Authorised share capital

(ii) Issued share capital

(iii) Called up share capital

(iv) Paid up share capital

(v) Ordinary shares

(vi) Preference shares

(vii) Debentures

(d) Explain and illustrate the share

premium account

(e) Explain and illustrate the other

reserves which may appear in a

company balance sheet

(f) Explain why the heading ‘profit and

loss account’ appears in a company

balance sheet

(g) Explain and illustrate the recording of

dividends

(h) Explain the impact of corporation tax

on company profits and illustrate the

ledger account required to record it.

(i) Record corporation tax in the profit

and loss account and balance sheet

of a company

(j) Draft a profit and loss account and

balance sheet for a company for

internal purposes.

16 Recording and presentation of

transactions in fixed assets; liabilities

and provisions

(a) Explain and illustrate the ledger

entries to record the acquisition and

disposal of fixed assets, using

separate accounts for fixed asset

cost and accumulated depreciation

(b) Explain and illustrate the inclusion of

profits or losses on disposal in the

profit and loss account

(c) Explain and record the revaluation of

a fixed asset in ledger accounts and

in the balance sheet

(d) Explain why, after an upward

revaluation, depreciation must be

based on the revised figure, and for

revalued assets sold, the consequent

transfer from revaluation reserve to

profit and loss account reserve as

revaluation surplus becomes realised

(e) Make the adjustments necessary if

changes are made in the estimated

useful life and/or residual value of a

fixed asset

(f) Explain and illustrate how fixed

asset balances and movements are

disclosed in company financial

statements

(g) Explain the distinction between

current and long-term liabilities


liabilities and provisions.

17 Goodwill, Research and Development

(a) Define goodwill

(b) Explain the factors leading to the

creation of non-purchased goodwill

(c) Explain the difference between

purchased and non-purchased

goodwill

(d) Explain why non-purchased goodwill

is not normally recognised in

financial statements

(e) Explain how purchased goodwill

arises and is reflected in financial

statements

(f) Explain the need to amortise

purchased goodwill

(g) Define “research” and

“development”

(h) Classify expenditure as research or

development

(i) Calculate amounts to be capitalised

as development expenditure from given

information

(j) Disclose research and development

expenditure in the financial statements.


PAGE 23

18 Events after the Balance Sheet Date

and Contingencies

(a) Define an event after the balance

sheet date

(b) Distinguish between adjusting and

non-adjusting events and explain the

methods of including them in


(c) Classify events as adjusting or non-

adjusting

(d) Draft notes to company financial


of events after the balance sheet

date

(e) Define ‘contingent liability’ and

‘contingent asset’

(f) Explain the different ways of

accounting for contingent liabilities

and contingent assets according to

their degree of probability

(g) Draft notes to company financial


of contingent liabilities and

contingent assets.

19, 20 & 21 Accounting for Limited

Companies 2 – Advanced

(a) Revise the work of Session 15 and

the preparation of financial

statements for limited companies for

internal purposes including the

treatment of corporation tax and

dividends

(b) Revise the work of Session 15 on

company capital structure, including

equity shares, preference shares and

debentures

(c) Outline the advantages and

disadvantages of raising finance by

borrowing rather than by the issue of

ordinary or preference shares

(d) Define and illustrate gearing (leverage)

(e) Define a bonus (capitalisation) issue

and its advantages and disadvantages

(f) Record a bonus (capitalisation) issue in

ledger accounts and show the effect in

the balance sheet

(g) Define a rights issue and its advantages

and disadvantages

(h) Record a rights issue in ledger accounts

and show the effect in the balance sheet.

(i) Revise the definition of reserves and the

different types of reserves

(j) Explain the need for regulation of

companies in legislation and accounting

standards

(k) Explain the provisions of legislation and

accounting standards governing

financial statements (excluding group

aspects):

(i) Companies Act 1985 including the

standard formats for company


(ii) The ASB standard on reporting

financial performance, including

requirements relating to the analysis

of profit, the reporting of realised

and unrealised profits and gains and

of historical cost profits.

(l) Explain and prepare the notes to

financial statements required for the

syllabus:

(i) Statement of movements in reserves

(ii) Details of fixed assets

(iii) Details of events after the balance

sheet date

(iv) Details of contingent liabilities and

contingent assets (see session 18)

(v) Details of research and development

expenditure

(m) Prepare financial statements for

publication complying with relevant

accounting standards and legislation as

detailed above.


23 Cash flow statements

(a) Explain the differences between

profit and cash flow

(b) Explain the need for management to

control cash flow

(c) Explain the value to users of financial

statements of a cash flow statement

(d) Explain ASB requirements relating to

cash flow statements (excluding

group aspects)

(e) Explain the inward and outward

flows of cash in a typical company

(f) Calculate the figures needed for the

cash flow statement including

among others:


PAGE 24

(i) Cash flows from operating

activities (indirect method)

(ii) Cash flows from investing

activities

(g) Calculate cash flow from

operating activities using the

direct method

(h) Review of information to be

derived by users from the cash

flow statement

(see also Sessions 26 – 27)

(i) Prepare cash flow statements

from given balance sheets with or

without a profit and loss account.

24 & 25 Basic consolidated accounts

(a) Define a parent company, subsidiary

company and group

(b) Explain the ASB and Companies Acts

requirements defining which

companies must be consolidated

(c) Prepare a consolidated balance sheet

for a parent with one wholly-owned

subsidiary (no goodwill arising)

(d) Explain how to calculate the profit

and loss reserve balance for the

consolidated balance sheet

(e) Explain how other reserves (share

premium account and revaluation

reserve) are dealt with on consolidation

(f) Introduce the concept of goodwill on

acquisition and illustrate the effect

on the consolidated balance sheet

(g) Explain the need to amortise goodwill

and illustrate in the workings

(h) Explain and illustrate a methodical

approach to calculating the

necessary figures for the

consolidated balance sheet

(i) Introduce the concept of minority

interests in subsidiaries and illustrate

the effect on the consolidated

balance sheet

(j) Explain and illustrate how the

calculation of the

minority interest is made.

26 & 27 Interpretation of Financial

Statements

(a) Revise users of financial statements

and their information needs


disadvantages of interpretation

based on financial statements

(c) Explain the factors forming the

environment in which the business

operates

(d) Explain the uses of ratio analysis

(e) Explain and calculate the main ratios

to be used in interpreting financial

statements to appraise:

(i) Profitability

(ii) Liquidity

(iii) Working capital efficiency

(iv) Financial risk

(v) Performance from an investor’s

point of view.

(f) Explain the working capital cycle (or

cash operating cycle)

(g) Explain normal levels of certain

ratios

(h) Formulate comments on movements

in ratios between one period and

another or on differences between

ratios for different businesses

(i) Explain the factors which may

distort ratios, leading to unreliable

conclusions

(j) Prepare and comment on a

comprehensive range of ratios for a

business.

28 Revision


PAGE 25

AIM


of the application of management

accounting techniques to support the

management processes of planning, control

and decision making.

OBJECTIVES


should be able to:

• explain the role of management

accounting within an organisation and the

requirement for management information

• describe costs by classification and

purpose

• identify appropriate material, labour and

expense costs

• understand the principles of costing and

apply them in straightforward scenarios

• understand and demonstrate the cost

factors affecting production and pricing

decisions

• understand the basic principles of

performance management



OVERALL SYLLABUS


commencing study for Paper 1.2. Some

understanding of the accounting principles

and practices from Paper 1.1 Preparing

Financial Statements and a basic

competence in numeracy are assumed.

This paper provides the basic techniques

required to enable the candidate to develop

the various methods into more complex

problems at later parts. Candidates will,

therefore, need a sound understanding of

the methods and techniques encountered in

this paper to ensure that they can take them

further in subsequent papers. The methods

introduced in this paper are revisited and

extended in Paper 2.4 Financial Management

and Control and taken yet further in Papers

3.3 Performance Management and 3.7

Strategic Financial Management.

SYLLABUS CONTENT

1 Accounting for management

(a) The nature, purpose, scope and

interrelations of functions carried out

by management in relation to

resources, costs, operations,

performance

(i) setting objectives (long and short-

term, strategic and operational,

corporate and personal)

(ii) planning to meet objectives

(iii) implementing objectives

(iv)monitoring and controlling

against objectives and plans

(b) Nature of internal reporting

(i) financial and non-financial

information for managers

(ii) cost centres, revenue centres,

profit centres and investment

centres and the impact of these

on management information.

(c) Management information

requirements

(i) importance and definition of

good information

(ii) presentation of information

(iii) role of accountants and

accounting information

(iv)role of IT.

(d) Maintaining and improving an

appropriate system

(i) cost units

Financial Information for Management

Paper 1.2

3.3 Performance Management 3.7 Strategic Financial Management


1.2 Financial Information for

Management

PAGE 26

Paper 1.2: Financial Information for Management (Continued)

(ii) cost/profit/responsibility centres

(iii) methods for recording relevant

information

(iv)sources of information and

recording/processing information

(v) computer based information,

storage and processing

(vi)analysis of output information

and its dissemination to relevant

individuals/departments.

2 Cost accounting

(a) Cost accounting versus management

accounting

(i) purposes of cost and management

accounting and financial accounting

(ii) role of cost accounting in a

management information system

(iii) non-financial information.

(b) Nature and purpose of cost

classification and definitions.

3 Elements of cost

(a) Materials

(i) standard and actual costs for

materials including the use of

FIFO, LIFO and weighted average

for material valuation and the

pricing of material issues

(ii) optimal purchase quantities to

include discounts

(iii) optimal batch quantities

(iv)reorder levels

(v) material losses.

(b) Labour

(i) direct and indirect labour

(ii) different remuneration methods

(iii) labour efficiency

(iv)labour turnover.

(c) Overheads

(i) direct and indirect expenses

(ii) principles and processes of

overhead cost analysis

(iii) allocation and apportionment of

overhead costs including reciprocal

service centre situations

(iv)absorption rates

(v) under- and over -absorption

(vi)fixed overhead expenditure and

volume variances

(vii) fixed overhead efficiency and

capacity variances where

appropriate

(viii) changes in the cost structure of

a business over time.

4 Costing systems

(a) Job, batch and process costing

(i) characteristics

(ii) direct and indirect costs

(including waste, scrap and

rectification costs)

(iii) valuation of process transfers

and work-in-progress using

equivalent units of production

and based on FIFO and weighted

average pricing methods

(iv) process costing normal losses,

abnormal losses and gains

(v) joint and by-products in process

costing

(b) Operation/service costing

(i) scope of operation/service costing

(ii) appropriate cost units

(iii) collection, classification and

ascertainment of costs.

5 Costing methods and techniques

(a) Standard costing

(i) establishment of standard costs

(ii) variance analysis

(iii) explanations of variances and

control

(iv) implications for management

(v) operating statements.

(b) Marginal and absorption costing

(i) marginal and absorption costing

profit and loss accounts

(ii) reconciliation of the profits under

the two methods

(iii) contrast of absorption and

marginal costing

6 Short-term decision making

(a) Cost behaviour

(i) fixed, variable and semi-variable

costs

(ii) cost behaviour using an

appropriate graph

(iii) high-low method

(iv) regression analysis.

(b) CVP analysis

(i) break-even point and revenue

(ii) margin of safety

(iii) target profit

(iv) contribution to sales ratio

(v) break-even chart and profit/

volume graph.

Financial Information for Management (Continued)

PAGE 27

(c) Limiting factors

(i) optimal production plan given a

scarce resource

(ii) linear programming techniques

(iii) other methods for more than two

variable problems.

(d) Preparation of cost estimates for

decision making

(i) relevant costing techniques to

include opportunity/sunk,

avoidable/unavoidable, fixed/

variable applied to such

situations as make or buy, shut

down and one-off contracts.

(e) Pricing of goods and services

(i) price/demand relationships

(ii) full cost plus pricing

(iii) marginal costing.

(f) Price skimming, penetration pricing,

premium pricing and price

discrimination.

EXCLUDED TOPICS


assessment. No areas of knowledge are

specifically excluded from the syllabus.


The key topic areas are:

• cost classification and behaviour

• material, labour and overhead costs

• absorption and marginal costing

• process costing

• standard costing

• CVP analysis

• limiting factors

• relevant costs for decision making

• pricing methods.


SYLLABUS

The examination is a three hour paper

constructed in two sections. Both sections

will draw from all parts of the syllabus and

will contain both computational and

discursive elements.

Number

of Marks



Section B: 5 compulsory short form

questions (8-12 marks each) 50

100




Formulae as required are included in the

formulae sheet given in the examinantion.

RELEVANT TEXTS




listed below:



publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.


The following text is also recommended as

study material for this paper:

C Drury Management and Cost

Accounting (6th Edition) International

Thomson Business Press

ISBN 1-84480-028-8.



student accountant.

PAGE 28


STUDY SESSIONS

1 Information for Management

(a) Distinguish between ‘data’ and

‘information’

(b) Describe the sources of information

(c) Identify and explain the attributes of

good information

(d) Describe the methods of recording

and processing information

(e) Describe the ways in which data

could be presented to management.

2 Management Information Systems

(a) Explain what is meant by a


(b) Explain the role of accountants and

accounting information within a


(c) Describe the purpose and role of

cost and management accounting

within a management information

system

(d) Compare and contrast financial and

cost and management accounting

(e) Outline the managerial processes of

planning, decision-making and

control

(f) Discuss the management of both

financial and non-financial

information requirements

(g) Describe the various types of

responsibility centres and the impact

of these on management

information.

3 Objectives, Strategy and Planning

(a) Define the terms ‘objectives’ and

‘strategy’

(b) Describe the different objectives for

different types of organisations

(c) Illustrate the links between strategy

and organisational structure

(d) Explain how the objectives and strategy

of an organisation impact upon its plans

(e) Describe the planning process

(f) Describe the main techniques used

in the planning and decision making

process for various types of organisation

(g) Explain the difference between

strategic, tactical and operational

planning

(h) Describe the basic elements of and

purpose of a management control

system

(i) Illustrate the need for monitoring

and evaluation

(j) Describe methods for monitoring and

controlling against objectives and

plans.

4 The Role of Information Technology in

Management Information

(a) Identify the characteristics and

different types of computer hardware

and software

(b) Evaluate the potential value of

computer systems in handling and

processing business data

(c) Describe methods of capturing and

processing data by computer

(d) Describe how data is grouped,

tabulated, stored and output

(e) Explain the role and features of

spreadsheet systems

(f) Describe how output could be

analysed and used within an

organisation.

5 Cost Classification

(a) Explain and illustrate classifications

used in the analysis of product/

service costs including by function,

direct and indirect, product and

period, fixed and variable, avoidable

and unavoidable, controllable and

uncontrollable

(b) Explain and illustrate the concept of

cost objects, cost units, cost centres,

revenue centres, profit centres and

investment centres

(c) Describe briefly the process of

accounting for input costs and

relating them to work done

(d) Describe briefly the different

methods of costing final outputs and

their appropriateness to different

types of business organisation/

situation

(e) Describe the nature of control

achieved through the comparison of

actual costs against plan.

6 Cost Behaviour - 1

(a) Explain the importance of cost

behaviour in relation to business

decision-making

PAGE 29


(b) Describe factors which influence cost

behaviour

(c) Explain how the terms linear, curvi-

linear and step functions apply to

costs

(d) Identify, describe and illustrate

graphically different types of cost

behaviour

(e) Explain the structure of linear

functions and equations

(f) Provide examples of costs which

contain both fixed and variable

elements

(g) Use high/low analysis to separate

the fixed and variable elements of

such costs

7 Cost behaviour - 2

(a) Construct a scatter graph to

establish whether a linear function

would be appropriate

(b) Establish a linear function using

regression analysis and interpret the

results

(c) Calculate and explain the concepts

of correlation and coefficient of

determination.

8 Material Costs – 1

(a) Describe the different procedures

and documents necessary for

ordering, receiving and issuing

materials from stock

(b) Describe the control procedures used

to monitor physical and ‘book’ stock

and to minimise discrepancies and

losses

(c) Calculate, explain and evaluate the

value of closing stock and material

issues using LIFO, FIFO and average

methods (weighted and periodic)

(d) Calculate the standard cost of stocks

from given information

(e) Prepare ledger entries to record

material cost inputs and outputs

(f) Interpret the entries and balances in

the material stock account.

9 Material Costs – 2

(a) Explain the reasons for holding stock

(b) Identify and explain the costs of

having stock

(c) Calculate and interpret optimal

reorder quantities

(d) Calculate and interpret optimal

reorder quantities when discounts

apply

(e) Produce and interpret calculations to

minimise stock costs when stock is

gradually replenished

(f) Describe appropriate methods for

establishing reorder levels.

10 Labour Costs

(a) Explain the difference between, and

calculate, direct and indirect labour

costs

(b) Explain the methods used to relate

input labour costs to work done

(c) Prepare journal and ledger entries to

record labour cost inputs and

outputs

(d) Describe and illustrate different

remuneration methods and incentive

schemes

(e) Calculate the level, and analyse the

costs and causes of, labour turnover

(f) Describe and illustrate measures of

labour efficiency and utilisation

(g) Interpret the entries and balances in

the labour account.

11 Overheads – 1

(a) Explain the difference between the

treatment of direct and indirect

expenses

(b) Describe and justify the process of

apportioning manufacturing

overhead costs incurred to

production

(c) Allocate and apportion factory

overheads using an appropriate

basis

(d) Re-apportion service centre costs

including the use of the reciprocal

method

(e) Comment on the use of blanket,

department, actual and pre-

determined absorption rates

(f) Identify, calculate and discuss the

appropriate absorption rates using

relevant bases.

12 Overheads –2

(a) Prepare journal and ledger entries for

manufacturing overheads incurred and

absorbed

PAGE 30


(b) Calculate, explain and account for

under – and over – absorbed

overheads

(c) Calculate and explain fixed overhead

expenditure, volume and, where

appropriate, efficiency and capacity

variances

(d) Describe and evaluate methods of

attributing non-manufacturing

overhead costs to units of output

(e) Perform process cost accounting

transactions for selling, distribution

and administration overhead in a

given business context

(f) Describe how the cost structure of a

business has changed over time and

the implication of this with regard to

overhead analysis.


14 Marginal and Absorption Costing

(a) Explain the concept of contribution

(b) Demonstrate and discuss the impact

of absorption and marginal costing

on stock valuation and profit

measurement

(c) Establish the standard cost per unit

from given data under absorption

and marginal costing

(d) Produce profit and loss accounts

using absorption and marginal

costing

(e) Reconcile the profits reported under

the two methods

(f) Discuss the advantages and

disadvantages of absorption and

marginal costing.

15 Job and Batch Costing

(a) Describe the characteristics of job

and batch costing

(b) Describe the situations where the

use of job or batch costing would be

appropriate

(c) Discuss, and illustrate, the treatment

of direct, indirect and abnormal

costs

(d) Complete cost records and accounts

in job and batch cost accounting

situations

(e) Estimate job costs from given

information.

16 Process Costing – 1

(a) Describe the characteristics of

process costing

(b) Describe situations where the use of

process costing is appropriate

(c) Describe the key areas of complexity

in process costing

(d) Define ‘normal’ losses and

‘abnormal’ gains and losses

(e) State and justify the treatment of

normal losses and abnormal gains

and losses in process accounts

(f) Account for process scrap

(g) Calculate the cost per unit of process

outputs, and prepare simple process

accounts, in absorption and marginal

costing systems.

17 Process Costing –2

(a) Calculate and explain the concept of

equivalent units

(b) Allocate process costs between work

remaining in process and transfers

out of a process using the weighted

average cost and FIFO methods

(c) Prepare process accounts in

situations where work remains

incomplete

(d) Prepare process accounts in

situations where losses and gains

are identified at different stages of

the process

(e) Distinguish between by-products and

joint products

(f) Value by-products and joint products

at the point of separation

(g) Prepare process accounts in

situations where by-products and/or

joint products occur.

18 Operation/Service Costing

(a) Describe situations where the use of

operation/service costing is appropriate

(b) Illustrate suitable unit cost measures

that may be used in a variety of

different operations and services

(c) Carry out service cost analysis in

internal service situations

(d) Carry out service cost analysis in

service industry situations.

19 Cost-Volume-Profit (CVP) Analysis - 1

(a) Explain the objective of CVP

analysis

PAGE 31


(b) Explain the concept of break-even

(c) Calculate and explain the break-even

point and revenue, target profit,

contribution to sales ratio and margin

of safety.

20 Cost-Volume-Profit (CVP)

Analysis - 2

(a) Construct break-even, contribution,

and profit/volume charts from given

data

(b) Apply the CVP model in multi-

product situations.

21 Limiting Factors

(a) Explain and recognise what causes

optimisation problems

(b) Identify, formulate and determine

the optimal solution when there is a

single limiting factor.

22 Linear programming

(a) Formulate a linear programming

problem involving two variables

(b) Determine the optimal solution to a

linear programming problem using a

graph

(c) Determine the optimal solution to a

linear programming problem using

equations

(d) Explain the methods available for

dealing with optimisation problems

with more than two variables

(e) Formulate, but do not solve, a linear

programming problem involving

more than two variables

(f) Explain shadow prices (calculations

not examinable).

23 Relevant Costing - 1

(a) Explain the concept of relevant

costing

(b) Explain the relevance of such terms

as opportunity and sunk costs,

avoidable and unavoidable costs,

fixed and variable costs, historical

and replacement costs, controllable

and uncontrollable costs, to decision

making

24 Relevant Costing - 2

(a) Calculate the relevant costs for

materials and labour

(b) Calculate and explain the deprival

value of an asset

(c) Construct a relevant cost statement

and explain the results for such

situations as make or buy decisions,

shut down decisions, one-off

contracts and further processing

decisions for joint products.

25 Pricing

(a) Explain the factors that influence the

price of a product

(b) Establish the price/demand

relationship of a product

(c) Establish the optimum price/output

level when considering profit

maximisation and maximisation of

revenue

(d) Calculate prices using full cost and

marginal cost as the pricing base

(e) discuss the advantages and

disadvantages of these pricing bases

(f) Discuss pricing policy in the context

of price skimming, penetration

pricing, premium pricing and price

discrimination.

26 Standard Costing - 1

(a) Explain the purpose of standard costing

(b) Establish the standard cost per unit

from given data under absorption

and marginal costing

(c) Explain the purpose of the following

variances:

(i) Materials price and usage

(ii) Labour rate, idle time and

efficiency

(iii) Variable overhead expenditure

and efficiency

(iv) Fixed overhead expenditure,

volume and, where appropriate,

efficiency and capacity

(v) Sales volume and price.

27 Standard Costing - 2

(a) Calculate and interpret the above

variances, using the appropriate

costing method

(b) Prepare operating statements to

reconcile budgeted to actual profit

(c) Discuss the implications of the

results of variance analysis for

management.

28 Revision

PAGE 32

AIM


of the techniques, processes and

procedures which are required to ensure

the efficient and effective use and

deployment of human resources, and to

use the human resource to the greatest

possible benefit of the organisation.

OBJECTIVES


should be able to:

• identify, understand and explain the

complex interpersonal relationships that

exist within organisations

• appreciate the relationship between

theory and practice

• understand the nature, processes and

procedures of people management

• explain the principles of successful team

performance and the need to plan,

monitor and evaluate team based work

activities

• investigate future personnel

requirements and describe recruitment

and selection procedures

• understand and describe the principles

of motivation

• understand and describe the role and

process of employee development

• understand the need for clear and

precise communication

• explain the principles of effective

counselling

• describe the elements of disciplinary

and grievance procedures.


OVERALL SYLLABUS

The paper is concerned with an understanding

of people management and the techniques

involved. The paper is constructed in such

a way that it provides a broad introduction

to the problems and opportunities involved

in managing people. It is intended to cultivate

an understanding of the importance of good

practice in human resource management.

The professional accountant is often in a

management position and thus fulfils

another role, that of the management of the

human resource. It is important therefore

that the professional accountant understands

issues of management and human resources.

Whilst there are no pre-requisites for this

paper, candidates will be expected to

demonstrate an understanding of the theory

and issues involved in human resource

management and to display appropriate

writing skills in answering the examination

paper.

Managing People is a pre-requisite for

paper 3.5 Strategic Business Planning and

Development, where many of the ideas

introduced are developed further.

It should also be noted that although the

course is divided into five topic areas, the

nature of the syllabus means that there will

often be overlap between the individual

topics.

SYLLABUS CONTENT

1 Management and team development

(a) The organisation of work

(i) the need for formal organisations

(ii) organisational types and

differences.

(b) The role of management

(i) modern management writers

(ii) classical theories of management.

(c) The role of the manager

(i) the role of the manager in the

organisation of work

(ii) the responsibilities of the manager.

Managing People

Paper 1.3

3.5 Strategic Business Planning and Development

1.3 Managing People

PAGE 33

Paper 1.3: Managing People (Continued)

(d) Individual and group behaviour

(i) organisational culture

(ii) groups and teams

(iii) perception and role theory.

(e) Team management

(i) the need for teams

(ii) team construction

(iii) team and group differences.

(f) Objective setting

(i) the need for objectives

(ii) profit and other objectives.

(g) Authority, responsibility and delegation

(i) organisational structure

(ii) classical and modern approaches

to structure

(iii) authority, responsibility and

delegation.

(h) Standard setting and performance

management

(i) work standards and indicators

(ii) performance related pay.

2 Recruitment and selection

(a) The recruitment and selection process

(i) process, roles and responsibilities

(ii) assessment criteria.

(b) Effective recruitment

(i) recruitment and selection plan

(ii) process of recruitment

(iii) use of media.

(c) The job description and personnel

specification

(i) job description

(ii) personnel specification.

(d) Job analysis

(i) purpose of analysis

(ii) methods of analysis.

(e) Selection methods

(i) appropriate methods

(ii) usefulness of methods.

(f) The selection interview

(i) purpose

(ii) skills involved

(iii) importance of the selection process.

(g) Equal opportunities and the

management of diversity

(i) equal opportunity issues

(ii) managing diversity.

3 Training and development

(a) The learning process

(i) the learning process

(ii) the role of management.

(b) Retention, training and development

(i) duties of the training manager

(ii) methods for individual

development.

(c) Effective training and development

(i) benefits of training

(ii) training needs analysis

(iii) staff evaluation methods

(iv) management development

(v) in-house and external training.

(d) Competence assessment

(i) process and barriers

(ii) staff appraisal

(iii) measures of effectiveness.

(e) Conducting the appraisal interview

(i) management skills involved

(ii) key communication skills.

(f) Individual skills and development

(i) appraisal process and employee

development.

(ii) the role of management

(iii) the skills development programme

(iv) the mentoring process.

(h) The management of health and safety

(i) health and safety awareness

(ii) the obligation of management.

4 Motivation and leadership

(a) Motivation, concepts, models and

practices

(i) the key theories of motivation

(ii) classical theories

(iii) modern theories

(iv) reward schemes.

(b) Effective leadership

(i) the nature and importance of

leadership

(ii) classical theories

(iii) modern theories.

5 Effective communication practices

(a) Working with people – interpersonal

skills

(i) interpersonal skills

(ii) effective management practice

(iii) verbal and non verbal

communication.

(b) Communication

(i) the need for communication

(ii) communication patterns.

(c) The role of counselling

(i) the role of management

(ii) skills of effective counselling.

(d) Controlling conflict, grievance and

discipline

(i) causes of conflict

(ii) managing conflict

(iii) appropriate procedures

Managing People (Continued)

PAGE 34

(iv) process understanding

(v) the role of management

(vi) appeals.

EXCLUDED TOPICS

The syllabus content outlines the area for





• an understanding of the theory,

techniques, processes, procedures and

practice of people management and

team development

• rules, procedures and processes of

people management

• training and development, the trained

workforce, employee assessment

• the theories of motivation and

leadership and their application

• effective communication practices.

APPROACH TO THE EXAMINING THE

SYLLABUS


constructed in two sections. Section A

consists of a brief scenario with a range of

5 to 10 mark requirements related to it,

worth 40 marks in total. The scenario is

generally devised to test the application

and understanding of a particular topic,

although candidates should be aware that

more than one topic may form part of the

scenario.

Section B consists of five essay type

questions, with one question usually taken

from each of the five topics in the syllabus.

Each question carries 15 marks and

candidates must attempt four questions.

There are no calculations involved, and

candidates should note that the answers in

Section B must be presented in essay form.

Candidates need to show an understanding

of the detail of the topic. Candidates

should be aware that although the course

is made up of a number of discrete topics,

individual examination questions may well

require a knowledge of more than one of

these topics.

Number

of Marks

Section A: Compulsory scenario

question 40

Section B: Choice of 4 from 5

essay questions (15 marks each) 60

100



guidance on the syllabus.

RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.



texts useful:

Beardwell I, Holden L, Claydon T.

Human Resource Management – A

Contemporary Perspective (4th Edition)

Prentice Hall ISBN 0273622307

Bratton J and Gold J Human Resource

Management (3rd Edition) Palgrave

Macmillan ISBN 0333 993268

Mullins L J Management and

Organisational Behaviour (6th Edition)

Pitman ISBN 0273 651471

Handy C Understanding Organisations (5th

Edition) Penguin



student accountant.


PAGE 35

STUDY SESSIONS

MANAGEMENT AND TEAM

DEVELOPMENT

1 The organisation of work

(a) Explain the need for formal

organisations

(b) Identify organisational types and

differences.

2 The role of management

(a) Identify and explain the contribution

made by modern writers on

management: Drucker, Kanter,

Mintzberg, Ouchi, Peters

(b) Identify and explain the contribution

made by classical writers on

management: Fayol, Stewart, Taylor,

Mayo, Weber

(c) Identify the differences between

classical and modern theories of

management

(d) Identify the difference between

individual and group contribution to

work performance: Schein

(e) Outline areas of management

authority and responsibility

(f) List the systems of performance

reward for individual and group

contribution.

3 The role of the manager

(a) Explain the role of the manager in

the organisation of work

(b) List the management tasks involved

in organising the work of others

(c) Illustrate the role of the manager in

achieving tasks

(d) Identify the responsibilities of the

supervisor.

4 Individual and group behaviour

(a) Explain the concept of organisational

culture: Anthony, Handy

(b) Discuss the differences between

individual and group behaviour

(c) outline the contribution of

individuals and teams to

organisational success

(d) Identify individual and team

approaches to work

(e) Understand perception and role

theory.

5 Team management

(a) Explain the role of the manager in

building the team and developing

individuals

(b) Define the purpose of a team

(c) Outline the composition of

successful teams: Belbin, Peters and

Waterman

(d) Explain the development of a team:

Tuckman

(e) List team building tools

(f) Examine ways of rewarding a team

(g) Identify methods to evaluate team

performance.

6 Objective setting

(a) Explain the importance of objective

setting

(b) Compare and contrast profit and

other objectives: Drucker, Cyert and

March, Marginalist Theories, Simon

(c) Explain the behaviourial theories of

objective setting

(d) Explain the importance of

understanding ethics and social

responsibility

(e) Compare and contrast the difference

between corporate objectives and

personal objectives

(f) Illustrate the difference between

quantitative and qualitative target

setting

(g) Outline the management role in

identifying performance standards

and accountability

(h) Identify methods to measure

achievement of objectives.

7 Authority, responsibility and delegation

(a) Describe, recognise and understand

the importance of organisational

structure

(b) Compare classical and modern

approaches to organisational

structure: Burns and Stalker,

Contingency Theory, Fayol,

Mintzberg, Trist and Bamforth,

Urwick, Weber, Woodward

(c) Define the terms authority,

responsibility and delegation

(d) Explain the term legitimized power:

Weber

(e) Describe the process of determining

authority and responsibility

(f) Examine the case of responsibility

without authority.


PAGE 36

8 Standard setting and performance

management

(a) Define the term performance

management

(b) Identify a process for establishing

work standards and performance

management

(c) Outline a method to establish

performance indicators

(d) Illustrate ways of applying

performance management

(e) Describe management contribution

to personal development planning

(f) Explain the term performance related

pay.

RECRUITMENT AND SELECTION

9 The recruitment and selection process

(a) Explain the importance of effective

recruitment and selection to the

organisation

(b) Define the recruitment and selection

process

(c) Outline the roles and responsibilities

of those involved in the recruitment

and selection process

(d) List the most common reasons for

ineffective recruitment and selection

(e) List and describe criteria against which

to assess successful recruitment and

selection practices.

10 Effective recruitment

(a) Outline a plan for an effective

recruitment process

(b) Identify the stages in the recruitment

process

(c) Compare and contrast the

choice of media for job advertising

(d) Analyse the purpose and

effectiveness of the job application

form

(e) Explain the purpose and usefulness

of applicant references.

11 The job description and personnel

specification

(a) Outline the purpose and use of a job

description and person specification

(b) Explain how to devise a job

description and personnel

specification: Rodgers, Fraser

(c) Compare and contrast the purpose of

the job description and the person

specification.

12 Job analysis

(a) Define the purpose of job analysis

(b) Identify methods of job analysis

(c) Outline the skills involved in carrying

out job analysis

(d) Justify the use of job analysis.

13 Selection methods

(a) List alternative methods of selection

(b Evaluate the usefulness of selection

methods

(c) Identify those involved in the process

of selection

(d) Establish the skills involved in

successful decision making

(e) Explain the importance to the

organisation of good selection

decisions.

14 The selection interview

(a) Outline the purpose of the selection

interview

(b) Identify who should be involved in

selection interviewing

(c) Identify the key skills required for

selection interviewing

(d) List the most common reasons for

ineffective interviewing

(e) Explain the importance of the

selection interview in the selection

process.

15 Equal opportunities and the

management of diversity

(a) Understanding equal opportunities

(b) Measuring equal value

(c) Appreciate the legal position

(d) Explain the appropriateness of

managing diversity in the workplace

(e) Identify individual circumstances

and differences.

TRAINING AND DEVELOPMENT

16 The learning process

(a) Explain the process of learning in

the workplace

(b) Describe the ways in which

individuals learn: Honey and

Mumford, Kolb

(c) Explain the effect on learning of

individual differences

(d) Outline the barriers to learning

(e) Describe the role of management

and the organisation in the learning

process.


PAGE 37

17 Retention, Training and development

(a) Explain the importance of training and

development to the organisation and

the individual

(b) Explain the roles and responsibilities

of a training manager

(c) Compare and contrast the various

methods used in developing

individuals in the workplace.

18 Effective training and development

(a) List the benefits to the organisation

and the individual of effective

training and development

(b) Explain the methods used to analyse

training needs

(c) Suggest ways in which training

needs can be met

(d) Describe methods of staff evaluation

and follow-up

(e) Describe the skills involved in

developing staff

(f) Explain the development methods

available to management

(g) Evaluate the effectiveness of

in-house and external training

courses.

19 Competence assessment

(a) Explain the process of competence

assessment

(b) Outline the purposes and benefits of

staff appraisal in the process

(c) Describe the barriers to effective

staff appraisal

(d) Suggest ways to measure the

effectiveness of staff appraisal and

the process of assessment.

20 Conducting the appraisal process

(a) Identify the benefits of the appraisal

process

(b) Identify the management skills

involved in the appraisal process

(c) Describe the process of preparation

of an appraisal interview, including

location of interview and pre

interview correspondence

(d) Identify the key communication skills

required to conduct an effective

appraisal interview

(e) Explain the importance of feedback

from the appraisal interview.

21 Individual skills and development

(a) Explain the link between the

appraisal process and effective

employee development

(b) Describe the role of the appraisee in

the process

(c) Suggest ways in which

self-development can be part of

the process.

(d) Describe the role of the manager in

work based skills development

(e) Identify the methods used to develop

skills

(f) Outline how to plan a skills

development programme

(g) Explain the role of mentoring in the

process of skills development.

22 The management of health and safety

(a) Identify preventative and protective

measures

(b) Describe safety awareness and training

(c) Outline working conditions and

hazards

(d) Explain the legal context and the

obligation of management.

MOTIVATION AND LEADERSHIP

23 Motivation, concepts, models and

practices

(a) Outline the key theories of

motivation

(b) Outline classical and modern

theories of motivation: Argyris,

Equity Theory, Handy, Herzberg,

Maslow, McClelland, McGregor,

Vroom

(c) Outline the difference between

content and process theories of

motivation

(d) Describe ways in which

management can motivate staff

(e) Explain the importance of the reward

system in the process of motivation

(f) Explain the importance of

constructive feedback in motivation.

24 Effective leadership

(a) Define the term ‘leadership’

(b) Describe the nature and importance

of leadership

(c) Outline classical and modern

theories of leadership: Blake and

Mouton, Contingency Theory,


PAGE 38PAGE 38

Fiedler, Handy, Hersey and

Blanchard, Likert, Tannenbaum,

Trait Theory, White and Lippit

(d) Compare and contrast the terms

‘leadership’ and ‘management’

(e) Identify the skills of a leader.

EFFECTIVE COMMUNICATION

PRACTICES

25 Working with people – interpersonal

skills

(a) Define the term ‘interpersonal skills’

(b) Explain the importance of developing

effective working relationships

(c) Distinguish between verbal and

non-verbal forms of communication

(d) Compare and contrast the difference

between aggressive and assertive

behaviour

(e) Illustrate the link between

interpersonal skills and effective

management practice.

26 Communication

(a) Explain the importance of formal

and informal communication in the

workplace

(b) Explain communication models

(c) List and describe barriers to

communication

(d) Outline the importance to the

manager of effective communication

(e) Describe the effects of poor

communication

(f) List and describe the attributes of

effective communication

(g) List the main methods and patterns

of communication

(h) Explain the importance of the

process of consultation.

27 The role of counselling

(a) Define counselling in the

management context

(b) Outline the role of the manager

when counselling staff

(c) Explain the importance of effective

counselling

(d) Identify the skills used in the process

of effective counselling

(e) Suggest reasons why the need to

counsel a member of staff may arise.

28 Controlling conflict, grievance and

discipline

(a) Identify the main causes of conflict

within an organisation

(b) Outline procedures for managing

conflict

(c) Outline a suitable framework (both

internal and external to the

organisation) for dealing with

grievance and disciplinary matters

(d) Explain the need for effective

organisational procedures

(e) Explain the role of management in

respect of disciplinary matters

(f) Suggest ways in which the outcome

of the disciplinary process should be

communicated to the individual

concerned

(g) Outline the features of an appeals

procedure.


PAGE 39






2.2 Corporate and Business Law

2.3 Business Taxation

2.4 Financial Management and

Control




This stage continues the

introduction of the new subject

areas, develops candidates'

analytical skills and introduces

candidates to the problems and

situations that they will meet at

work.

Part 2 tests the application of the

theory in the context of

recognisable problems and

conceptual understanding. It will

consolidate knowledge of current

principles, practices and

techniques and begin to develop

candidates' ability to criticise

current practices. Questions will

present practical scenarios

requiring candidates to select the

best answer from a range of

available solutions in order to

achieve the specified objective.

The standard required of

candidates completing Part 2 is

that required in the final year of a

UK degree.


PART 2



• analyse and evaluate

information

• apply concepts and principles

flexibly in a variety of

circumstances

• identify, define and rank

problems

• interpret results

and

• criticise proposed solutions or

practices.

2

PAGE 40

AIM

To develop a knowledge and understanding

of information systems development and

delivery as required to take an informed

and active role in information systems

solutions.

OBJECTIVES


should be able to:

• explain how to effectively use

information systems and information

systems resources in an organisation

• identify and apply methods of

organising and accounting for

information systems delivery and

information systems projects

• explain the principles of initiating,

planning and controlling information

systems projects

• participate in the definition and

specification of user and system

requirements

• describe how an appropriate solution

might be defined to fulfil the specified

user requirements

• participate in the implementation,

monitoring and maintenance of an

information systems solution

• participate in the quality assurance of

an information systems project

• identify how computer software can

assist effective information systems

management, development and quality

assurance.


OVERALL SYLLABUS

The paper assumes a familiarity with the

basic applications of information technology.

The paper provides the knowledge and

understanding of information systems

required to enable the candidate to

progress to the more strategic perspectives

considered in Paper 3.4 Business

Information Management.

The ideas introduced in this paper are also

drawn upon in Paper 2.6 Audit and

Internal Review, Paper 3.1 Audit and

Assurance Services and Paper 3.5 Strategic

Planning and Development.

SYLLABUS CONTENT

1 Managing information systems (IS)

(a) Business strategy and IS/IT alignment.

(b) Delivering information systems –

organisational arrangements.

(c) Delivering information systems –

accounting issues.

(d) Organising information systems –

structural issues.

(e) Feasibility study.

(f) Project initiation.

(g) Project planning.

(h) Project monitoring and control.

(i) Software support for project

management.

2 Designing information systems

(a) The information systems

development process.

(b) Investigating and recording user

requirements.

(c) Documenting and modelling user

requirements – processes.

(d) Documenting and modelling user

requirements – static structures.

(e) Documenting and modelling user

requirements – events.

(f) External design.

(g) Developing a solution to fulfil

requirements.

(h) Software package selection.

Information Systems

Paper 2.1



PAGE 41

(i) Software support for the systems


3 Evaluating information systems

(a) Technical information systems

requirements.

(b) Legal compliance in information

systems.

(c) Implementing security and legal

requirements.

(d) Quality assurance in the management

and development process.

(e) Systems and user acceptance testing.

(f) Implementation issues and

implementation methods.

(g) Post-implementation issues.

(h) Change control in systems

development and maintenance.

(i) Relationship of management,

development process and quality.


The syllabus has three key areas, managing

information systems, designing information

systems and evaluating information systems.


SYLLABUS


constructed in two sections. Section A is

based on a short narrative scenario. This

section will have three compulsory

questions from across the syllabus, linked

to the narrative scenario. Each question

will be worth 20 marks giving a total of 60

marks for this section.

Section B contains three independent

questions, one question from each main

area of the syllabus. Each question is

worth 20 marks. The candidate must

answer two questions giving a total of 40

marks for this section.

Number

of marks

Section A: 3 compulsory questions

(20 marks each) 60


questions (20 marks each) 40

100


The Study Guide and Exam Notes provide

more detailed guidance on the syllabus,

particularly with respect to acceptable

approaches to modelling

RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


Information Systems (Continued)

BPP

Contact number: +44 (0)20 8740 2222.



texts useful:

Don Yeates and James Cadle Project

Management for Information Systems

(4th Edition) Prentice Hall, 2004

ISBN 0273620193

Steve Skidmore and Malcolm Eva

Introducing Systems Development

Palgrave Macmillan, 2003

ISBN 0333973690

Looking specifically at each area of the

paper:

MANAGING INFORMATION SYSTEMS



Prentice Hall, 2004

ISBN 0273620193

Relevant chapters 2,3, 5-11 & 13



Palgrave Macmillan, 2003

ISBN 0333721411

Relevant chapters 1-4 & 10

PAGE 42


STUDY SESSIONS

PART 1: MANAGING INFORMATION

SYSTEMS

Overall

This section provides the candidate with an

insight into how information systems (IS)

and information systems projects are

organised and managed. The intention is to

concentrate on the following areas:

• Information Systems strategy,

organisation and financing

• Project Management.

1 Business strategy and IS/IT alignment

(a) Explain an approach that an

organisation may follow to formulate

its strategic business objectives.

(b) Discuss how information systems

may be used to assist in achieving

these objectives.

(c) Identify current trends in information

technology (IT) and the opportunities

they offer to organisations.

(d) Distinguish between a business

strategy and an information systems

strategy.

(e) Identify responsibility for the

ownership of the IS strategy.

2 Delivering information systems –

organisational arrangements

(a) Describe the traditional structure of

a centralised Information Systems

department and the roles and

responsibilities of each function.

Supporting texts

Colin Bentley Practical PRINCE2

The Stationary Office 2002

DESIGNING INFORMATION SYSTEMS



Palgrave Macmillan 2003

ISBN 0333721411

Relevant chapters 5-9



Prentice Hall, 2004


Supporting texts

Ken Lunn Software Development with

UML Palgrave Macmillan 2002

Simon Bennett, Steve McRobb, Ray

Farmer

Object-Oriented Systems Analysis and

Design McGraw-Hill 2002

EVALUATING INFORMATION SYSTEMS



Palgrave Macmillan 2003




Prentice Hall 2004

Relevant Chapter 12

Supporting texts

Ron Patton Software Testing

SAMS Publishing 2001



student accountant.

PAGE 43

(b) Explain the principles of a

decentralised Information Systems

function.

(c) Discuss the advantages and

disadvantages of centralising or

decentralising the information

systems function.

(d) Explain the principles of outsourcing

the information systems function.

(e) Describe the advantages and

disadvantages of outsourcing the

information systems function.

3 Delivering information systems –

accounting issues

(a) Briefly describe the types of cost

incurred in delivering information

systems.

(b) Describe how the costs of the

information systems function may be

distributed between customer

departments.

(c) Explain the principles, benefits and

drawbacks of cross-charging costs.

(d) Discuss the issues raised by

establishing the information systems

function as a cost or profit centre.

(e) Describe the advantages and

disadvantages of establishing the

information systems function as a

separate company.

(f) Explain the problems of accounting

for shared infrastructure costs.

4 Organising information systems –

structural issues

(a) Describe the typical hardware,

software, data and communications

infrastructures found within

information systems functions.

(b) Discuss the meaning and need for a

disaster recovery plan.

(c) Discuss the meaning and need for a

risk management process.

(d) Describe the meaning and

implications of legacy systems.

(e) Discuss the relationship of

information systems with end-users

and the implications of the

expectations and skills of end-users.

5 Feasibility study

(a) Explain the purpose and objectives

of a feasibility study.

(b) Evaluate the technical, operational,

social and economic feasibility of the

proposed project.

(c) Describe and categorise the benefits

and costs of the proposed project.

(d) Apply appropriate investment

appraisal techniques to determine

the economic feasibility of a project.

(e) Define the typical content and

structure of a feasibility study report.

6 Project initiation

(a) Define the content and structure of

terms of reference.

(b) Describe the typical contents of a

Project Quality Plan and explain the

need for such a plan.

(c) Identify the roles and responsibilities

of staff who will manage and

participate in the project.

(d) Define in detail the role and

responsibilities of the project manager.

(e) Explain the concept of a flat

management structure and its

application to project-based systems

development.

7 Project planning

(a) Assist in splitting the project into its

main phases.

(b) Participate in the breakdown of work

into lower-level tasks.

(c) Assist in the estimation of the time

taken to complete these lower-level

tasks.

(d) Define dependencies between lower-

level tasks.

(e) Construct and interpret a project

network.

(f) Construct and interpret a Gantt Chart.

8 Project monitoring and control

(a) Describe methods of monitoring and

reporting progress.

(b) Define the reasons for slippage and

how to deal with slippage when it

occurs.

(c) Discuss the reasons for changes

during the project and the need for a

project change procedure.

(d) Identify the effects of progress, slippage

and change requests on the project


PAGE 44

plan.

(e) Discuss the particular problems of

planning and controlling information

systems projects.

9 Software support for project

management

(a) Define the meaning of a project

management software package and

give a brief list of representative

products.

(b) Describe a range of features and

functions that a project management

software package may provide.

(c) Explain the advantages of using a

project management software

package in the project management

process.

PART 2: DESIGNING INFORMATION

SYSTEMS

Overall


insight into how systems are defined and

developed. The intention is to concentrate

on the following areas:

• The definition and agreement of

business requirements

• The external design of the system

• The selection of a software package

solution.

10 The information systems development

process

(a) Define the participants in the

systems development process –

managers, analysts, designers,

programmers and testers.

(b) Describe the waterfall approach to

systems development and identify its

application in a representative

systems development methodology.

(c) Describe the spiral approach to

systems development and identify its

application in a representative

systems development methodology.

(d) Discuss the relative merits of the

waterfall and spiral approaches,

including an understanding of hybrid

methodologies that include elements

of both.

11 Investigating and recording user

requirements

(a) Define the tasks of planning,

undertaking and documenting a user

interview.

(b) Identify the potential role of

background research, questionnaires

and special purpose surveys in the

definition of requirements.

(c) Describe the purpose, conduct and

recording of a facilitated user

workshop.

(d) Explain the potential use of

prototyping in requirements

definition.

(e) Explain how requirements can be

collected from current computerised

information systems.

(f) Discuss the problems users have in

defining, agreeing and prioritising

requirements.

12 Documenting and modelling user

requirements – processes

(a) Describe the need for building a

business process model of user

requirements.

(b) Describe in detail the notation of

either a data flow diagram or a

flowchart.

(c) Construct a business process model

of narrative user requirements using

a data flow diagram or a flowchart.

(d) Explain the role of process models in

the systems development process.


requirements – static structures


business structure model of user

requirements.


either an entity-relationship model

(Logical Data Model) or a class

model.

(c) Construct a business structure model

of narrative user requirements using

an entity-relationship model (Logical

Data Model) or a class model.

(d) Explain the role of structure models

in the systems development process.


requirements – events


business event model of user

requirements.


either a statechart diagram (state


PAGE 45

used in defining an external

design.

16 Developing a solution to fulfil

requirements

(a) Define the bespoke software

approach to fulfilling the user’s

information systems requirements.

(b) Briefly describe the tasks of design,

programming and testing required in

developing a bespoke systems solution.

(c) Define the application software

package approach to fulfilling the

user’s information systems

requirements.

(d) Briefly describe the tasks of package

selection, evaluation and testing

required in selecting an appropriate

application software package.

(e) Describe the relative merits of the

bespoke systems development and

application software package

approaches to fulfilling an

information systems requirement.

17 Software package selection

(a) Describe the structure and contents

of an Invitation to Tender (ITT).

(b) Describe how to identify software

packages and their suppliers that

may potentially fulfil the information

systems requirements.

(c) Develop suitable procedures for

distributing an ITT and dealing with

subsequent enquiries and bids.

(d) Describe a process for evaluating the

application software package, the

supplier of that package and the bid

received from the supplier.

(e) Describe risks of the application

software package approach to

systems development and how these

might be reduced or removed.

18 Software support for the systems

development process

(a) Define a Computer Aided Software

Engineering (CASE) tool and give a

brief list of representative products.

(b) Describe a range of features and

functions that a CASE tool may

provide.

(c) Explain the advantages of using a

CASE tool in the systems


(d) Define a Fourth Generation

Language and give a brief list of

representative products.

(e) Describe a range of features and

functions that a Fourth Generation

Language may provide.

(f) Explain how a Fourth Generation

Language contributes to the

prototyping process.

PART 3: EVALUATING INFORMATION

SYSTEMS

Overall


insight into how systems are implemented

and evaluated. The intention is to

concentrate on the following areas:

• The definition and agreement of non-

functional business requirements

• The quality assurance of the solution

• The implementation and maintenance

of the solution.

19 Technical information systems

requirements

(a) Define and record performance and

volume requirements of information

systems.

(b) Discuss the need for archiving,

backup and restore, and other

“house-keeping” functions.

(c) Explain the need for a software audit


transition diagram) or an entity life

history.

(c) Construct a business event model of

narrative user requirements using a

statechart diagram (state transition

diagram) or an entity life history.

(d) Explain the role of event models in

the systems development process.

15 External design

(a) Define the characteristics of a “user-

friendly” system.

(b) Describe the task of external design

and distinguish it from internal design.

(c) Design effective output documents

and reports.

(d) Select appropriate technology to

support the output design.

(e) Design effective inputs.

(f) Select appropriate technology to

support input design.

(g) Describe how the user interface may

be structured for ease of use

(h) Explain how prototyping may be

PAGE 46

trail and define the content of such a

trail.

(d) Examine the need to provide

interfaces with other systems and

discuss the implications of

developing these interfaces.

(e) Establish requirements for data

conversion and data creation.

20 Legal compliance in information systems

(a) Describe the principles, terms and

coverage typified by the UK Data

Protection Act.

(b) Describe the principles, terms and

coverage typified by the UK

Computer Misuse Act.

(c) Explain the implications of software

licences and copyright law in

computer systems development.

(d) Discuss the legal implications of

software supply with particular

reference to ownership, liability and

damages.

21 Implementing security and legal

requirements

(a) Describe methods to ensure the

physical security of IT systems.

(b) Discuss the role, implementation

and maintenance of a password

system.

(c) Explain representative clerical and

software controls that should assist

in maintaining the integrity of a

system.

(d) Describe the principles and

application of encryption techniques.

(e) Discuss the implications of software

viruses and malpractice.

(f) Discuss how the requirements of the

UK Data Protection and UK

Computer Misuse legislation may be

implemented.

22 Quality assurance in the management

and development process

(a) Define the characteristics of a quality

software product.

(b) Define the terms, quality

management, quality assurance and

quality control.

(c) Describe the V model and its

application to quality assurance and

testing.

(d) Explain the limitations of software

testing.

(e) Participate in the quality assurance

of deliverables in requirement

specification using formal static

testing methods.

(f) Explain the role of standards and, in

particular, their application in quality

assurance.

(g) Briefly describe the task of unit

testing in bespoke systems

development.

23 System and user acceptance testing

(a) Define the scope of system testing.

(b) Distinguish between dynamic and

static testing.

(c) Use a cause-effect chart (decision

table) to develop an appropriate test

script for a representative system

test.

(d) Explain the scope and importance of

performance testing and usability

testing.

(e) Define the scope and procedures of

user acceptance testing.

(f) Describe the potential use of

automated tools to support system

and user acceptance testing.

24 Implementation issues and

implementation methods

(a) Plan for data conversion and creation.

(b) Discuss the need for training and

suggest different methods of

delivering such training.

(c) Describe the type of documentation

needed to support implementation

and comment on ways of effectively

organising and presenting this

documentation.

(d) Distinguish between parallel running

and direct changeover and comment

on the advantages and disadvantages

of each.

25 Post-implementation issues

(a) Describe the metrics required to

measure the success of the system.

(b) Discuss the procedures that have to

be implemented to effectively collect

the agreed metrics.


PAGE 47

(c) Identify what procedures and

personnel should be put in place to

support the users of the system.

(d) Explain the possible role of software

monitors in measuring the success of

the system.

(e) Describe the purpose and conduct of

an end-project review and a post-

implementation review.

(f) Describe the structure and content of

written reports as compared with an

end-project review and a post-

implementation review.

26 Change control in systems development

and maintenance

(a) Describe the different types of

maintenance that a system may

require.

(b) Explain the need for a change control

process for dealing with these changes.

(c) Describe a maintenance lifecycle.

(d) Explain the meaning and problems

of regression testing.

(e) Discuss the role of user groups and

their influence on system

requirements.

27 Relationship of management,

development process and quality

(a) Describe the relationship between

project management and the

systems development process.

(b) Describe the relationship between

the systems development process

and quality assurance.

(c) Explain the time/cost/quality triangle


and its implications for information

systems projects.

(d) Discuss the need for automation to

improve the efficiency and

effectiveness of information systems

management, delivery and quality

assurance.

(e) Explain the role of the accountant in

information systems management,

delivery and quality assurance.

28 Revision

PAGE 48

AIM

To develop knowledge and understanding of

the general legal framework within which an

accountant operates. To develop an awareness

of and an ability to understand both common

law and statute in relation to specific legal

areas of central importance to business.

OBJECTIVES

On completion of this paper students

should be able to:

• analyse and evaluate situations from a

legal perspective

• identify the essential elements of the

English legal system including the main

sources of law and explain its operation

• explain and demonstrate an ability to

use the essential principles relating to

the formation, content and remedies for

the breach of contracts

• explain the rules of agency as they apply

to sole traders, partnerships and companies

• explain the law relating to the partnership

• describe the different types of company

and explain the rules relating to their

financing, management, administration

and regulation

• explain the law relating to employment

relationships with particular regard to

dismissal, redundancy and discrimination.


OVERALL SYLLABUS

There is no prerequisite knowledge for this

paper although the generic skills developed

in Part 1 will provide the basis for the

substantive study undertaken.

Paper 2.2

Corporate and Business Law

Although all of the work done in other papers

in Part 2 takes place within the legal

framework, legal regulation is particularly

relevant to Paper 2.1 Information Systems,

Paper 2.3 Business Taxation (UK) and Paper

2.6 Audit and Internal Review. Questions

in Paper 2.2 will neither assume, nor draw

on, any knowledge from those papers.

In Part 3, Paper 3.2 Advanced Taxation,

will require an ability to understand and

apply tax law. Paper 3.6 Advanced

Corporate Reporting will address the issue

of corporate insolvency.

SYLLABUS CONTENT

1 The English legal system

This section provides an introduction to

some key features of the English legal

system and will facilitate understanding

of the sources of law, how law is

administered and how legal rules

emerge in the legal system.

(a) Court structure and the

administration of justice.

(b) Case law and legislation: precedent,

statutory instruments, statutory

interpretation.

(c) Arbitration.

(d) The impact of European Community

legislation.

(e) Human Rights.

2 General principles of the law of contract

This section deals with major features

of the formation, content and discharge

of a contract and will provide an

understanding of the basic nature of

contractual agreements.

(a) Formation: offer, acceptance,

consideration, intention to create

legal relations, privity.

(b) Contents: terms, exclusion clauses

and their control.

(c) Contracts in restraint of trade.

(d) Discharge of contract.

(e) Breach of contract and remedies.

3 Agency and partnership

This section will familiarise the student

with those general rules of agency,

which find specific application in

relation to partnerships and companies.

It also examines the legal rules

governing the operation of partnerships.

(a) Creation of agency.

(b) Principal and agent: reciprocal rights

and duties.

(c) Authority of the agent.

(d) Types of partnerships including

limited liability partnerships.

(e) Formation of Partnerships.

(f) Internal regulation of Partnerships.

(g) Partnerships and outsiders.

4 The company form

This section deals with the nature of

companies; both the private company;

and

the public limited company, in comparison

to the sole trader or the partnership.

(a) The limited company – distinguished

from partnership.

PAGE 49

Corporate and Business Law (Continued)

(b) The private company and public

limited company.

(c) The meaning and consequences of

separate legal personality.

5 The formation and constitution of the

company

This section examines the legal

requirements controlling the setting up

of a company.

(a) The formalities involved in

registering a company.

(b) The constitutional documents of the

company: memorandum and articles

of association.

(c) The contractual capacity of a company.

(d) Statutory books, records and returns.

6 Capital and financing of companies

This section deals in outline with the

capital and financing of companies,

covering share and loan-capital.

(a) Share capital: ordinary and

preference shares.

(b) Class rights and their alteration.

(c) Loan capital: debentures and

company charges

(d) Capital maintenance and dividend law.

7 Management and administration of a

company

This section takes an overview of the

legal obligations of the management in

relation to the administration of the

company. The role of key personnel is

identified and the rights and obligations

they have, are explored.

(a) Directors: appointment, termination

of office and disqualification; duties

(especially duty of care); powers.

(b) Company Secretary: appointment;

duties; powers.

(c) Auditors: appointment, removal,

resignation; duties; powers.

8 Company meetings

This section deals with the function and

conduct of the company meeting.

(a) Types of meetings: ordinary and

extraordinary general meetings.

(b) Types of resolutions: ordinary,

extraordinary, special, elective and

written.

9 Majority control and minority protection

This section examines the way in which

potential abuse of majority power may

be prevented or remedied.

(a) Unfair prejudice.

(b) Just and equitable winding up.

(c) DTI investigations.

10 Insolvency

This section will introduce students to

the ways in which insolvent companies

may be dealt with.

(a) Voluntary liquidation.

(b) Compulsory liquidation.

(c) Administration.

11 Employment

This section focuses on the major

legislative and common law principles

which govern employment relationships.

(a) Contracts of service and contracts for

services.

(b) Unfair and wrongful dismissal.

(c) Redundancy.

(d) Discrimination.

12 Criminal Law

(a) Insider dealing.

(b) Money laundering.

EXCLUDED TOPICS

The syllabus does not attempt to cover

every aspect of the various subject areas it

deals with. For example, Contract does not

cover misrepresentation or frustration.


Company law, as set out in sections 4–10

above, is central to the syllabus and it will

provide a possible 50% of the total marks

allocated in any particular paper.

APPROACH TO EXAMINING THE SYLLABUS


divided into two sections. Section A will

contain short, knowledge-based questions.

Section B will be problem-based and will

test communication skills and the ability to

appraise and analyse information.

Number

of marks

Section A: Choice of 6 from 8




100

PAGE 50


Knowledge of new legislation will not be

expected until at least six months after the

last day of the month in which the Royal

Assent (or similar procedure in other

countries) is given, or six months after the

specific provision comes into effect, which

ever is the later.



RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.



texts useful:

Kelly D & Holmes A Business Law

(4th Edition) Cavendish

ISBN 1859414699

- covers all aspects of the syllabus.

Smith K & Keenan D Advanced Business

Law (11th Edition) Pitman

- covers contract, employment, company

and agency law.

Smith K & Keenan D Company Law for

Students (12th Edition) Pitman

- covers the company law in more detail.



student accountant.


STUDY SESSIONS

1 English legal system – I

Court Structure and Administration of

Justice

(a) Understand how different types of

cases are dealt with by different courts

(b) Identify the major courts and their

relationship of seniority

(c) Explain how appeals go from one

court to another.

2 English legal system – II

Case Law and Legislation

(a) Explain what is meant by case law

and precedent within the context of

the hierarchy of the courts

(b) Explain legislation and evaluate

delegated legislation

(c) Illustrate the rules and presumptions

used by the courts in interpreting

statutes

(d) The impact of human rights law.

3 English legal system – III

European Union as a source of Law

(a) Evaluate the impact of the various

institutions of the European

Community on UK law

(b) Provide examples of the impact of

the EC on domestic law.

Arbitration

(a) Evaluate arbitration as an alternative

to the court structure in business

relationships.

PAGE 51

4 General principles of the law of

contract – I

Formation

(a) Analyse the nature of a simple contract

(b) Distinguish the legal requirements

for the creation of a contract

(c) Explain the meaning of offer and

distinguish it from invitations to treat

(d) Explain the meaning and

consequence of acceptance.


contract – II

Formation

(a) Explain the need for consideration

(b) Consider the doctrine of privity

(c) Distinguish the presumptions

relating to intention to create legal

relations.


contract – III

Contents

(a) Distinguish terms from mere

representations

(b) Define the various contractual terms

(c) Explain the effect of exclusion

clauses and evaluate their control

(d) Explain the effect of contracts in

restraint of trade and evaluate their

control.


contract – IV

Breach of contract and remedies

(a) Explain how contracts can be

discharged

(b) Explain the meaning and effect of

breach of contract

(c) Explain the rules relating to the

award of damages

(d) Consider the equitable remedies for

breach of contract.

8 Agency – 1

(a) Define the role of the agent and give

examples of such relationships

(b) Explain how the agency relationship

is established

(c) Define the authority of the agent.

9 Agency – II

(a) Analyse the reciprocal rights and

duties between principal and agent

(b) Detail the relationship between the

agent and third parties.

10 Partnership – I

Formation of Partnership

(a) Define and explain the role of the

partnership form in the context of

contemporary business organisation

(b) Consider how partnerships come

into being

(c) Demonstrate a knowledge of the

legislation governing the partnership,

both unlimited and limited.

11 Partnership – II

Internal Regulation of Partnerships

(a) Analyse the duties of partners to

each other

(b) Analyse the rights of partners to

each other


(c) Explain what is meant by

partnership property.

12 Partnership – III

Partnerships and Outsiders

(a) Explain the authority of partners in

relation to partnership activity

(b) Analyse the liability of various

partners for partnership debts

(c) Explain the way in which

partnerships can be brought to an

end.

13 Company Law – I

The Company Form

(a) Distinguish between companies and

partnerships

(b) Analyse different types of

companies, especially private and

public companies

(c) Explain the meaning and effect of

limited liability.

14 Company Law – II

The Company Form

(a) Illustrate the effect of separate

personality

(b) Cite instances where separate

personality will be ignored.

15 Company Law – III

The formation of the company

(a) Describe the procedure for

registering companies, both public

and private

(b) Detail the statutory books, records

and returns that companies must

PAGE 52

keep or make

(c) Explain the controls over the names

that companies may or must use.

16 Company Law – IV

The constitution of the company

(a) Detail the content and effect of the

memorandum of association

(b) Describe the contents of Table A

articles of association

(c) Analyse the effect of a company’s

constitutional documents

(d) Explain how articles of association

can be changed.

17 Company Law – V

Share capital

(a) Examine the different meanings of

capital

(b) Illustrate the difference between

various classes of shares

(c) Explain the procedure for altering

class rights.

18 Company Law – VI

Loan capital

(a) Define companies’ borrowing powers

(b) Explain the meaning of debenture

(c) Distinguish loan capital from share

capital

(d) Explain the concept of a company

charge and distinguish between fixed

and floating charges

(e) Detail the need and the procedure

for registering company charges.

19 Company Law – VII

Capital Maintenance and Dividend Law

(a) Explain the doctrine of capital

maintenance

(b) Examine the effect of issuing shares

at either discount, or premium

(c) Explain the rules governing the

distribution of dividends in both

private and public companies.

20 Company Law – VIII

Directors – 1

(a) Explain the role of directors in the

operation of a company

(b) Detail the ways in which directors

are appointed, can lose their office

or be subject to a disqualification

order

(c) Distinguish between the powers of

the board of directors, the managing

director and individual directors to

bind their company.

21 Company Law – IX

Directors – 2

(a) Explain the duties that directors owe

to their companies

(b) Demonstrate an understanding of

some of the way in which the

companies legislation has attempted

to control directors

(c) Distinguish between fraudulent and

wrongful trading.

22 Company Law – X

Other Company Officers

(a) Detail the appointment procedure

relating to, and the duties and

powers of, a company secretary

(b) Detail the appointment procedure

relating to, and the duties and

powers of, company auditors.

23 Company Law – XI

Company meetings and resolutions

(a) Distinguish between types of

meetings: ordinary and extraordinary

general meetings and class meetings

(b) Explain the procedure for calling

such meetings

(c) Detail the procedure for conducting

company meetings

(d) Distinguish between types of

resolutions: ordinary, extraordinary,

special, elective and written.

24 Company Law - XII

Majority control and minority protection

(a) Explain the normal rule of majority

control as expressed in Foss v

Harbottle

(b) Consider the common law

exceptions to Foss v Harbottle

(c) Evaluate the just and equitable

winding up procedure as a means of

protecting minority rights

(d) Discuss the statutory protection

relating to unfairly prejudicial

conduct under the companies

legislation as an alternative to


PAGE 53

winding up

(e) Consider Department of Trade and

Industry investigations as a form of

minority protection.

25 Company Insolvency – XIII

(a) Explain the meaning of and

procedure involved in voluntary

liquidation

(b) Explain the meaning of and

procedure involved in compulsory

liquidation

(c) Consider administration as an

alternative to winding up.

26 Employment Law – I

Contracts of service and for services

(a) Distinguish between employees and

the self-employed

(b) Explain why such a distinction is

important

(c) Explain the nature of the contract of

employment and give examples of

the main duties placed on the

parties to such a contract.

27 Employment Law – II

Dismissal and Redundancy

(a) Distinguish between wrongful and

unfair dismissal including

constructive dismissal

(b) Explain what is meant by

redundancy

(c) Detail the remedies available to

those who have been subject to

unfair dismissal or redundancy.

28 Employment Law – III

Discrimination

(a) Explain what is meant by

discrimination in its various forms,

including indirect as well as direct

discrimination

(b) Detail the legal provisions which

seek to control discrimination

(c) Detail the remedies available to

those who have been subjected to

discrimination.


29 Criminal Law

Syllabus 12 a and b

(a) Understand the nature and legal

control over insider dealing

(b) Understand the nature and legal

control over money laundering.

PAGE 54

AIM


in the core areas of tax related to

businesses and their employees.

OBJECTIVES


should be able to:

• explain the operation of the UK tax

system

• prepare computations of the corporation

tax liability for individual companies

and groups of companies

• prepare computations of the income tax

liability for employees, sole traders and

partnerships

• prepare computations of the chargeable

gains arising on incorporated and

unincorporated businesses

• explain and apply the principles and

scope of Value Added Tax

• explain the impact of National

Insurance Contributions on employees,

employers and the self-employed

• explain the use of exemptions and

reliefs in deferring or minimising tax

liabilities

• demonstrate the skills expected at Part 2.


OVERALL SYLLABUS

An understanding of the formats of

accounts used for sole traders, partnerships

and companies from Paper 1.1 Preparing

Financial Statements is assumed. There is

no substantial integration with other papers

in Part 2.

Paper 2.3

Business Taxation(United Kingdom)

The coverage in Paper 2.3 will provide the

grounding for the study of the optional

Paper 3.2 Advanced Taxation.

Paper 3.2 develops the topics by applying

the tax knowledge to problems encountered

in practice, by giving more emphasis to

planning to minimise or defer tax and by

examining the interaction of taxes.

SYLLABUS CONTENT

1 Corporate businesses

(a) Scope of corporation tax.

(b) Residence.

(c) Profits chargeable to corporation tax

(i) Trading income

(ii) capital allowances

(iii) relief for trading losses

(iv) Property income

(v) Interest

(vi)charges on income.

(d) Chargeable gains

(i) principles and scope

(ii) the basis of calculation

(iii) the identification and application

of relevant exemptions and reliefs.

(e) Calculation of the corporation tax liability.

(f) Overseas aspects

(i) trading overseas via a subsidiary

or a branch

(ii) double taxation relief

(iii) transfer pricing.

(g) Groups of companies.

(h) Self assessment system.

(i) Value Added Tax.

2 Unincorporated businesses

(a) Basic income tax computation.

(b) Self assessment system.

(c) Trading income

(i) badges of trade

(ii) computation of assessable profit

(iii) basis of assessment

(iv)change of accounting date

(v) capital allowances

(vi)relief for trading losses

(vii) partnerships and limited liability

partnerships

3.2 Advanced Taxation


PAGE 55

(viii) personal pensions.

(d) Capital gains tax

(i) principles and scope (restricted to

business assets)

(ii) the basis of calculation

(iii) the identification and application

of relevant exemptions and reliefs.

(e) Value Added Tax.

(f) Class 2 and Class 4 NIC.

3 Employees

(a) Employment Income

(i) basis of assessment

(ii) allowable deductions

(iii) PAYE system

(iv)benefits.

(b) Occupational pension schemes.

(c) Class 1 and Class 1A NIC.

4 Tax planning

(a) Employment v self-employment.

(b) Remuneration packages.

(c) Choice of business medium.

(d) Incorporation of a business.

(e) Disposal of a business.

(f) Directors and shareholders.

EXCLUDED TOPICS

The following topics are specifically

excluded from Paper 2.3:


(a) Scope of corporation tax

(i) investment companies

(ii) close companies

(iii) companies in receivership and

liquidation

(iv) anti-avoidance legislation

(v) reorganisations

(vi) purchase by a company of its

own shares

(vii) personal service companies.


(i) research and development

expenditure

(ii) the 100% first-year allowance for

information and communication

technology equipment

(iii) the 100% first-year allowance

for expenditure on renovating

business premises in

disadvantaged areas

(iv) the 100% first-year allowance

for flats above shops

(v) the 100% first-year allowance for

water technologies

(vi) capital allowances for

agricultural buildings, patents,

scientific research and know how

(vii) in respect of industrial buildings

allowance: enterprise zones,

initial allowances, and the sale of

an industrial building at less than

original cost following a period of

non-industrial use (note that

sales for more than original cost

are examinable)

(viii) furnished holiday lettings

(ix) non-trading deficits on loan

relationships

(x) trade charges on income

(xi) relief for intangible assets

(xii) the corporate venturing scheme.


(i) assets held at 31 March 1982

(ii) part disposals

(iii) negligible value claims

(iv) leases, chattels and wasting

assets

(v) a detailed question on the

pooling provisions for shares

(vi) the same day and nine day

matching rules for shares and

securities applicable to corporate

businesses.

(vii) substantial shareholdings

(e) Calculation of the corporation tax

liability

(i) in relation to the minimum

corporation tax rate of 19%

where profits are paid out as a

dividend, an accounting period

spanning 31 March 2004,

dividends paid to corporate

shareholders, and groups of

companies


(i) controlled foreign companies

(ii) foreign companies trading in the

UK

(iii) expense relief in respect of

overseas tax

(iv)the restriction of double taxation

relief for underlying tax to the full

rate of corporation tax

(v) the carry back and carry forward

of unrelieved foreign tax.

(g) Groups of companies

(i) consortia

(ii) 51% groups and group income

elections

Business Taxation (United Kingdom)

PAGE 56

(iii) pre-entry gains and losses

(iv) the anti-avoidance provisions

where arrangements exist for a

company to leave a group

(v) the tax charge that applies where

a company leaves a group within

six years of receiving an asset by

way of a no gain/no loss transfer.

(h) Self assessment system

(i) form CT61 and quarterly

accounting for income tax.

(i) Value Added Tax

(i) group registration

(ii) imports, exports and trading

within the European Community

(iii) partial exemption

(iv)second-hand goods scheme

(v) the capital goods scheme

(vi)in respect of property and land:

leases, do-it-yourself builders,

and the landlord's option to tax

(vii) penalties apart from the default

surcharge, serious

misdeclarations (but not repeated

misdeclarations) and default

interest

(viii) special schemes for retailers.


(a) Basic income tax computation

(i) personal allowances other than

the personal allowance for people

aged under 65

(ii) tax credits

(iii) non-trade charges on income

(iv) joint property of husbands and

wives, maintenance payments

and minor children

(v) propery income

(vi) interest and miscellaneous

income

(vii) individual savings accounts

(viii) the enterprise investment

scheme and venture capital trusts

(ix) foreign income, non-residents

and double taxation relief

(x) income from trusts and

settlements

(xi)anti-avoidance legislation.

(c) Trading income

(i) as for corporate businesses

(ii) farmers averaging of profits

(iii) the averaging of profits for

authors and creative artists

(iv) loss relief for shares in unquoted

trading companies

(v) investment income and charges

of a partnership

(vi)the allocation of notional profits

and losses for a partnership

(vii) the simplification of pensions

that is to take place from 6 April

2006. This topic will not be

examinable until the June 2007

diet.


(i) as for corporate businesses

(ii) calculation of the indexation

allowance

(iii) reinvestment relief

(iv)principal private residence

(v) partnership capital gains

(vi) overseas aspects

(vii) losses in the year of death

(viii) the transfer of assets between a

husband and wife

(ix)the exemption of gilt edged

securities and qualifying

corporate bonds

(x) the payment of CGT by annual

instalments

(xi)capital sums received in respect

of the loss, destruction or

damage of an asset

(xii) relief for losses incurred on

loans made to traders.

(e) Value Added Tax

(i) as for corporate businesses.

(f) Class 2 and Class 4 NIC

(i) the offset of trading losses

against non-trading income (for

Class 4 NIC).

3 Employees


(i) the calculation of a car benefit

where emission figures are not

available

(ii) share and share option incentive

schemes for employees

(iii) payments on the termination of

employment, and other lump

sums received by employees.

(b) Occupational pension schemes

(i) a detailed knowledge of the

conditions that must be met to

obtain HM Revenue & Customs'

approval for an occupation

pension scheme


PAGE 57

(ii) the option for certain

occupational pension schemes to

apply to be subject to the

personal pension scheme rules.

(c) Class 1 and Class 1A NIC

(i) the calculation of directors’ NIC

on a month by month basis.


The key topic areas, taken directly from the

syllabus content list, are as follows:


(a) Scope of corporation tax.

(b) Profits chargeable to corporation tax.

(c) Calculation of the corporation tax

liability.

(d) Self assessment system.


(a) Basic income tax computation.

(b) Self assessment system.

(c) Trading income.

3 Employees

(a) Employment Income.


SYLLABUS


divided into two sections.

Only core topics will be examined in

Section A. A non-core topic may form part

of a question (such as a chargeable gain in

a corporation tax computation), but this

will account for a maximum of ten marks.

At least 40 of the 55 available marks in

Section A will be of a computational nature.

• Question 1 will be on a corporate

business (for approximately 30 marks).

• Question 2 will be on an unincorporated

business and/or employees (for

approximately 25 marks).

The questions in Section B will be a mix of

computational and written, and include the

minimisation or deferral of tax liabilities by

the identification and application of

relevant exemptions and reliefs.

• Question 3 will be on VAT (either for an

incorporated business or an

unincorporated business).

• Question 4 will be on capital gains

(either for an incorporated business or

an unincorporated business).

• Questions 5, 6 and 7 will be on any

area of the syllabus.

Number

of Marks

Section A: 2 compulsory questions 55



100

Tax rates, allowances and benefits will be

given in the examination paper.


The ACCA applies a six-month rule in that

questions requiring an understanding of

new legislation will not be set until at least

six calendar months after the last day of

the month in which the legislation received


Royal Assent. The same rule applies to the

effective date of the provisions of an Act

introduced by Statutory Instrument. It

would, however, be considered

inappropriate to examine legislation it is

proposed to repeal or substantially alter.

Knowledge of section numbers will not be

needed to understand questions in this paper,

nor will students be expected to use them in

their answers. If students wish to refer to

section numbers in their answers they may

do so and will not be penalised if old, or

even incorrect, section numbers are used.

Names of cases or a detailed knowledge of

the judgement are not required but

knowledge of the principles decided in

leading cases is required.



RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch

PAGE 58

STUDY SESSIONS


(a) Scope of corporation tax

(i) Define the terms ‘period of

account’, ‘accounting period’, and

‘financial year’

(ii) Explain when an accounting

period starts and finishes

(b) Residence

(i) Explain how the residence of a

company is determined


(i) Trading income

– State the expenditure that is

allowable in calculating the

tax-adjusted trading profit

– Explain how relief can be

obtained for pre-trading

expenditure

(ii) Capital allowances

– Define plant and machinery for

capital allowances purposes

– Calculate writing down

allowances and first year

allowances

– Explain the treatment of motor

cars

– Compute balancing

allowances and charges

– Explain the treatment of short

life assets and long life assets

– Define an industrial building

for industrial buildings

allowance purposes

– Calculate industrial buildings

allowance for new and

second-hand buildings

– Compute the balancing

adjustment on the disposal of

an industrial building

(iii) Relief for trading losses

– Explain how trading losses

can be carried forward


can be claimed against

income of the current or

previous accounting periods

– State the factors that will

influence the choice of loss

relief claim

(iv)Property income

– Compute the property

business profit

– Explain the treatment of a

premium received for the

grant of a short lease

– Explain how relief for a

property business loss is

given

(v) Interest

– Explain how profits from loan

relationships and interest

received are assessed

(vi)Charges on income

– Explain the treatment of

charges on income


(i) Principles and scope

– Prepare a basic capital gains

computation

– State the allowable

deductions



International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.


Candidates may also find the following texts

useful:

A Homer and R Burrows Tolley’s Tax

Guide Tolley Publishing ISBN 1860128319

A Melville Taxation Prentice Hall

ISBN 0 273 655522–1

Wider reading is also available especially

regular study of the relevant articles in

ACCA's student accountant.

PAGE 59

– Calculate the indexation

allowance

(ii) The basis of calculation

– Explain the treatment of

capital losses

– Explain the identification rules

for disposals of shares and

securities

– Apply the pooling provisions

for shares and securities

– Explain the treatment

following a bonus issue, rights

issue or takeover (as a result

of the chargeable gain part

disposal rules not being

examinable, any question on

the takeover of shares or

securities will involve a paper

for paper transaction.

Reorganisations are not

mentioned in the Study Guide.

This is because all the

relevant rules can be

examined by way of a

takeover (for example, where

shareholders receive two

different classes of share in

exchange for their existing

shareholding))

(iii) The identification and

application of relevant

exemptions and reliefs

– Explain and apply rollover

relief

(e) Calculation of the corporation tax

liability

(i) Prepare a basic corporation tax

computation

(ii) Explain the implications of

receiving franked investment

income

(iii) Calculate the corporation tax

liability at the starting rate, small

company rate and full rate, and

apply tapering relief

(iv) Explain how the payment of a

dividend can impact upon the

amount of corporation tax

payable


(i) Trading overseas via a subsidiary

or a branch

– Compare the UK tax treatment

of an overseas branch to an

overseas subsidiary

(ii) Double taxation relief

– Calculate double taxation

relief for withholding tax and

underlying tax

(iii) Transfer pricing

– Explain and apply the transfer

pricing rules

(g) Groups of companies

(i) Define an associated company

(ii) Define a 75% group

(iii) Explain and apply the reliefs

available to members of a 75%

group

(iv)Define a 75% capital gains group

(v) Explain and apply the reliefs

available to members of a 75%

capital gains group

(h) Self assessment system

(i) Describe the features of self-

assessment

(ii) Explain how HM Revenue &

Customs can enquire into a self-

assessment return

(iii) Calculate interest on overdue tax

(iv) Explain how large companies are

required to account for

corporation tax on a quarterly

basis

(i) Value Added Tax

(i) Describe the scope of VAT

(ii) State the circumstances in which

a person must register for VAT,

and explain the advantages of

voluntary VAT registration

(iii) State the circumstances in which

pre-registration input VAT can be

recovered

(iv) Explain how a person can

deregister for VAT

(v) Explain how VAT is accounted for

and administered

(vi) Explain how the tax point is

determined

(vii) List the information that must

be given on a VAT invoice

(viii) Describe the principles that

apply to the valuation of supplies

(ix)State the circumstances in which

input VAT is non-deductible

(x) Describe the relief that is

available for impairment losses

on trade debts

(xi) List the principal zero-rated and

exempt supplies

(xii) Describe the cash accounting,

the annual accounting and flat


PAGE 60

rate schemes

(xiii) State the circumstances in

which the default surcharge, a

serious misdeclaration penalty,

and default interest will be

applied


(a) Basic income tax computation

(i) Prepare a basic income tax

computation

(ii) Explain the treatment of savings

income and dividends

(iii) Explain the treatment of trade

charges on income

(b) Self assessment system

(i) Describe the features of self-

assessment

(ii) Calculate payments on account

and balancing payments/

repayments

(iii) Calculate interest on overdue tax

and state the penalties that can

be charged

(iv) Explain how HM Revenue &

Customs can enquire into a self-

assessment return

(c) Trading income

(i) Badges of trade

– Describe and apply the

badges of trade

(ii) Computation of assessable profit

– As for corporate businesses

(iii) Basis of assessment

– Explain the basis of

assessment

– Compute the assessable

profits on commencement and

cessation

(iv)Change of accounting date

– State the factors that will

influence the choice of

accounting date

– State the conditions that must

be met for a change of

accounting date to be valid

– Compute the assessable

profits on a change of

accounting date

(v) Capital allowances


(vi)Relief for trading losses


can be carried forward

(although only trade charges

are examinable, the impact of

non-trade charges where trade

charges are carried forward is

examinable. In any

examination question on this

area, a figure for non-trade

charges will simply be given.

The carry forward of losses on

incorporation is examinable)


can be claimed against total

income and chargeable gains

– Explain the relief for trading

losses in the early years of a

trade

– Explain terminal loss relief

(vii) Partnerships and limited liability

partnerships

– Explain how a partnership is


assessed to tax

– Allocate assessable profits

between the partners following

a change in the profit sharing

ratio or a change in the

members of the partnership

– Describe the alternative loss

relief claims that are available

to partners

– Explain the loss relief

restriction that applies to the

partners of a limited liability

partnership

(viii) Personal pensions

– Explain the relief given for

contributions to a personal

pension scheme


(i) Principles and scope (restricted

to business assets)


– Define a business asset for

the purposes of taper relief

– Compute taper relief

(including non-business

assets)

(ii) The basis of calculation


(quoted shares and securities

(including the valuation rules)

are examinable since certain

quoted shareholdings will

qualify for business asset

taper relief. The indexation

allowance is not examinable

PAGE 61


for individual taxpayers.

Therefore, any question

involving shares and securities

will simply give a figure for

the value of the 1985 pool as

at 5 April 1998)

(iii) The identification and

application of relevant

exemptions and reliefs


– Explain and apply holdover

relief for the gift of business

assets

– Explain and apply the relief

available when a business is

transferred to a limited

company

(e) Value Added Tax

(i) As for corporate businesses

(f) Class 2 and Class 4 NIC

(i) Calculate class 2 NIC

(ii) Calculate class 4 NIC

3 Employees


(i) Basis of assessment

– State the factors that determine

whether an engagement is

treated as employment or self-

employment

– Explain the basis of assessment

– Describe the income assessable

(ii) Allowable deductions

– List the allowable deductions,

including travelling expenses

– Explain the use of the

statutory approved mileage

allowances

(iii) PAYE system

– Explain the PAYE system

(iv)Benefits

– Identify P11D employees

– Explain how benefits are

assessed

(b) Occupational pension schemes

(i) State the main features of an

occupational pension scheme

(ii) Explain the significance of an

occupational pension scheme

being approved by HM Revenue

& Customs

(c) Class 1 and Class 1A NIC

(i) Calculate class 1 NIC

(ii) Calculate class 1A NIC

4 Tax planning

(a) Employment v self-employment

(i) Compare the tax implications of

employment as compared to self-

employment

(b) Remuneration packages

(i) Compare alternative

remuneration packages

(c) Choice of business medium

(i) Compare the tax position of a

director/shareholder with that of

a sole trader

(d) Incorporation of a business

(i) Explain the factors that must be

considered when incorporating a

business

(e) Disposal of a business

(i) Explain the tax implications

arising on the disposal of a

business

(f) Directors and shareholders

(i) Compute whether remuneration

or a dividend is the most tax

efficient way to extract profit from

a company

PAGE 62

AIM


of financial management methods for

analysing the benefits of various sources of

finance and capital investment

opportunities, and of the application of

management accounting techniques for

business planning and control.

OBJECTIVES


should be able to:

• explain the role and purpose of financial

management

• evaluate the overall management of

working capital

• evaluate appropriate sources of finance

for particular situations

• appraise capital investment through the

use of appropriate methods

• identify and discuss appropriate costing

systems and techniques

• prepare budgets and use them to

control and evaluate organisational

performance

• understand the basic principles of

performance measurement

• critically assess the tools and

techniques of financial management

and control

• demonstrate the knowledge,

understanding, skills, abilities and critical

evaluation expected in Part 2.


OVERALL SYLLABUS

Students must have a thorough knowledge

of the material in Paper 1.2 Financial

Information for Management and a good

knowledge of other Part 1 papers.

Financial Management and Control is

integrated with other Part 2 papers by

providing a management decision

framework within which some aspects of

the Part 2 syllabus are developed. The

effects of capital allowances and

corporation tax on capital investment

appraisal are examinable. Knowledge

gained from Paper 2.3 Business Taxation

(UK) will be useful in this respect.

Financial Management and Control is

developed in Part 3 into advanced study of

Performance Management (Paper 3.3) and

Strategic Financial Management (Paper 3.7).

SYLLABUS CONTENT

1 Financial management objectives

(a) The nature, purpose and scope of

financial management.

(b) The relationship between financial

management, management

accounting and financial accounting.

(c) The relationship of financial

objectives and organisational

strategy.

(d) Problems of multiple stakeholders in

financial management and the

consequent multiple objectives.

(e) Objectives (financial and otherwise)

in not-for-profit organisations.

2 The financial management environment

(a) Financial intermediation and credit

creation.

(b) Money and capital markets

(i) Domestic and international

(ii) Stock markets (both major

markets and small firm markets).




Paper 2.4

Financial Management and Control

Paper 2.4

PAGE 63

(c) The Efficient Markets Hypothesis.

(d) Rates of interest and yield curves.

(e) The impact of fiscal and monetary

policy on business.

(f) Regulation of business (for example,

pricing restrictions, green policies

and corporate governance).

3 Management of working capital

(a) The nature and scope of working

capital management.

(b) Funding requirements for working

capital.

(c) Working capital needs of different

types of business.

(d) The relationship of working capital

management to business solvency.

(e) Management of stock, debtors, short

term funds, cash, overdrafts and

creditors.

(f) Techniques of working capital

management (including ratio

analysis, EOQ, JIT, credit evaluation,

terms of credit, cash discounts,

factoring and invoice discounting,

debtors cycles, efficient short-term

fund investing, cash forecasting and

budgets, Miller-Orr model, basic

foreign exchange methods,

probabilities and risk assessment,

terms of trade with creditors).

4 Sources of finance

(a) Sources and relative costs (including

issue costs) of various types of

finance and their suitability to

different circumstances and

organisations (large and small, listed

and unlisted) including:

(i) access to funds and the nature of

business risk

(ii) the nature and importance of

internally generated funds

(iii) capital markets (types of share

capital, new issues, rights issues,

loan capital, convertibles,

warrants)

(iv) the effect of dividend policy on

financing needs

(v) bank finance (short, medium and

long term, including leasing)

(vi) trade credit

(vii) government sources: grants,

regional and national aid

schemes and tax incentives.

(viii) problems of small company

financing (collateral, maturity,

funding gap, risk)

(ix)problems of companies with low

initial earnings (R&D, Internet,

and other high-technology

businesses)

(x) venture capital and financial

sources particularly suited to the

small company

(xi)international money and capital

markets, including an introduction

to international banking and the

finance of foreign trade.

(b) Requirements of finance (for what

purpose, how much and for how

long) in relation to business

operational and strategic objectives.

(c) The importance of the choice of

capital structure: equity versus debt

and basic analysis of the term profile

of funds.

(d) Financial gearing and other key

financial ratios and analysis of their

significance to the organisation.

(e) Appropriate sources of finance,

taking into account:

(i) cost of finance

(ii) timing of cash payments

(iii) business risk and financial risk

(vi) effect on gearing and other ratios

(v) effect on company’s existing

investors.

5 Capital investment appraisal

(a) Discounted cash flow techniques

(i) simple and compound interest

(ii) net present value

(iii) annuities and perpetuities

(iv) internal rate of return

(v) future value

(vi) nominal interest.

(b) Appraisal of domestic capital

investment opportunities for profit

making and not-for-profit

organisations through the use of

appropriate methods and techniques

(i) the risk / return relationship

(ii) return on capital employed

(iii) payback

(iv) internal rate of return

Financial Management and Control (Continued)

PAGE 64

Paper 2.4: Financial Management and Control (Continued)

(v) net present value

(vi) single and multi-period capital

rationing

(vii) lease or buy decisions

(viii) asset replacement using

equivalent annual cost.

Including (in categories (i)-(viii))

the effects of taxation, inflation,

risk and uncertainty

(probabilities,

sensitivity analysis, simulation).

6 Costing systems and techniques

(a) The purpose of costing as an aid to

planning, monitoring and control of

business activity

(b) Different approaches to costing

(c) Costing information requirements

and limitations in not-for-profit

organisations

(d) Behavioural implications of different

costing approaches including

performance evaluation

(e) Implications of costing approaches

for profit reporting, the pricing of

products and internal activities/

services.

7 Standard costing and variance analysis

(a) Standard costing

(i) determination of standards

(ii) identification and calculation of

sales variances (including quantity

and mix), cost variances (including

mix and yield); absorption and

marginal approaches

(iii) significance and relevance of

variances

(iv) operating statements

(v) interpretation and relevance of

variance calculations to business

performance

(b) Planning and operational variances

(c) Behavioural implications of standard

costing and variance reporting.

8 Budgeting and budgetary control

(a) Objectives of budgetary planning and

control systems including aspects of

behavioural implications

(b) Evaluation of budgetary systems

such as fixed and flexible, zero

based and incremental, periodic,

continuous and activity based

(c) Development, implementation and

coordination of budgeting systems:

functional, subsidiary and master/

principal budgets (including cash

budgeting); budget review

(d) Calculation and cause of variances

as aids to controlling performance

(e) Quantitative aids to budgeting and

the concepts of correlation, basic

time series analysis (seasonality)

and forecasting; use of computer-

based models

(f) Behavioural implications of

budgeting and budgetary control.

9 Performance measurement

(a) Measurement of productivity, activity,

profitability and quality of service

(b) Relationship of measure to type of

entity and range of measures, both

monetary and non-monetary

(c) Indices to allow for price and

performance changes through time

(d) Evaluating performance against

objectives and plans, and identifying

areas of concern from the infomation

produced

(e) The impact of cost centres, revenue

centres, profit centres and

investment centres on management

appraisal

(f) Difference between business

performance and management

performance

(g) Benchmarking.

EXCLUDED TOPICS


excluded from the syllabus:

• Calculations involving the derivation of

cost of capital in discounting problems.

Candidates will always be supplied with

an appropriate discount rate.

• Calculations relating to Modigliani and

Miller propositions.


The core of the syllabus is aimed at developing

the skills required in supporting managerial

decision making. These reflect the core

competencies needed for students to satisfy

the aim of the paper identified above.


PAGE 65

The core areas are:

• financial management objectives

• management of working capital

• sources of finance

• capital investment appraisal

• costing systems

• standard costing and variance analysis

• budgeting and budgetary control

• performance measurement.


SYLLABUS

The examination is a three hour paper in two

sections. Financial management issues will

always, but not exclusively, be examined in

Section A. The Section A question will

typically be a scenario-based question. Most

of the Section B questions will contain a mix

of computation and discursive elements

although it is intended that at least one

question will be entirely discursive. The

balance between computation and discursive

elements will remain largely constant from one

examination to the next.

Number

of marks

Section A: One compulsory

scenario-based question 50



100


Present value and annuity tables, and a

formula sheet, will be provided in the

examination. The Study Guide provides

more detailed guidance on the syllabus.

RELEVANT TEXTS




listed below:

FTC Foulks Lynch – ACCA's official publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.


Candidates will also find the following texts

useful:

C Drury Management and Cost

Accounting (5th Edition)

International Thomson Business Press

ISBN 1861525362

A Griffiths & D Wall

Applied Economics (9th Edition)

F T Prentice Hall

ISBN 0273651528

D Watson, A Head Corporate Finance:

Principles and Practice (3rd Edition)

FT Prentice Hall ISBN 027368356x


STUDY SESSIONS

1 The Economic Environment I

Macroeconomic objectives

(a) Identify and explain the main macro-

economic policy targets

(b) Explain how government economic

policy may affect planning and

decision-making in business

(c) Define and explain the role of fiscal,

monetary, inflation and exchange

rate policy

Fiscal Policy

(d) Identify the main tools of fiscal policy

(e) Explain how public expenditure is

financed and the meaning of PSBR

(f) Explain how PSBR and taxation

policy interact with other economic

indicators

(g) Identify the implications of fiscal

policy for business

2 The Economic Environment II

Monetary, inflation and exchange rate

policy

(a) Identify the main tools of monetary

policy

(b) Identify the factors which influence

inflation and exchange rates,

including the impact of interest rates

(c) Identify the implications of

monetary, inflation and exchange

rate policy for business



student accountant.

PAGE 66

Aspects of government intervention and

regulation

(d) Explain the requirement for and the

role of competition policy

(e) Explain the requirement for and the

role of official aid intervention

(f) Explain the requirement for and the

role of Green policies

(g) Identify examples of government

intervention and regulation

3 The nature and scope of financial

management

(a) Broadly describe the relationship

between financial management,

management accounting and

financial accounting

(b) Discuss the nature and scope of

financial objectives for private sector

companies in the context of

organisational objectives

(c) Discuss the role of social and non-

financial objectives in private sector

companies and identify their

financial implications

(d) Identify objectives (financial and

otherwise) in not-for-profit

organisations and identify the extent

to which they differ from private

sector companies

(e) Discuss the problems of multiple

stakeholders in financial

management and the consequent

multiple objectives and scope for

conflict

4 The financial management framework

(a) Identify the general role of financial

intermediaries

(b) Explain the role of commercial banks

as providers of funds (including the

creation of credit)

(c) Discuss the risk/return trade-off

(d) identify the international money and

capital markets and outline their

operation

(e) Explain the functions of a stock

market and corporate bond market

(f) Explain the key features of different

types of security in terms of the risk/

return trade-off

(g) Outline the Efficient Markets

Hypothesis and assess its broad

implications for corporate policy and

financial management

(h) Explain the Separation Theorem

(i) Explain the functions of, and identify

the links between, the money and

capital markets

5 Management of Working

Capital I

General issues

(a) Explain the nature and scope of

working capital management

(b) Distinguish between cash flow and

profits

(c) Explain the requirement for effective

working capital management

(d) Explain the relationship between

working capital management and

business solvency

(e) Distinguish between the working

capital needs of different types of

business

Management of stock

(f) Calculate and interpret stock ratios

(g) Explain the role of stock in the

working capital cycle

(h) Apply the tools and techniques of

stock management including the

EOQ model

(i) Analyse and evaluate the results of

stock management techniques


Capital II

Management of creditors

(a) Explain the role of creditors in the


(b) Explain the availability of credit

(c) Identify the risks of taking increased

credit and buying under extended

credit terms

(d) Explain how methods of paying

suppliers may influence cash flows

of both parties

(e) Discuss the particular problems of

managing overseas accounts payable

(f) Calculate and interpret creditor ratios

(g) Apply the tools and techniques of

creditor management

(h) Analyse and evaluate the results of

creditor management techniques

Management of debtors

(i) Explain the role of debtors in the


(j) Explain how the creditworthiness of

customers may be assessed


PAGE 67

(k) Evaluate the balance of risks and

costs of customer default against the

profitability of marginal business

(l) Explain the role of factoring and

invoice discounting

(m) Explain the role of early settlement

discounts

(n) Discuss the particular problems of

managing overseas debtors

(o) Calculate and interpret debtor ratios

(p) Apply the tools and techniques of

debtor management

(q) Analyse and evaluate the results of

debtor management techniques.


Capital III

Management of cash

(a) Explain the role of cash in the


(b) Calculate optimal cash balances

(c) Describe the functions of, and

evaluate the benefits from,

centralised cash control and

Treasury Management

(d) Calculate and interpret cash ratios

(e) Apply the tools and techniques of

cash management, including the

Baumol model and the Miller-Orr

Model

(f) Analyse and evaluate the results of

cash management techniques.

8 Sources of finance I: small and medium

sized enterprises (SMEs)

(a) Explain financing in terms of the

risk/return trade-off

(b) Describe the requirements for

finance of SMEs (purpose, how

much, how long)

(c) Describe the nature of the financing

problem for small businesses in

terms of the funding gap, the

maturity gap and inadequate security

(d) Identify the role of risk and the lack

of information on small companies

to help explain the problems of SME

financing

(e) Explain the role of information provision

provided by financial statements

(f) Describe the particular financing

problems of low-earning/high growth

companies

(g) Describe the response of government

agencies and financial institutions to

the SME financing problem

(h) Explain what other measures may be

taken to ease the financial problems

of SMEs such as trade creditors,

factoring, leasing, hire purchase,

AIM listing, business angels and

venture capital

(i) Describe how capital structure

decisions in SMEs may differ from

larger organisations

(j) Describe appropriate sources of

finance for SMEs

(k) Calculate and interpret appropriate

ratios.

9 Sources of finance II: equity financing

(a) Describe ways in which a company

may obtain a stock market listing

(b) Describe how stock markets operate,

including the AIM

(c) Explain the requirements of stock

market investors in terms of returns

on investment

(d) Calculate, analyse and evaluate

appropriate financial ratios (e.g.

EPS, PE ratio, dividend yield, etc.)

(e) Outline and apply the dividend

valuation model, including the

growth adjustment

(f) Explain the importance of internally

generated funds

(g) Describe the advantages and

disadvantages of rights issues

(h) Calculate the price of rights

(i) Explain the purpose and impact of a

bonus issue, scrip dividends and

stock splits.

10 Sources of finance III: debt and near-

debt financing

(a) Explain the features of different

types of preference shares and the

reasons for their issue

(b) Explain the features of different

types of long-term straight debt and

the reasons for their issue

(c) Explain the features of convertible

debt and warrants and the reasons

for their issue


PAGE 68

(d) Broadly describe the reasons for the

choice of financing between

preference shares, debt and near-

debt instruments in terms of the risk/

return trade-off

(e) Assess the effect on EPS of

conversion and option rights

(f) Broadly describe international debt

markets and the financing of foreign

trade

(g) Calculate and interpret appropriate

ratios

11 Sources of finance IV: the capital

structure decision

(a) Explain and calculate the level of

financial gearing

(b) Distinguish between operational and

financial gearing, and business risk

and financial risk

(c) Outline the effects of gearing on the

value of shares, company risk and

required return

(d) Explain how a company may

determine its capital structure in

terms of interest charges, dividends,

risk and redemption requirements

(e) Explain the role of short term

financing in the capital structure

decision

(f) Explain the relationship between the

management of working capital and

the long term capital structure decision

(g) Calculate and interpret appropriate

ratios

12 Investment decisions

(a) Define and distinguish between

capital and revenue expenditure

(b) Compare and contrast fixed asset

investment and working capital

investment

(c) Describe the impact of investment

projects on financial statements

(d) Calculate payback and assess its

usefulness as a measure of

investment worth

(e) Calculate ROCE and assess its

usefulness as a measure of

investment worth

13 Interest and discounting

(a) Explain the difference between

simple and compound interest

(b) Explain the relationship between

inflation and interest rates,

distinguishing between nominal and

real interest rates, and calculate

nominal interest rates

(c) Explain what is meant by future

values and calculate future values,

including application of the annuity

formula

(d) Explain what is meant by

discounting and calculate present

values, including the application of

the annuity and perpetuity formula,

and the use of present value and

annuity tables

(e) Explain the importance of the time

value of money.

14 Investment appraisal using DCF

methods

(a) Explain the role of the cost of capital

in appraising investments

(b) Identify and evaluate relevant cash

flows of potential investments

(c) Calculate present values to derive

the NPV and IRR measures of

investment worth

(d) Explain the superiority of DCF

methods over payback and ROCE

(e) Assess the merits of IRR and NPV

(f) Apply DCF methods to asset

replacement decisions

(g) Explain the role of the cost of capital

in appraising investments.

15 Project appraisal allowing for inflation

and taxation

Inflation

(a) Distinguish general inflation from

specific price increases and assess

their impact on cash flows

(b) Evaluate capital investment projects

on a real terms basis

(c) Evaluate capital investment projects

on a nominal terms basis

Taxation

(d) Calculate the effect of capital

allowances and Corporation Tax on

project cash flows

(e) Evaluate the profitability of capital

investment projects on a post-tax

basis


PAGE 69

16 Project appraisal allowing for risk

(a) Distinguish between risk and

uncertainty

(b) Identify the sources of risk affecting

project profitability

(c) Evaluate the sensitivity of project

NPV to changes in key variables

(d) Apply the probability approach to

calculating expected NPV of a project

and the associated standard deviation

(e) Explain the role of simulation in

generating a probability distribution

for the NPV of a project

(f) identify risk reduction strategies for

projects

(g) Evaluate the usefulness of risk

assessment methods

17 Capital rationing

(a) Distinguish between hard and soft

capital rationing

(b) Apply profitability index techniques

for single period divisible projects

(c) Evaluate projects involving single

and multi-period capital rationing

18 Leasing decisions

(a) Distinguish between operating and

finance leases

(b) Apply DCF methods to projects

involving buy or lease problems

(c) Assess the relative advantages and

disadvantages of different types of

lease

(d) Describe the impact of leasing on

company gearing

19 Costing systems and techniques

(a) Outline and distinguish between the

nature and scope of management

accounting and the role of costing in

meeting the needs of management

(b) Describe the purpose of costing as

an aid to planning, monitoring and

controlling business activity

(c) Different approaches to costing

(i) marginal costing and absorption

costing

(ii) service costing

(iii) theory of constraints and

throughput accounting

(iv) activity based costing; use of

cost drivers and activities

(v) life cycle costing

(vi) target costing

(d) Describe the costing information

requirements and limitations in not-

for-profit organisations

(e) Broadly outline the behavioural

implications of different costing

approaches including performance

evaluation

(f) Explain the potential for different

costing approaches to influence

profit reporting and the pricing of

products and internal services

(g) Explain the role of costing systems in

decision making.

20 Standard costing I

(a) Explain the uses of standard costs

and the methods by which they are

derived and subsequently reviewed

(b) Calculate and evaluate capacity

limitations when setting standards

(c) Describe the types of standard

(ideal, attainable, current and basic)

and their behavioural implications

(d) Calculate basic labour, material,

overhead (variable and fixed) and

sales variances, including problems

of labour idle time

(e) Explain the reasons for variances

(f) Assess appropriate management

action arising from the variances

identified.

21 Standard costing II

(a) Prepare reconciliations using

operating statements which

(i) reconcile budgeted and actual

profit figures, and/or

(ii) reconcile the actual sales less the

standard cost of sales with the

actual profit

(b) Calculate and explain operational

and planning variances

(c) Demonstrate how absorption and

marginal approaches can be used in

standard costing

(d) Calculate mix and yield variances for

materials

(e) Calculate mix and quantity variances

for sales

(f) Demonstrate an understanding of the

inter-relationships between variances

(g) Explain the reasons for variances

(h) Assess appropriate management

action arising from the variances

identified.


PAGE 70

22 Budgetary planning and control I

(a) Identify the purposes of budgetary

planning and control systems

(b) Describe the planning and control

cycle, and the control process

(c) Explain the implications of

controllability for responsibility

reporting

(d) Prepare, review and explain a budget

preparation timetable

(e) Prepare and evaluate functional,

subsidiary and master budgets,

including cash budgets

(f) Explain the processes involved with

the development and

implementation of budgets

(g) Explain the process of participation

in budget setting and how this can

address motivational problems.

23 Budgetary planning and control II

(a) Prepare and evaluate fixed and

flexible budgets and evaluate the

resulting variances

(b) Prepare flexed budgets when

standard fixed overhead absorption

is employed

(c) Assess the behavioural implications

of budgetary control and

performance evaluation, including

participation in budget setting.

24 Budgetary planning and control III

(a) Describe and evaluate the main

features of zero based budgeting

systems

(b) Describe the areas/organisations in

which zero based budgeting may be

applied

(c) Describe and evaluate incremental

budgeting and discuss the differences

with zero based budgeting

(d) Describe and evaluate periodic and

continuous budgeting systems

25 Quantitative aids to budgeting

(a) Describe and apply the techniques of

(i) high-low method

(ii) least squares regression

(iii) scatter diagrams and correlation

(iv) forecasting with least squares

regression

(v) time series to identify trends and

seasonality

(vi) forecasting with time series

(b) Evaluate the results of quantitative

aids.

26 Indices

(a) Explain the purpose of index

numbers, and calculate and interpret

simple index numbers for one or

more variables

(b) Deflate time-related data using an index

(c) Construct a chained index series

(d) Explain the term 'average index',

distinguishing between simple and

weighted averages

(e) Calculate Laspeyre and Paasche

price and quantity indices

(f) Describe the relative merits of

Laspeyre and Paasche indices.


(a) Outline the essential features of

responsibility accounting for various

types of entiy

(b) Describe the range of management

performance measures available for

various types of entity

(c) Calculate and explain the concepts

of return on investment and residual

income

(d) Explain and give examples of

appropriate non-montary

performance measures

(e) Describe the various types of

responsibility centre and the impact

of these on management appraisal

(f) Discuss the potential conflict in the

use of a measure for both business

and management performance

(g) Analyse the application of financial

performance measures including

cost, profit and return on capital

employed

(h) Assess and illustrate the

measurement of profitability, activity

and productivity

(i) Discuss the measurement of quality

and service

(j) Identify areas of concern from

information supplied and

performance measures calculated

(k) Describe the features of

benchmarking and its application to

performance appraisal.

28 Revision

Financial Management and Control

PAGE 71

Paper 2.5

Financial Reporting(INT)





AIM

To build on the basic techniques in Paper

1.1 Preparing Financial Statements and to

develop knowledge and understanding of

more advanced financial accounting

concepts and principles. Candidates will be

required to apply this understanding by

preparing and interpreting financial reports

in a practical context.

OBJECTIVES


should be able to:

• appraise and apply specified accounting

concepts and theories to practical work

place situations

• appraise and apply the International

regulatory framework of financial

reporting

• prepare financial statements for different

entities to comply with specified

International Accounting Standards,

International Financial Reporting

Standards and other related

pronouncements

• prepare group financial statements

(excluding group cash flow statements) to

include a single subsidiary. An associate

or joint venture may also be included

• analyse, interpret and report on

financial statements (including cash

flow statements) and related

information to a variety of user groups

• discuss and apply the requirements of

other specified International Accounting

Standards / International Financial

Reporting Standards



OVERALL SYLLABUS

Paper 2.5 builds on the techniques

developed at Paper 1.1 Preparing Financial

Statements and tests the conceptual and

technical financial accounting knowledge

that candidates will require in order to

progress to the higher level analytical,

judgmental and communication skills of

Paper 3.6 Advanced Corporate Reporting.

Paper 2.5 also provides essential financial

accounting knowledge and principles that

need to be fully understood by auditors,

thus it forms some of the prerequisite

knowledge of Paper 2.6 Audit and Internal

Review, and the option Paper 3.1 Audit

and Assurance services.

Prerequisite knowledge for Paper 2.5 is

largely the basic knowledge and skills

demonstrated at Paper 1.1, but many

accounting standards require the use of

discounting techniques which candidates

will have acquired at Paper 2.4 Financial

Management and Control.

SYLLABUS CONTENT

1 Accounting principles, concepts and

theory

(a) The IASB’s Framework for the


Financial Statements.

(b) Agency theory.

(c) Price level changes, capital

maintenance.

2 Regulatory framework

(a) The structure of the International

Accounting Standards Board (IASB).

(b) The standard setting process.

(c) The role of the International

Financial Reporting Interpretations

Committee (IFRIC).

(d) The IASB’s relationship with the

PAGE 72

Financial Reporting (INT) (Continued)

International Organisation of Security

Commission (IOSCO).

3 Preparation and presentation of

financial statements for companies

limited by liability and other entities

(a) Accounting for share capital and

reserves

(i) issue and redemption of shares

(ii) the principle of maintenance of

capital

(iii) the principle of distributable profits.

(b) Tangible and intangible non-current

assets.

(c) Net current assets.

(d) Earnings per share.

(e) Tax in company accounts including:

(i) current tax

(ii) deferred tax.

(f) IASs, IFRSs and SIC / IFRIC

pronouncements as specified in the

examinable documents.

4 Preparation of consolidated financial

statements

(a) Definition of subsidiary companies.

(b) Exclusions from consolidations.

(c) Preparation of consolidated income

statements and balance sheets

including:

(i) elimination of intra-group

transactions

(ii) fair value adjustments.

(d) Associates and joint ventures.

5 Analysis and interpretation of

financial statements and related

information

(a) Analysis of corporate information.

(b) Preparation of reports on financial

performance for various user groups.

(c) Preparation and analysis of cash

flow statements of a single company.

(d) Related party transactions.

(e) Segmental information.

EXCLUDED TOPICS



• partnership and branch financial

statements

• preparing group financial statements

involving more than one subsidiary

• piecemeal acquisitions, disposal of

subsidiaries and group reconstructions

• foreign currency translation/

consolidations, hedging,

hyperinflationary economies

• financial statements of banks and

similar financial institutions

• group cash flows

• schemes of reorganisation/

reconstruction

• company/share valuation

• derivative financial instruments

• accounting for retirement benefit costs/

plans

• share-based payments

• International Exposure Drafts and

Discussion Drafts/Papers.



Accounting principles and concepts,

accounting theory

• Framework for the Preparation and

Presentation of Financial Statements.

• Revenue recognition.

• Substance over form.

Preparation of financial statements of

companies limited by liability

• Presentation of financial statements.

• Accounting and disclosure requirements

of International Accounting Standards/


Standards.

Preparation of consolidated financial

statements

• Definitions of subsidiaries: exclusions

from consolidation.

• Simple groups.

Analysis and interpretation of financial

statements

• Preparation of reports for various user

groups.

• Preparation and analysis of cash flow

statements.

Other topic areas

Note these may be examined as part of a

question within the above key areas or as a

substantial part of a separate optional

question:

PAGE 73


• accounting for leases

• construction contracts

• earnings per share

• impairment of assets, provisions

• non-current assets held for sale and

discontinued operations

• goodwill and other intangible assets.


SYLLABUS

The examination is a three hour paper in

two sections. It will contain both

computational and discursive elements.

Some questions will adopt a scenario/case

study approach.

The Section A compulsory question will be

the preparation of group financial

statements and/or extracts thereof, and

may include a small related discussion

element. Computations will be designed to

test an understanding of principles. At

least one of the optional questions in

Section B will be a conceptual/discursive

question that may include illustrative

numerical calculations.

An individual question may often involve

elements that relate to different areas of

the syllabus. For example a question on

the preparation of financial statements for

public issue could include elements relating

to several accounting standards. In

scenario questions candidates may be

expected to comment on management’s

chosen accounting treatment and

determine a more appropriate one, based

on circumstances described in the

question.

Questions on topic areas that are also

included in Paper 1.1 will be examined at

an appropriately greater depth in Paper

2.5. Some International Accounting

Standards are very detailed and complex.

At Paper 2.5 candidates need to be aware

of the principles and key elements of these

Standards. Candidates will also be

expected to have an appreciation of the

need for accounting standards and why

they have been introduced.

Number

of Marks


question 25



100










section of student accountant.

RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch

Accountancy Tuititon Centre (ATC)

International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.


Candidates may also find the following text

useful:

Abbas Ali Mirza, Graham Holt, Magnus

Orrell, Liesel Knorr International Financial

Reporting Standards (IFRS) Workbook:

Standard Outlines, Multiple-Choice

Questions and Case Studies with Solutions

(2005) John Wiley & Sons Inc, UK (ISBN:

0-4716-9742-7)



student accountant.

PAGE 74


STUDY SESSIONS

1 Review of basic concepts and the

Framework for the Preparation and

Presentation of Financial Statements

(a) Discuss what is meant by a

conceptual framework and GAAP

(b) Describe the objectives of financial

statements and the qualitative

characteristics of financial information

(c) Define the elements of financial

statements

(d) Apply the above definitions to

practical situations

(e) Revision of Paper 1.1 – prepare the

final accounts of a company from a

trial balance.

2 Accounting concepts and accounting

theory

(a) Outline the concept of

‘comprehensive income’

(b) Explain the principle of fair value

(c) Discuss and apply accounting

policies.

(d) Describe the deficiencies of historic

cost accounts (HCA) during periods

of rising prices and explain in

principle alternatives to HCA.

3 Revenue recognition

(a) Outline the principles of the timing

of revenue recognition

(b) Explain the concept of substance

over form in relation to recognising

sales revenue

(c) Explain the principle of realised

profits

(d) Discuss the various points in the

production and sales cycle where it

may, depending on circumstances,

be appropriate to recognise gains

and losses – give examples of this

(e) Describe the IASB’s ‘balance sheet

approach’ to revenue recognition

within its Framework and compare

this to the requirements of relevant

accounting standards.

4 The structure of the IASB’s regulatory

framework

(a) Describe the constitution of the IASB

and its objectives

(b) Describe the influence of national

standard setters and the

International Organisation of Security

Commissions (IOSCO) on IASs and

IFRSs

(c) Outline the International Accounting

Standard setting process and the role

of the International Financial

Reporting Interpretations Committee

(IFRIC).

5 Preparation of financial statements for

companies

(a) State the objectives of accounting

standards on Presentation of Financial

Statements

(b) Describe the structure and content of


(c) Discuss ‘fair presentation’ and the

accounting concepts/principles in

relevant accounting standards

(d) Prepare the financial statements of

companies in accordance with

International Accounting Standard /


Standards

(e) Describe the main issues involved

when a comapany adopts


Standards(IFRSs) for the first time

(f) Apply the requirements of the IASB

to the preparation of financial

statements for a first time adopter of


Standards.

6&7 Accounting Policies, Changes in

Accounting Estimates and Errors;

Non-current Assets Held for Sale and

Discontinued Operations

(a) Explain the need for accounting

standards in the above areas

(b) Discuss the importance of identifying

and reporting the results of a

discontinued operation; define


(c) Describe the circumstances where

assets meet the criteria of 'held for

sale'

(d) Discuss the accounting treatment of

non-current assets held for sale

(e) Prepare financial statements in

accordance with requirements of the

relevant accounting standards in the

above areas

(f) Describe the circumstances where a

change in accounting policy is

permitted

PAGE 75


(g) Define and account for errors,

changes in accounting estimates and

changes in accounting policies

(h) Explain and illustrate the contents

and purpose of the statement of

changes in equity.

8 Share Capital and Reserves

(a) Explain the need for an accounting

standard on Financial Instruments

(b) Distinguish between debt and equity

capital

(c) Apply the requirements of relevant

accounting standards to the issuing

and finance costs of:

(i) equity and preference shares

(ii) debt instruments with no

conversion rights, and

(iii) convertible debt (compound

financial instruments)

(d) Explain and apply general principles

relating to the purchase or

redemption of shares

(e) Discuss the advantages of

companies being able to redeem/

purchase their own shares

(f) Discuss the principles relating to

profits available for distribution.

9 Non-current assets – tangible

(a) Define the initial cost of a non-

current asset (including a self-

constructed asset) and apply this to

various examples of expenditure

distinguishing between capital and

revenue items

(b) Describe, and be able to identify,

subsequent expenditure that may be

capitalised

(c) State and appraise the effects of

accounting standards on the

revaluation of property, plant and

equipment

(d) Account for gains and losses on the

disposal of revalued assets

(e) Calculate depreciation on:

(i) revalued assets, and

(ii) assets that have two or more

major components

(f) Apply the provisions of accounting

standards on Accounting for

Government Grants and Disclosure

of Government Assistance

(g) Discuss the way in which the

treatment of investment properties

differs from other properties

(h) Apply the requirements of

accounting standard on investment

properties.

10 Leases

(a) Define the essential characteristics

of a lease

(b) Describe and apply the method of

determining a lease type (i.e. an

operating or finance lease)

(c) Explain the effect on the financial

statements of a finance lease being

incorrectly treated as an operating lease

(d) Account for operating leases in


(e) Account for finance leases in the

financial statements of lessors and

lessees

(f) Outline the principles of the

accounting standard on leasing and

its main disclosure requirements

Note: the net cash investment

method will not be examined.

11 Intangible assets

(a) Discuss the nature and possible

accounting treatments of both

internally generated and purchased

goodwill

(b) Distinguish between goodwill and

other intangible assets

(c) Describe the criteria for the initial

recognition and measurement of

intangible assets

(d) Describe the subsequent accounting

treatment, including the principle of

impairment tests in relation to

purchased goodwill

(e) Describe the circumstances in which

the goodwill calculation results in a

negative amount, and its subsequent

accounting treatment

(f) Describe and apply the requirements

of accounting standards on internally

generated assets other than goodwill

(e.g. research and development).

12 Impairment of assets

(a) Define the recoverable amount of an

asset; define impairment losses

(b) Give examples of, and be able to

identify circumstances that may

indicate that an impairment of an

asset has occurred

PAGE 76


(c) Describe what is meant by a cash-

generating unit

(d) State the basis on which

impairment losses should be allocated,

and allocate a given impairment loss

to the assets of a cash-generating unit.

13 Liabilities – provisions, contingent

liabilities and contingent assets

(a) Explain why an accounting standard

on provisions is necessary – give

examples of previous abuses in this

area

(b) Define provisions, legal and

constructive obligations, past events

and the transfer of economic benefits

(c) State when provisions may and may

not be made, and how they should

be accounted for

(d) Explain how provisions should be

measured

(e) Define contingent assets and

liabilities – give examples and

describe their accounting treatment

(f) Be able to identify and account for:

(i) warranties/guarantees

(ii) onerous contracts

(iii) environmental and similar

provisions

(g) Discuss the validity of making

provisions for future repairs or

refurbishments.

14 Inventory and construction contracts

(a) Review the principles of inventory

valuation covered in Paper 1.1

(b) Define a construction contract and

describe why recognising profit

before completion is generally

considered to be desirable and the

circumstances where it may not be;

discuss if this may be profit

smoothing

(c) Describe the ways in which contract

revenue and contract cost may be

recognised

(d) Calculate and disclose the amounts to

be shown in the financial statements

for construction contracts.

15 Earnings per share

(a) Explain the importance of

comparability in relation to the

calculation of earnings per share

(eps) and its importance as a stock

market indicator

(b) Explain why the trend of eps may be

a more accurate indicator of

performance than a company’s profit

trend

(c) Define earnings and the basic

number of shares

(d) Calculate the eps in accordance with


following circumstances:

(i) basic eps

(ii) where there has been a bonus

issue of shares/stock split during

the year, and

(iii) where there has been a rights

issue of shares during the year

(e) Explain the relevance to existing

shareholders of the diluted eps, and

describe the circumstances that will

give rise to a future dilution of the eps

(f) Calculate the diluted eps in the


(i) where convertible debt or

preference shares are in issue; and

(ii) where share options and

warrants exist.

16 Taxation in financial statements

(a) Account for current tax liabilities and

assets in accordance with relevant

accounting standards

(b) Describe the general principles of

government sales taxes (e.g. VAT or

GST)

(c) Explain the effect of taxable

temporary differences on accounting

and taxable profits

(d) Outline the principles of accounting for

deferred tax

(e) Outline the requirements of relevant

accounting standards relating to

deferred tax assets and liabilities

(f) Calculate and record deferred tax

amounts in the financial statements.

17 Accounting for the substance of

transactions

(a) Explain the importance of recording

the substance rather than the legal

form of transactions – give examples

of previous abuses in this area

(b) Describe the features which may

indicate that the substance of

transactions may differ from their

legal form

(c) Explain and apply the principles of

PAGE 77


recognition and derecognition of

assets and liabilities

(d) Be able to recognise the substance

of transactions in general, and

specifically account for the following

types of transaction:

(i) goods sold on sale or return/

consignment goods

(ii) sale and repurchase/leaseback

agreements

(iii) factoring of accounts receivable.

18 & 19

Business combinations – introduction

(a) Describe the concept of a group and

the objective and usefulness of

consolidated financial statements

(b) Explain the different methods which

could be used to prepare


(c) Explain and apply the definition of

subsidiary companies

(d) Describe the circumstances and

reasoning for subsidiaries to be

excluded from consolidated financial

statements in accordance with


(e) Prepare a consolidated balance

sheet for a simple group dealing with

pre and post acquisition profits,

minority interests and consolidated

goodwill

(f) Explain the need for using

coterminous year ends and uniform

accounting polices when preparing


(g) Describe how the above is achieved

in practice

(h) Prepare a consolidated Income

Statement for a simple group, including

an example where an acquisition

occurs during the year and there is a

minority interest.

20 Business combinations – intra-group

adjustments

(a) Explain why intra-group transactions

should be eliminated on consolidation

(b) Explain the nature of a dividend paid

out of pre-acquisition profits

(c) Account for the effects (in the

income statement and balance

sheet) of intra-group trading and

other transactions including:

(i) unrealised profits in inventory

and non-current assets

(ii) intra-group loans and interest

and other intra-group charges,

and

(iii) intra-group dividends including

those paid out of pre-acquisition

profits.

21 Business combinations – fair value

adjustments

(a) Explain why it is necessary for both

the consideration paid for a subsidiary

and the subsidiary’s identifiable assets

and liabilities to be accounted for at

their fair values when preparing


(b) Prepare consolidated financial

statements dealing with fair value

adjustments (including their effect on

consolidated goodwill) in respect of:

(i) depreciating and non-depreciating

non-current assets

(ii) inventory

(iii) monetary liabilities (basic

discounting techniques may be

required)

(iv) assets and liabilities (including

contingencies), not included in the

subsidiary’s own balance sheet.

22 & 23

Business combinations - associates and

joint ventures

(a) Define associates and joint ventures

(i.e. jointly controlled operations,

assets and entities)

(b) Distinguish between equity accounting

and proportional consolidation

(c) Describe the two formats of

proportional consolidation

(d) Prepare consolidated financial

statements to include a single

subsidiary and an associate

or a joint venture.

24 Analysis and interpretation of financial

statements

(a) Calculate useful financial ratios for a

single company or for group financial

statements

(b) Analyse and interpret ratios to give

an assessment of a company’s

performance in comparison with:

(i) a company’s previous period's


(ii) another similar company for the

PAGE 78


same period

(iii) industry average ratios

(c) Discuss the effect that changes in

accounting policies or the use of

different accounting polices between

companies can have on the ability to

interpret performance

(d) Discuss how the interpretation of

current value information would

differ from that of historical cost

information

(e) Discuss the limitations in the use of

ratio analysis for assessing corporate

performance, outlining other

information that may be of relevance.

Note: the content of reports should

draw upon knowledge acquired in other

sessions.

These sessions concentrate on the

preparation of reports and report writing

skills.

25 & 26 Cash flow statements

(a) Prepare a cash flow statement,

including relevant notes, for an

individual company in accordance

with relevant accounting standards

Note: questions may specify the use

of the direct or the indirect method

(b) Appraise the usefulness of, and

interpret the information in, a cash

flow statement.

27 Related party disclosures

(a) Define and apply the definition of

related parties in accordance with


(b) Describe the potential to mislead

users when related party

transactions are included in a

company’s financial statements

(c) Adjust financial statements (for

comparative purposes) for the effects

of non-commercial related party

transactions

(d) Describe the disclosure requirements

for related party transactions.

28 Segment reporting

(a) Discuss the usefulness and problems

associated with the provision of

segment information

(b) Define a reportable segment and the

information that is to be reported

(primary and secondary formats)

(c) Prepare segment reports in

accordance with relevant accounting

standards

(d) Assess the performance of a

company based on the information

contained in its segment report.

PAGE 79

AIM

To build on the basic techniques in Paper

1.1 Preparing Financial Statements and to

develop knowledge and understanding of

more advanced financial accounting

concepts and principles. Candidates will be

required to apply this understanding by

preparing and interpreting financial reports

in a practical context.

OBJECTIVES


should be able to:

• appraise and apply specified accounting

concepts and theories to practical work

place situations

• appraise and apply the regulatory

framework of financial reporting

• prepare financial statements for

different entities to comply with the

Companies Acts and specified

Accounting Standards and other related

pronouncements

• prepare group financial statements

(excluding group cash flow statements)

to include a single subsidiary. An

associate or joint venture may also be

included

• analyse, interpret and report on

financial statements (including cash

flow statements) and related

information to a variety of user groups


specified Accounting Standards.



OVERALL SYLLABUS

Paper 2.5 builds on the techniques

developed at Paper 1.1 Preparing Financial

Statements and tests the conceptual and

technical financial accounting knowledge

that candidates will require in order to

progress to the higher level analytical,

judgmental and communication skills of

Paper 3.6 Advanced Corporate Reporting.

Paper 2.5 also provides essential financial

accounting knowledge and principles that

need to be fully understood by auditors,

thus it forms some of the prerequisite

knowledge of Paper 2.6 Audit and Internal

Review, and the option Paper 3.1 Audit

and Assurance services.

Prerequisite knowledge for Paper 2.5 is

largely the basic knowledge and skills

demonstrated at Paper 1.1, but many

accounting standards require the use of

discounting techniques which candidates

will have acquired at Paper 2.4 Financial

Management and Control.

SYLLABUS CONTENT

1 Accounting principles, concepts and

theory

(a) The ASB’s Statement of Principles

for Financial Reporting.

(b) Agency theory.

(c) Price level changes, capital

maintenance.

2 Regulatory framework

(a) Structure of the UK regulatory

framework

(i) EC directives

(ii) Companies Acts.

(b) Standard setting process: the

Financial Reporting Council (FRC)

and its subsidiary bodies; the role of

the International Accounting

Standards Board (IASB).





Paper 2.5

Financial Reporting(GBR)

PAGE 80

3 Preparation and presentation of

financial statements for limited liability

companies and other entities

(a) Accounting for share capital and

reserves

(i) issue and redemption of shares

(ii) distributable profits.

(b) Tangible and intangible fixed assets.

(c) Net current assets.

(d) Earnings per share.

(e) Tax in company accounts including

(i) current tax

(ii) deferred tax.

(f) SSAPs, FRSs, UITF abstracts and

IFRSs as specified in the examinable

documents.

4 Preparation of consolidated financial

statements

(a) Definition of subsidiary companies.

(b) Exclusions from consolidations.

(c) Preparation of consolidated profit and

loss accounts and balance sheets

including:

(i) elimination of intra-group

transactions

(ii) fair value adjustments.

(d) Associates and joint ventures.


statements and related information

(a) Analysis of corporate information.

(b) Preparation of reports on financial

performance for various user groups.

(c) Preparation and analysis of cash

flow statements of a single company.

(d) Related party transactions.

(e) Segmental information.

EXCLUDED TOPICS



• partnership and branch financial

statements

• preparing group financial statements

involving more than one subsidiary

• piecemeal acquisitions, disposal of

subsidiaries and group reconstructions

• foreign currency translation/

consolidations, hedging,

hyperinflationary economics

• financial statements of banks and

similar financial institutions

• group cash flows

• schemes of reorganisation/reconstruction

• company/share valuation

• derivative transactions

• accounting for pension costs

• share based payments

• the ASB’s Financial Reporting Exposure

Drafts and Discussion Drafts / Papers.



Accounting principles and concepts,

accounting theory

• Statement of Principles.

• Revenue recognition.

• Substance over form.

Preparation of financial statements of

limited companies

• Form and content of published financial

statements.

• Accounting and disclosure requirements

of the Companies Acts and Accounting

Standards.

Preparation of consolidated financial

statements

• Definitions of subsidiaries: exclusions

from consolidation.

• Simple groups.

Analysis and interpretation of financial

statements

• Preparation of reports for various user

groups.

• Preparation and analysis of cash flow

statements.

Other topic areas

Note these may be examined as part of a

question within the above key areas or as a

substantial part of a separate optional

question:

• hire purchase and leasing

• long-term contracts

• earnings per share

• impairment of fixed assets, provisions

• discontinued operations

• goodwill and other intangibles.

Financial Reporting (GBR) (Continued)

PAGE 81


SYLLABUS


two sections. It will contain both


Some questions will adopt a scenario/case

study approach.

The Section A compulsory question will be

the preparation of group financial

statements and/or extracts thereof, and

may include a small related discussion

element. Computations will be designed to

test an understanding of principles. At

least one of the optional questions in

Section B will be a conceptual/discursive

question that may include illustrative

numerical calculations.

An individual question may often involve

elements that relate to different areas of the

syllabus. For example a published

financial statements question could include

elements relating to several accounting

standards. In scenario questions candidates

may be expected to comment on

management’s chosen accounting

treatment and determine a more

appropriate one, based on circumstances

described in the question.

Questions on topic areas that are also

included in Paper 1.1 will be examined at

an appropriately greater depth in Paper

2.5. Some Accounting Standards are very

detailed and complex.

At Paper 2.5 candidates need to be aware

of the principles and key elements of these

Standards. Candidates will also be

expected to have an appreciation of the

need for an accounting standard and why it

has been introduced.

Number

of Marks


question 25



100










section of student accountant

RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.




student accountant.


PAGE 82


STUDY SESSIONS

1 Review of basic concepts and the

Statement of Principles for Financial

Reporting

(a) Discuss what is meant by a

conceptual framework and GAAP

(b) Describe the objectives of financial

statements and the qualitative

characteristics of financial information

(c) Define the elements of financial

statements

(d) Apply the above definitions to

practical situations

(e) Revision of Paper 1.1 – prepare the

final accounts of a company from a

trial balance

2 Accounting concepts and accounting

theory

(a) Outline the concept of

‘comprehensive income’

(b) Explain the principle of fair value

(c) Discuss and apply accounting

policies

(d) Describe the deficiencies of historic

cost accounts (HCA) during periods

of rising prices and explain in

principle alternatives to HCA.

3 Revenue recognition

(a) Outline the principles of the timing

of revenue recognition

(b) Explain the role of the concept of

substance over form in relation to

recognising sales revenue

(c) Explain and define realised profits

(d) Discuss the various points in the

production and sales cycle where it

may, depending on circumstances,

be appropriate to recognise gains

and losses – give examples of this

(e) Describe the ASB’s 'balance sheet

approach' to revenue recognition

within its Statement of Principles

and compare this to requirements of

relevant accounting standards.

4 The structure of the UK regulatory

framework

(a) Describe the influence of EC

directives

(b) Explain the role of the Companies

Acts

(c) Outline the Standard setting process

and the role of the:

(i) Financial Reporting Council

(FRC)

(ii) Accounting Standards Board

(ASB)

(iii) Urgent Issues Task Force (UITF)

(iv) Financial Reporting Review

Panel (FRRP)

(d) Explain the relationship between UK

and International Accounting

Standards (IASs)/International

Financial Reporting Standards

(IFRSs).

5 Preparation of financial statements for

limited companies

(a) State the requirements of the

Companies Act regarding the form

and content of the prescribed

formats

(b) Prepare the financial statements of

limited companies in accordance with

the prescribed formats and relevant

accounting standards

(c) Describe the main issues involved

when a company adopts


Standards (IFRSs) for the first time

(d) Apply the requirements of the IASB

to the preparation of financial

statements of a first time adopter of


Standards

6 Reporting financial performance I


standard in this area

(b) Discuss the importance of identifying

and reporting the results of

discontinued operations; define


(c) Distinguish between extraordinary

and exceptional items, including

their accounting treatment and

required disclosures

7 Reporting financial performance II

(a) Explain the contents and purpose of

the statement of total recognised

gains and losses, linking it to the

Statement of Principles and the

concept of comprehensive income

(b) Describe and prepare, a:

(i) note of historical cost profits and

losses

(ii) reconciliation of movements in

PAGE 83

shareholders’ funds

(iii) statement of movements in reserves

(c) Define prior period adjustments and

account for the correction of

fundamental errors and changes in

accounting policies.

(d) Prepare a profit and loss account in

accordance with the requirements of

the relevant Financial Reporting

Standard.

8 Share capital and reserves


standard on Financial Instruments

(b) Distinguish between debt and share

capital

(c) Apply the requirements of relevant

accounting standards to the issue

and finance costs of:

(i) equity and preference shares

(ii) debt instruments with no

conversion rights, and

(iii) convertible debt

(d) Explain and apply the general

requirements to purchase or

redemption of shares

(e) Apply the requirements that allow

private companies to redeem shares

out of capital

(f) Discuss the advantages of companies

being able to redeem shares

(g) Define and discuss the Companies

Acts rules relating to profits available

for distribution

9 Fixed assets – tangible

(a) Define the initial cost of a fixed asset

(including a self-constructed asset)

and apply this to various examples

of expenditure distinguishing

between capital and revenue items

(b) Describe, and be able to identify,

subsequent expenditure that may be

capitalised

(c) State and appraise the effects of

accounting standards on the

revaluation of fixed assets

(d) Account for gains and losses on the

disposal of revalued assets

(e) Calculate depreciation on:

(i) revalued assets, and

(ii) assets that have two or more

major components

(f) Apply the provisions of accounting

standards on Government Grants

(g) Discuss why the treatment of

investment properties should differ

from other properties

(h) Apply the requirements of

accounting standard on Accounting

for Investment Properties.

10 Hire purchase and leasing

(a) Distinguish between a hire purchase

contract and a lease

(b) Describe and apply the method of

determining a lease type (i.e. an

operating or finance lease)

(c) Explain the effect on the financial

statements of a finance lease being

incorrectly treated as an operating

lease

(d) Account for operating leases in


(e) Account for finance leases in the

financial statements of lessors and

lessees

(f) Outline the principles of the

accounting standard on leasing and

its main disclosure requirements

Note: the net cash investment

method will not be examined.

11 Fixed assets – goodwill and intangible

assets

(a) Discuss the nature and possible

accounting treatments of both

internally generated and purchased

goodwill

(b) Distinguish between goodwill and

other intangible assets

(c) Describe the criteria for the initial


intangible assets

(d) Describe the subsequent accounting

treatment, including amortisation

and the principle of impairment

testing in relation to purchased

goodwill

(e) Describe the circumstances in which

negative goodwill arises, and its

subsequent accounting treatment

and disclosure

(f) Describe and apply the requirements

of accounting standards on Research

and Development.

12 Fixed assets – impairment of fixed

assets and goodwill


PAGE 84

(a) Define the recoverable amount of an

asset; define impairment losses

(b) Give examples of, and be able to

identify circumstances that may

indicate that an impairment of fixed

assets has occurred

(c) Describe what is meant by an

income generating unit

(d) State the basis on which impairment

losses should be allocated, and

allocate a given impairment loss to the

assets of an income generating unit.

13 Liabilities – provisions,

contingent liabilities and contingent assets

(a) Explain why an accounting standard

on provisions is necessary – give

examples of previous abuses in this

area

(b) Define provisions, legal and

constructive obligations, past events

and the transfer of economic benefits

(c) State when provisions may and may

not be made, and how they should

be accounted for

(d) Explain how provisions should be

measured

(e) Define contingent assets and

liabilities – give examples and

describe their accounting treatment

(f) Be able to identify and account for:

(i) warranties/guarantees

(ii) onerous contracts

(iii) environmental and similar

provisions

(g) Discuss the validity of making

provisions for future repairs or

refurbishments.

14 Stock and long-term contracts

(a) Review the principles of stock

valuation covered in Paper 1.1

(b) Define a long-term contract and

describe why recognising profit

before completion is generally

considered to be desirable and the

circumstances where it may not be;

discuss if this may be profit

smoothing

(c) Describe the ways in which

attributable profit may be measured

(d) Calculate and disclose the amounts

to be shown in the financial

statements for long-term contracts.

15 Earnings per share

(a) Explain the importance of

comparability

in relation to the calculation of

earnings per share (eps) and its

importance as a stock market indicator

(b) Explain why the trend of eps may be

a more accurate indicator of

performance than a company’s profit

trend

(c) Define earnings and the basic

number of shares

(d) Calculate the eps in accordance with



(i) basic eps

(ii) where there has been a bonus issue

of shares during the year, and

(iii) where there has been a rights

issue of shares during the year

(e) Explain the relevance to existing

shareholders of the diluted eps and

describe the circumstances that will

give rise to a future dilution of the eps

(f) Calculate the diluted eps in the


(i) where convertible debt or

preference shares are in issue; and

(ii) where share options and

warrants exist.

16 Taxation in financial statements

(a) Account for current taxation in


standards

(b) Record entries relating to corporation

tax in the accounting records

(c) Apply requirements of accounting

standard on VAT

(d) Explain the effect of timing differences

on accounting and taxable profits

(e) Outline the principles of accounting

for deferred tax

(f) Outline the requirements of

accounting standards on Deferred

tax

(g) Calculate and record deferred tax

amounts in the financial statements.

17 Accounting for the substance of

transactions

(a) Explain the importance of recording

the substance rather than the legal

form of transactions – give examples

of previous abuses in this area

(b) Describe the features which may


PAGE 85

indicate that the substance of

transactions may differ from their

legal form

(c) Explain and apply the principles in

accounting standards for the

recognition and derecognition of

assets and liabilities

(d) Be able to recognise the substance

of transactions in general, and

specifically account for the following

types of transaction:

(i) stock sold on sale or return/

consignment stock

(ii) sale and repurchase/leaseback

agreements

(iii) factoring of debtors.

18 & 19 Group accounting – introduction

(a) Describe the concept of a group and

the objective and usefulness of


(b) Explain the different methods which

could be used to prepare group

accounts

(c) Explain and apply the definition of

subsidiary companies in the

Companies Acts and accounting

standards

(d) Describe the circumstances and

reasoning for subsidiaries to be

excluded from consolidated financial

statements

(e) Prepare a consolidated balance

sheet for a simple group dealing with

pre and post acquisition profits,

minority interests and consolidated

goodwill

(f) Explain the need for using

coterminous year ends and uniform

accounting polices when preparing


(g) Describe how the above is achieved

in practice

(h) Prepare a consolidated profit and

loss account for a simple group,

including an example where an

acquisition occurs during the year

and there is a minority interest.

20 Group accounting – intra group

adjustments

(a) Explain why intra-group transactions

should be eliminated on consolidation

(b) Explain the nature of a dividend paid

out of pre-acquisition profits

(c) Account for the effects (in the profit

and loss account and balance sheet)

of intra-group trading and other

transactions including:

(i) unrealised profits in stock and

fixed assets

(ii) intra-group loans and interest and

other intra-group charges, and

(iii) intra-group dividends including

those paid out of pre-acquisition

profits.

21 Group accounting – fair value

adjustments

(a) Explain why it is necessary for both

the consideration paid for a subsidiary

and the subsidiary’s identifiable assets

and liabilities to be accounted for at

their fair values when preparing


(b) Prepare consolidated financial

statements dealing with fair value

adjustments (including their effect on

consolidated goodwill) in respect of:

(i) depreciating and non-

depreciating fixed assets

(ii) stock

(iii) monetary liabilities (basic

discounting techniques may be

required)

(iv)assets and liabilities (including

contingencies) not included in the

subsidiary’s own balance sheet.

22 & 23 Group accounting – associates

and joint ventures

(a) Define associates and joint ventures,

including an arrangement that is not

an entity

(b) Distinguish between equity

accounting and proportional

consolidation

(c) Describe the equity and gross equity

methods


statements to include a single

subsidiary and an associate or a

joint venture.


statements

(a) Calculate useful financial ratios for a

single company or for group financial

statements


PAGE 86

(b) Analyse and interpret ratios to give

an assessment of a company’s

performance in comparison with:

(i) a company’s previous period's


(ii) another similar company for the

same period

(iii) industry average ratios

(c) Discuss the effect that changes in

accounting policies or the use of

different accounting polices between

companies can have on the ability to

interpret performance

(d) Discuss how the interpretation of

current value information would

differ from that of historical cost

information

(e) Discuss the limitations in the use of

ratio analysis for assessing corporate

performance, outlining other

information that may be of

relevance.

Note: the content of reports should

draw upon knowledge acquired in other

sessions.

These sessions concentrate on the

preparation of reports and report writing

skills.

25 & 26 Cash flow statements

(a) Prepare a cash flow statement,

including relevant notes, for an

individual company in accordance

with relevant accounting standards

Note: questions may specify the use

of the direct or the indirect method

(b) Appraise the usefulness of, and

interpret the information in, a cash

flow statement.

27 Related parties

(a) Define and apply the definition of

related parties in accordance with


(b) Describe the potential to mislead

users when related party

transactions are included in a

company’s financial statements

(c) Adjust financial statements (for

comparative purposes) for the effects

of non-commercial related party

transactions

(d) Describe the disclosure requirements

for related party transactions.

28 Segmental reporting

(a) Discuss the usefulness and problems

associated with the provision of

segmental information

(b) Define a reportable segment and the

information that is to be reported

(c) Prepare segmental reports in


standards

(d) Assess the performance of a

company based on the information

contained in its segmental report.


PAGE 87

Paper 2.6

Audit and Internal Review(INT)





AIM


of the audit process and its application in

the context of the external regulatory

framework and for business control and

development.

OBJECTIVES

On completion of this paper, candidates

should be able to:

• understand the nature, purpose and

scope of auditing and internal review,

including the role of external audit and

its regulatory framework, and the role of

internal audit in providing assurance on

risk management and on the control

framework of an organisation

• identify risks, describe the procedures

undertaken in the planning process,

plan work to meet the objectives of the

audit or review assignment and draft the

content of plans

• describe and evaluate accounting and

internal control systems and identify and

communicate control risks, potential

consequences and recommendations

• explain and evaluate sources of

evidence, describe the nature, timing

and extent of tests on transactions and

account balances (including sampling

and analytical procedures) and design

programs for audit and review

assignments

• evaluate findings, investigate

inconsistencies, modify the work

program as necessary, review

subsequent events, and justify and

prepare appropriate reports for users

within and external to the organisation,

including recommendations to enhance

business performance


relevant International Standards on

Auditing



OVERALL SYLLABUS

Paper 2.6 builds on the knowledge and

understanding developed by Paper 1.1

Preparing Financial Statements and to a

limited extent Paper 1.2 Financial

Information for Management.

Candidates will be expected to be familiar

with Paper 2.5 Financial Reporting,

including the requirements of the

accounting standards examined within it.

They will also be expected to be familiar

with Paper 2.1 Information Systems.

Paper 2.6 provides the knowledge and

understanding of the audit process which is

then developed in Paper 3.1 Audit and

Assurance Services.

SYLLABUS CONTENT

1 Audit framework

(a) The development and changing nature

of audit.

(b) Statutory audits, accountability,

stewardship and agency.

(c) Professional ethics and codes of

conduct, their application to external

audit and internal audit,

responsibility for fraud and error.

2 Internal audit and internal review

(a) The role of internal audit and internal

review and their relationship with:

(i) corporate governance

(ii) risk management

(iii) organisational control

(iv) corporate objectives.

PAGE 88

Audit and Internal Review (INT) (Continued)

(b) Scope and functions of internal

audit, the nature and extent of

internal audit assignments.

(c) Outsourced internal audit functions.

(d) The nature and extent of internal

review assignments including

operational, systems, value for

money and financial reviews.

3 Regulation

(a) International Standards on Auditing:

(i) their development and role

(ii) their relationship with national

standards.

(b) Auditors:

(i) regulation and supervision

(ii) their relationship with governments

(iii) the role of IFAC.

4 Planning and risk

(a) Objectives of audit and review

assignments, the relevance of

stakeholder dialogue.

(b) Communicating the objectives of

audit and review assignments.

(c) Analytical procedures.

(d) Risk assessment.

(e) Materiality, tolerable error, and

sample sizes.

(f) Design and documentation of the

plan and work program.

(g) Co-ordination of the work of others.

(h) Information technology in planning

and risk assessment.

5 Internal control

(a) Objectives of internal control systems.

(b) Inherent weaknesses in internal

control systems.

(c) The use of internal control systems

by auditors.

(d) Transaction cycles (revenue, purchases,

payroll, inventory, capital expenditure).

(e) The evaluation of internal control

systems by auditors including

internal control checklists and tests

of control.

(f) Communication with management.

6 Other audit and internal review evidence

(a) Financial statement assertions: assets,

liabilities, income and expenditure,

including accounting estimates.

(b) Assertions reported on and opinions

provided in review assignments.

(c) Analytical procedures as substantive

evidence.

(d) Balance and transaction testing.

(e) Computer-assisted audit techniques,

their uses and limitations.

(f) Management representations.

(g) Audit sampling and other selective

testing procedures.

(h) Subsequent events reviews.

(i) Going concern reviews.

(j) The overall review of evidence

obtained.

(k) Modifications to the plan and work

program in the light of findings.

7 Reporting

(a) Format and content of unmodified

and modified external audit reports

on financial statements.

(b) Format and content of review reports

and other reports on assignment

objectives.

(c) Recommendations for the

enhancement of business performance.

EXCLUDED TOPICS

The audit of groups is not examinable at

this level. Candidates should be aware of

the content, wording and meaning of

external audit reports and they may be

asked to prepare the explanatory

paragraphs for inclusion in a modified audit

report. However, candidates are not

expected to draft full external audit reports.

Exposure Drafts (EDs) are not examinable

for Paper 2.6.



• professional ethics as they apply to

accountants working in public practice

and in business

• risk assessment and the response to

assessed risks for external auditors

• the role of internal audit in risk

management and corporate governance

• internal controls

• substantive audit evidence.

PAGE 89



SYLLABUS


constructed in two sections. The bulk of

the questions will be discursive but some

questions involving computational elements

will be set from time to time.

Section A is compulsory. The questions

will cover the key elements of the syllabus

relevant to both internal and external audit

assignments. Section B requires

candidates to answer two out of three

questions. The questions will cover all

areas of the syllabus.

Number

of marks

Section A: 3 compulsory

questions (which may be

scenario based)

(no single question will exceed

25 marks) 60



100


This paper encompasses:

1 Internal review, which may be provided

either by internal auditors or may be

outsourced to external auditors.

2 External audit

References to audit and auditors mean

both internal and external audit and

auditors, except where otherwise indicated.

Candidates need to be aware that

questions involving knowledge of new

examinable regulations will not be set until

at least six months after the last day of the

month in which the regulation was issued.





RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222




student accountant.

STUDY GUIDE

1 The Nature, Purpose and Scope of

Audit and Review

Explain the:

(a) Nature and development of audit

and review

(b) Concepts of accountability,

stewardship and agency

(c) Concepts of materiality, true and fair

presentation and reasonable

assurance

(d) Reporting as a means of

communication to different

stakeholders

(e) Need for auditors to communicate

with those charged with governance

(f) High level of assurance provided by

audit assignments; the moderate

level of assurance provided by

review assignments; assignments in

which no assurance is provided.

NB: Students are expected to be aware

of the nature and purpose of non-

financial review services as described in

Session 6. Internal review questions

may deal with these subjects, as well as

financial and systems reviews in the

context of companies and small not-for-

profit organisations

These articles and other communications

from the Examiner can be downloaded via

the student section of

www.accaglobal.com.

PAGE 90


2 Statutory Audits

Describe the:

(a) Regulatory framework in which

statutory audits take place

(b) Development and status of

International Standards on Auditing

and their relationship with national

standards

(c) Reasons for, and mechanisms for,

the regulation of auditors by

governments and other regulatory

agencies

(d) Types of opinion provided in

statutory audit assignments

(e) Explain the objectives and principal

characteristics of statutory audit and

discuss its value (e.g. in assisting

management to reduce risk and

improve performance)

(f) Limitations of statutory audits

3 Internal Audit and Review I

Explain the:

(a) Development and role of internal

audit in achieving corporate

objectives and as part of good

corporate governance practice

(b) Relative merits of out-sourcing

internal audit and internal review

services to external auditors and

others, and the associated problems

(c) Difference between the role of

external audit and internal audit

4 Regulatory environment

(a) Corporate governance

(i) explain the objective, relevance

and importance of corporate

governance

(ii) discuss the relative merits and

disadvantages of voluntary codes

and legislation

(b) Code of best practice

(i) outline the provisions of

international codes of Corporate

Governance (such as OECD) that

are most relevant to auditors

(ii) outline good Corporate Governance

requirements relating to directors'

responsibilities (e.g. for risk

management and internal control)

and the reporting responsibilities of

auditors

(c) Audit committees

(i) explain the structure and roles of

audit committees and discuss

their benefits and drawbacks


disadvantages of regulation by a

voluntary code of practice rather

than law

(d) Internal financial control effectiveness

(i) outline the importance of internal

control and risk management

(ii) compare the responsibilities of

management and auditors

(internal and external) for the

design and operation of systems

and controls, and the reliability of

management information

(financial and non-financial)

(iii) describe the factors to be taken

into account when assessing the

need for an internal audit

function

5 Internal Audit and Review III

Describe the:

(a) Elements of best practice in the

structure and operations of an

internal audit function

(b) Scope of internal audit work and the

limitations of the internal audit

function

(c) Types of report provided in internal

audit and internal review assignments

6 Internal Audit and Internal Review IV

Describe and illustrate the:

(a) Nature and purpose of internal

review assignments including:

(i) value for money

(ii) best value

(iii) IT

(iv) financial

(b) Nature and purpose of operational

internal review assignments

including:

(i) procurement

(ii) marketing

(iii) treasury

(iv) HR

7 Professional Ethics and

Professional Codes of Conduct I

(a) Describe the sources of, and

enforcement mechanisms associated

with, professional ethics and

professional codes of conduct

PAGE 91


(b) Define the fundamental concepts of

professional ethics

(c) Define the detailed requirements of,

and illustrate and analyse the

application of, professional ethics in

the context of independence,

objectivity and integrity

(d) Distinguish between the elements of

professional ethics applicable to

internal auditors and those

applicable to external auditors

(e) Describe the responsibilities of internal

and external auditors for the prevention

and detection of fraud and error and in

relation to laws and regulations


Professional Codes of Conduct II

(a) Describe the requirements of

professional ethics and other

requirements in relation to the

acceptance of audit and review

assignments, including situations in

which there is an imposed limitation

in audit scope

(b) Define the detailed requirements of,



the context of confidentiality and

conflicts of interest

(c) Describe the importance of

engagement letters and describe

their contents

9 Preliminary Planning Procedures

(a) Distinguish between risk-based,

procedural and other approaches to

audit and review work

(b) Describe the sources and nature of

information gathered in planning

audit and review assignments

(c) Describe the understanding of the

entity required by auditors

(d) Describe the purpose of analytical

procedures in planning and illustrate

the application of such procedures

(e) Describe the components of risk and

the use of information technology in

risk analysis

(f) Illustrate and explain the importance

of the application of risk analysis

(g) Define and illustrate the concepts of

materiality and tolerable error

(h) Evaluate misstatements

10 The Work Plan, the Work Program and

Documentation

(a) Describe and illustrate the contents

of work plans, work programs and

working papers

(b) Describe the nature of

documentation required for different

types of assignment

(c) Explain the importance of

documentation

(d) Illustrate the use of information

technology in the audit

11 The Work of Others

Describe the:

(a) Extent to which external auditors are

able to rely on the work of:

(i) internal audit

(ii) experts

(iii) service organisations

and recognise where

reliance is needed

(b) Extent to which internal auditors are


(i) experts

(ii) service organisations

(c) Conditions that must be met before

reliance can be placed on the work

of others and the planning

considerations in co-ordinating the

work of others

(d) Division of responsibilities between

auditors and others

(e) Extent to which reference to the

work of others can be made in audit

and review reports

12 Internal Control I

(a) Describe the objectives of internal

control systems and the responsibility

for internal control systems in the

context of organisational objectives

(b) Describe the importance of internal

control to auditors

(c) Describe and illustrate the

limitations of internal control

systems in the context of fraud and

error

(d) Explain the need to modify the audit

plan in the light of the results of

tests of control

(e) Distinguish between tests of controls

and substantive tests

PAGE 92


13 Internal Control II – Revenue,

Purchases and inventory

(a) Describe, illustrate and analyse how

internal control systems over revenue,

purchases and inventory cycles

operate in both large and small entities

(b) Describe and illustrate the use by

auditors of internal control checklists

for revenue, purchases and inventory

transaction cycles

(c) Describe and tabulate tests of

control of revenue, purchases and

inventory for inclusion in a work

program

(d) Explain and illustrate how structural

and operational weaknesses in

revenue, purchases and inventory

systems should be reported to

management and how

recommendations should be made

14 Internal Control III – Revenue

Expenditure and Capital Expenditure


internal control systems over revenue

and capital expenditure transaction

cycles operate in both large and

small entities



for revenue and capital expenditure

transaction cycles


control of revenue and capital

expenditure for inclusion in a work

program



revenue and capital expenditure


management and how


15 Internal Control IV – Payroll


internal control systems over the

payroll transaction cycle operate in

both large and small entities



for the payroll transaction cycle


control of payroll for inclusion in a

work program



payroll systems should be reported

to management and how


16 Internal Control V – Bank and Cash



bank and cash transaction cycle

operate in both large and small

entities



for the bank and cash transaction

cycle


control of bank and cash for

inclusion in a work program


and operational weaknesses in bank

and cash systems should be reported



NB: For items 13–16, an

understanding of IT issues and

computer controls is required

17 Other Audit and Review Evidence I

(a) Describe the sources and relative

merits of different types of evidence

available

(b) Describe the financial statement

assertions commonly reported on

and the principles and objectives of

balance and transaction testing

(c) Distinguish between the interim and

the final audit

(d) Describe and illustrate how

analytical procedures are used as

substantive procedures

(e) Explain the problems associated

with the audit and review of

accounting estimates

(f) Describe the types of evidence

available in smaller entities

(g) Evaluate the quality of evidence

collected

18 Other Audit and Review Evidence II –

Receivables and Prepayments

(a) Describe and tabulate for inclusion

in a work program the substantive

procedures, including direct

confirmation of accounts receivable,

PAGE 93

used in obtaining evidence in

relation to receivables and

prepayments, and the related

income statement entries

(b) Explain the purpose of substantive

procedures in relation to financial

statement assertions concerning

receivables and prepayments

19 Other Audit and Review Evidence III –

Inventory

(a) Explain the importance of inventory

(b) Describe inventory counting

procedures

(c) Explain cut-off

(d) Describe and tabulate for inclusion


procedures used in obtaining

evidence in relation to inventory,

including the auditor's attendance at

inventory counting

(e) Explain the purpose of substantive

procedures, including direct

confirmation of inventory held by

third parties, in relation to financial


inventory

20 Other Audit and Review Evidence IV –

Current Liabilities and accruals




evidence in relation to current

liabilities and accruals, and the

related income statement entries


procedures, including supplier

statement reconciliations and direct

confirmation of accounts payable, in

relation to financial statement

assertions concerning current

liabilities and accruals

21 Other Audit and Review Evidence V –

Bank and cash



procedures including bank

confirmation reports used in

obtaining evidence in relation to

bank and cash, and the related





bank and cash

22 Other Audit and Review Evidence VI –

non-current assets and long-term

liabilities




evidence in relation to non-current

assets and non-current liabilities and

the related income statement entries




non-current assets and non-current

liabilities

23 Other Audit and Review Evidence VII

(a) Explain the need for sampling

(b) Distinguish between statistical and

non-statistical sampling


application of the basic principles of

statistical sampling and other

selective testing procedures

(d) Describe and illustrate the use of

computer assisted techniques in

obtaining evidence

(Note: candidates will not be

required to perform detailed

sampling calculations)

24 Going Concern Reviews

(a) Explain the importance of going

concern reviews

(b) Describe the procedures to be

applied in performing going concern

reviews

(c) Describe the disclosure requirements

in relation to going concern issues

(d) Describe the reporting implications

of the findings of going concern

reviews

25 Audit Finalisation and the

final review

Describe and explain the:

(a) Quality of management

representations as audit evidence


PAGE 94

(b) Circumstances in which obtaining

management representations is

necessary and the matters on which

representations are commonly

obtained

(c) Purpose of the subsequent events

review

(d) Procedures to be undertaken in

performing a subsequent events

review

(e) Importance of the overall review of

evidence obtained

(f) Problems associated with the

application of accounting treatments

(g) Significance of unadjusted

differences

26 Reporting I

(a) Describe, illustrate and analyse the

format and content of unmodified

and modified statutory audit reports

(b) Identify and report systems

weaknesses and their potential

effects and make appropriate

recommendations to management

(e.g. accounting procedures and

financial controls)

27 Reporting II

Describe, illustrate and analyse the

format and content of:

(a) Internal review reports and other

reports dealing with

recommendations for the

enhancement of business

performance


28 Not-For-Profit Organisations

(a) Apply audit and review techniques to

small not-for-profit organisations

(b) Explain how the audit and review of


differs from the audit and review of


PAGE 95

AIM

To develop knowledge and understanding of

the audit process and its application in the

context of the external regulatory framework

and for business control and development.

OBJECTIVES

On completion of this paper, candidates

should be able to:

• understand the nature, purpose and

scope of auditing and internal review,

including the role of external audit and

its regulatory framework, and the role of

internal audit in providing assurance on

risk management and on the control

framework of an organisation

• identify risks, describe the procedures

undertaken in the planning process,

plan work to meet the objectives of the

audit or review assignment and draft the

content of plans

• describe and evaluate accounting and

internal control systems and identify and

communicate control risks, potential

consequences and recommendations

• explain and evaluate sources of

evidence, describe the nature, timing

and extent of tests on transactions and

account balances (including sampling

and analytical procedures) and design

programs for audit and review assignments

• evaluate findings, investigate

inconsistencies, modify the work

program as necessary, review

subsequent events, and justify and

prepare appropriate reports for users

within and external to the organisation,

Paper 2.6

Audit and Internal Review(GBR)

including recommendations to enhance



relevant Statements of Auditing Standards

(International Standards on Auditing from

December 2005)



OVERALL SYLLABUS

Paper 2.6 builds on the knowledge and

understanding developed by Paper 1.1

Preparing Financial Statements and to a

limited extent Paper 1.2 Financial

Information for Management.

Candidates will be expected to be familiar

with Paper 2.5 Financial Reporting,

including the requirements of the

accounting standards examined within it.

They will also be expected to be familiar

with Paper 2.1 Information Systems.

Paper 2.6 provides the knowledge and

understanding of the audit process which is

then developed in Paper 3.1 Audit and

Assurance Services.

SYLLABUS CONTENT

1 Audit framework

(a) The development and changing

nature of audit.

(b) Statutory audits, accountability,

stewardship and agency.

(c) Professional ethics and codes of

conduct, their application to external

audit and internal audit,

responsibility for fraud and error.

2 Internal audit and internal review

(a) The role of internal audit and

internal review and their relationship

with:


(ii) risk management

(iii) organisational control

(iv)corporate objectives.





PAGE 96

(b) Scope and functions of internal

audit, the nature and extent of

internal audit assignments.

(c) Outsourced internal audit functions.

(d) The nature and extent of internal

review assignments including

operational, systems, value for

money and financial reviews.

3 Regulation

(a) Statements of Auditing Standards:

(i) their development and role

(ii) their relationship with International

Standards on Auditing.

(b) Auditors:

(i) regulation and supervision

(ii) their relationship with Government

(iii) the role of the Auditing Practices

Board and other UK standard-

setting bodies.

4 Planning and risk

(a) Objectives of audit and review

assignments, the relevance of

stakeholder dialogue.

(b) Communicating the objectives of

audit and review assignments.

(c) Analytical procedures.

(d) Risk assessment.

(e) Materiality, tolerable error, and

sample sizes.

(f) Design and documentation of the

plan and work program.

(g) Co-ordination of the work of others.

(h) Information technology in planning

and risk assessment.

5 Internal control

(a) Objectives of internal control

systems.

(b) Inherent weaknesses in internal

control systems.

(c) The use of internal control systems

by auditors.

(d) Transaction cycles (revenue,

purchases, payroll, stock, capital

expenditure).

(e) The evaluation of internal control

systems by auditors including

internal control checklists and tests

of control.

(f) Communication with management.

6 Other audit and internal review evidence

(a) Financial statement assertions:

assets, liabilities, income and

expenditure, including accounting

estimates.

(b) Assertions reported on and opinions

provided in review assignments.

(c) Analytical procedures as substantive

evidence.

(d) Balance and transaction testing.

(e) Computer-assisted audit techniques,

their uses and limitations.

(f) Management representations.

(g) Audit sampling and other selective

testing procedures.

(h) Subsequent events reviews.

(i) Going concern reviews.

(j) The overall review of evidence

obtained.

(k) Modifications to the plan and work

program in the light of findings.

7 Reporting

(a) Format and content of unqualified

and qualified external audit reports

on financial statements.

(b) Format and content of review reports

and other reports on assignment

objectives.

(c) Recommendations for the


performance.

EXCLUDED TOPICS

The audit of groups is not examinable at this

level. Candidates should be aware of the

content, wording and meaning of external

audit reports and they may be asked to

prepare the explanatory paragraphs for

inclusion in a qualified audit report. However,

candidates are not expected to draft full

external audit reports.

Exposure Drafts (EDs) are not examinable

for Paper 2.6.



• professional ethics as they apply to

accountants working in public practice

and in business

• risk assessment and the response to

assessed risks for external auditors

• the role of internal audit in risk

management and corporate governance

• internal controls

• substantive audit evidence.

Audit and Internal Review (GBR) (Continued)

PAGE 97


SYLLABUS


constructed in two sections. The bulk of

the questions will be discursive but some

questions involving computational elements

will be set from time to time.

Section A is compulsory. The questions

will cover the key elements of the syllabus

relevant to both internal and external audit

assignments. Section B requires

candidates to answer two out of three

questions. The questions will cover all

areas of the syllabus.

Number

of marks


questions (which may be

scenario based)


25 marks) 60



100


This paper encompasses:

1 Internal review, which may be provided

either by internal auditors or may be

outsourced to external auditors.

2 External audit.

References to audit and auditors mean

both internal and external audit and

auditors, except where otherwise indicated.










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student accountant.


STUDY SESSIONS

1 The Nature, Purpose and Scope of

Audit and Review

Explain the:

(a) Nature and development of audit

and review

(b) Concepts of accountability,

stewardship and agency

(c) Concepts of materiality, true and fair

presentation and reasonable

assurance

(d) Reporting as a means of

communication to different

stakeholders

(e) Need for auditors to communicate

with those charged with governance

(f) High level of assurance provided by

audit assignments; the moderate

level of assurance provided by

review assignments; assignments in

which no assurance is provided

NB: Students are expected to be aware

of the nature and purpose of non-

financial review services as described in

Session 6. Internal review questions

may deal with these subjects, as well as

financial and systems reviews in the

context of companies and small not-for-

profit organisations



the student section of

www.accaglobal.com.

PAGE 98


2 Statutory Audits

Describe the:

(a) UK regulatory framework in which

statutory audits take place

(b) Development and status of the

Auditing Practices Board Auditing

Standards and their relationship with

International Standards on Auditing

(c) Reasons for, and mechanisms for,

the regulation of auditors by

Government and other regulatory

agencies including other UK

standard-setters

(d) Types of opinion provided in

statutory audit assignments

(e) Explain the objectives and principal

characteristics of statutory audit and

discuss its value (e.g. in assisting

management to reduce risk and

improve performance)

(f) Limitations of statutory audits

3 Internal Audit and Review I

Explain the:

(a) Development and role of internal

audit in achieving corporate

objectives and as part of good

corporate governance practice

(b) Relative merits of out-sourcing

internal audit and internal review

services to external auditors and

others, and the associated problems

(c) Difference between the role of

external audit and internal audit


(a) Corporate governance

(i) explain the objective, relevance

and importance of corporate

governance



and legislation

(b) Code of best practice

(i) outline the provisions of the Code

of Best Practice (based on the

Cadbury Report) that are most

relevant to auditors

(ii) outline the requirements of the

Combined Code (of the Committee

on Corporate Governance) relating

to directors’ responsibilities (e.g.

for

risk management and internal

control) and the reporting

responsibilities of auditors

(c) Audit committees

(i) explain the structure and roles of

audit committees and discuss

their benefits and drawbacks




than law

(d) Internal financial control effectiveness

(i) outline the importance of internal

control and risk management

(ii) compare the responsibilities of


(internal and external) for the

design and operation of systems

and controls, and the reliability of

management information

(financial and non-financial)

(iii) describe the factors to be taken

into account when assessing the

need for an internal audit

function

5 Internal Audit and Review III

Describe the:

(a) Elements of best practice in the

structure and operations of an

internal audit function

(b) Scope of internal audit work and the

limitations of the internal audit

function

(c) Types of report provided in internal

audit and internal review assignments

6 Internal Audit and Review IV

Describe and illustrate the:

(a) Nature and purpose of internal

review assignments including:

(i) value for money

(ii) best value

(iii) IT

(iv) financial

(b) Nature and purpose of operational

internal review assignments

including:

(i) procurement

(ii) marketing

(iii) treasury

(iv) HR


Professional Codes of Conduct I

(a) Describe the sources of, and

enforcement mechanisms associated

PAGE 99

with, professional ethics and

professional codes of conduct

(b) Define the fundamental concepts of

professional ethics

(c) Define the detailed requirements of,



the context of independence,

objectivity and integrity

(d) Distinguish between the elements of

professional ethics applicable to

internal auditors and those

applicable to external auditors

(e) Describe the responsibilities of internal

and external auditors for the prevention

and detection of fraud and error and in

relation to laws and regulations

8 Professional Ethics and Professional

Codes of

Conduct II

(a) Describe the requirements of

professional ethics and other

requirements in relation to the

acceptance of audit and review

assignments, including situations in

which there is an imposed limitation

in audit scope

(b) Define the detailed requirements of,

and

illustrate and analyse the application

of, professional ethics in the context of

confidentiality and conflicts of interest

(c) Describe the importance of

engagement letters and describe

their contents

9 Preliminary Planning Procedures

(a) Distinguish between risk-based,

procedural and other approaches to

audit and review work

(b) Describe the sources and nature of

information gathered in planning

audit and review assignments

(c) Describe the understanding of the

entity required by auditors

(d) Describe the purpose of analytical

procedures in planning and illustrate

the application of such procedures

(e) Describe the components of risk and

the use of information technology in

risk analysis

(f) Illustrate and explain the importance

of the application of risk analysis

(g) Define and illustrate the concepts of

materiality and tolerable error

(h) Evaluate misstatements

10 The Work Plan, the Work Program and

Documentation

(a) Describe and illustrate the contents

of work plans, work programs and

working papers

(b) Describe the nature of

documentation required for different

types of assignment

(c) Explain the importance of

documentation

(d) Illustrate the use of information

technology in the audit

11 The Work of Others

Describe the:

(a) Extent to which external auditors are


(i) internal audit

(ii) experts


and recognise where reliance is

needed

(b) Extent to which internal auditors are


(i) experts


(c) Conditions that must be met before

reliance can be placed on the work of

others and the planning considerations

in co-ordinating the work of others

(d) Division of responsibilities between

auditors and others

(e) Extent to which reference to the

work of others can be made in audit

and review reports

12 Internal Control I

(a) Describe the objectives of internal

control systems and the responsibility

for internal control systems in the

context of organisational objectives

(b) Describe the importance of internal

control to auditors


limitations of internal control

systems in the context of fraud and

error

(d) Explain the need to modify the audit

plan in the light of the results of


PAGE 100

tests of control

(e) Distinguish between tests of controls

and substantive tests

13 Internal Control II – Sales, Purchases

and stock


internal control systems over sales,

purchases and stock cycles operate

in both large and small entities



for sales, purchases and stock cycles


control of sales, purchases and stock

for inclusion in a work program


and operational weaknesses in sales,

purchases and stock systems should

be reported to management and how


14 Internal Control III – Revenue

Expenditure and Capital Expenditure


internal control systems over revenue

and capital expenditure transaction

cycles operate in both large and

small entities



for revenue and capital expenditure

transaction cycles


control of revenue and capital

expenditure for inclusion in a work

program



revenue and capital expenditure


management and how


15 Internal Control IV – Payroll



payroll transaction cycle operate in




for the payroll transaction cycle


control of payroll for inclusion in a

work program



payroll systems should be reported



16 Internal Control V – Bank and Cash


internal control systems over the bank

and cash transaction cycle operate in




for the bank and cash transaction cycle


control of bank and cash for

inclusion in a work program


and operational weaknesses in bank

and cash systems should be reported



NB For items 13– 16 an understanding of

IT issues and computer controls is required

17 Other Audit and Review Evidence I

(a) Describe the sources and relative

merits of different types of evidence

available

(b) Describe the financial statement

assertions commonly reported on

and the principles and objectives of

balance and transaction testing

(c) Distinguish between the interim and

the final audit

(d) Describe and illustrate how

analytical procedures are used as

substantive procedures

(e) Explain the problems associated

with the audit and review of

accounting estimates

(f) Describe the types of evidence

available in smaller entities

(g) Evaluate the quality of evidence

collected

18 Other Audit and Review Evidence II –

Debtors and prepayments



procedures, including debtors

circularisations, used in obtaining

evidence in relation to debtors and

prepayments, and the related


PAGE 101





debtors and prepayments

19 Other Audit and Review Evidence III –

Stock

(a) Explain the importance of stock

(b) Describe stock counting procedures

(c) Explain cut-off

(d) Describe and tabulate for inclusion



evidence in relation to stock,

including the auditors' attendance at

stocktaking

(e) Explain the purpose of substantive

procedures including direct

confirmation of stock held by third

parties, in relation to financial

statement assertions concerning stock

20 Other Audit and Review Evidence IV –

Current liabilities and accruals




evidence in relation to current

liabilities and accruals, and

the related income statement entries


procedures including supplier

statement reconciliations and direct

confirmation of creditors, in relation

to financial statement assertions

concerning current liabilities and

accruals

21 Other Audit and Review Evidence V –

bank and cash

(a) Describe and tabulate for inclusion in

a work program the substantive

procedures including bank

confirmation reports used in

obtaining evidence in relation to

bank and cash, and the related





bank and cash

22 Other Audit and Review Evidence

VI – fixed assets and long-term

liabilities




evidence in relation to fixed assets

and long-term liabilities and the

related income statement entries




fixed assets and long-term liabilities

23 Other Audit and Review Evidence VII

(a) Explain the need for sampling

(b) Distinguish between statistical and

non-statistical sampling


application of the basic principles of

statistical sampling and other

selective testing procedures

(d) Describe and illustrate the use of

computer assisted techniques in

obtaining evidence

(Note: candidates will not be

required to perform detailed

sampling calculations)

24 Going Concern Reviews

(a) Explain the importance of going

concern reviews

(b) Describe the procedures to be

applied in performing going concern

reviews

(c) Describe the disclosure requirements

relating to going concern issues

(d) Describe the reporting implications

of the findings of going concern

reviews

25 Audit Finalisation and the

final review

Describe and explain the:

(a) Quality of management

representations as audit evidence

(b) Circumstances in which obtaining

management representations is

necessary and the matters on which

representations are commonly

obtained

(c) Purpose of the subsequent events

review

(d) Procedures to be undertaken in


PAGE 102

performing a subsequent events review

(e) Importance of the overall review of

evidence obtained

(f) Problems associated with the

application of accounting treatments

(g) Significance of unadjusted

differences

26 Reporting I

(a) Describe, illustrate and analyse the

format and content of unqualified

and qualified statutory audit reports

(b) Identify and report systems

weaknesses and their potential

effects and make appropriate


(e.g. accounting procedures and

financial controls)

27 Reporting II

Describe, illustrate and analyse the

format and content of:

(a) Internal review reports and other

reports dealing with

recommendations for the


performance

28 Not-For-Profit Organisations

(a) Apply audit and review techniques to


(b) Explain how the audit and review of


differs from the audit and review of



PAGE 103





Option papers:

3.1 Audit and Assurance Services


3.3 Performance Management

3.4 Business Information

Management

Core papers:

3.5 Strategic Business Planning

and Development

3.6 Advanced Corporate

Reporting

3.7 Strategic Financial

Management

Candidates must sit two option

papers and the three core papers.


The main aim of Part 3 is to

establish evidence of competence

to practise as a professional

accountant in public practice,

public sector or in industry and

commerce. This requires

candidates to demonstrate not

only that they have mastered the

range of required knowledge, skills

and techniques, but also that they

are able to apply them in a

managerial context.

By this stage, knowledge has to be

fully integrated in the way it is

used by professionals with a

recognition of how the different

subjects contribute to dealing with

problems. This stage will present

candidates with problems which

test their skills and sensitivity in

dealing with new contexts and

unforseen circumstances. In

dealing with such situations,

candidates will be expected to

tailor solutions to problems

appropriately and in a way which

demonstrates their grasp of

managerial skills.

Although emphasis will be given to

practical issues, candidates will

also be expected to criticise

current practice and express views

on developments in accounting.

They will also be expected to show

evidence of the necessary personal

qualities and interpersonal skills

required of the professional

accountant. Examinations at this

stage will be set at a level

equivalent to a UK Masters degree.


PART 3



• draw on knowledge across all

earlier papers studied

• integrate that knowledge

effectively and use it creatively

in applying concepts and

techniques

• analyse and interpret data and

information and present

reasoned conclusions

• diagnose and formulate

appropriate solutions to

problems which indicate

commercial awareness

• exercise judgement drawing on

technical, political and

commercial awareness in

developing and evaluating

alternatives and in proposing

solutions

• adapt to new systems and

circumstances

and

• communicate analyses and

conclusions effectively and with

3

PAGE 104

sensitivity for different purposes

and to contrasting audiences

with due emphasis on social

expectations.

While the skills identified above

will be tested directly by the

questions set, in assessing the

answers weight will be given to

candidates' ability to demonstrate

a grasp of the following personal

skills and attributes:

• strategic awareness – identifying

the strategic needs of the

organisation and contributing to

strategic planning and

management

• interpersonal skills – tact,

sensitivity to political tensions

and cultural differences,

awareness of social, economic

and political pressure, ability to

influence

• management skills – resource

management: people, material,

time and money, management

of the client, management of

change, in particular, in

technology and contingency

planning

and

• personal qualities – persistence

in pursuing inquiries and

probing responses, integrity,

objectivity, independence and

public responsibility.

PAGE 105

Paper 3.1

Audit and Assurance Services(INT)





AIM

To ensure that candidates can exercise

judgement and apply techniques in the

analysis of matters relating to the provision

of audit and assurance services, and can

evaluate and comment on current practices

and developments.

OBJECTIVES


should be able to:

• demonstrate their ability to work within

a professional and ethical framework

• understand current issues and

developments relating to auditing and

the provision of audit-related and

assurance services

• explain and evaluate the auditor’s

position in relation to the acceptance

and retention of professional

appointments

• evaluate and recommend quality control

policies and procedures

• identify and describe the work required

to meet the objectives of audit and non-

audit assignments

• apply and evaluate the requirements of

relevant International Standards on

Auditing

• evaluate findings and the results of

work performed and draft suitable

reports on assignments



OVERALL SYLLABUS

Candidates need a thorough understanding

of Paper 2.6 Audit and Internal Review and

knowledge of Paper 2.5 Financial Reporting

concerning the preparation and presentation

of financial statements. Paper 3.1 may draw

on aspects of information technology, covered

in Paper 2.1 Information Systems, by

considering its impact on assignments.

Paper 3.1 develops the knowledge gained

in Paper 2.5 Financial reporting by

introducing the audit implications of

accounting treatments.


in Paper 2.6 Audit and Internal Review by:

• extending the basic awareness of

professional codes and fundamental

principles to a detailed understanding of

rules of professional conduct

• introducing practice management

• extending the application of procedures

involved in planning, conducting and

reporting on audit assignments to group

audits, audit-related services and non-

audit assignments

• critically evaluating procedures and

reports

• introducing current issues and

developments.

SYLLABUS CONTENT

1 Professional and ethical considerations

(a) Rules of professional conduct

(i) integrity, objectivity and

independence

(ii) professional duty of confidence

(iii) changes in professional

appointments

(iv) books, documents and papers

(v) corporate financial advice

(vi) conflicts of interest.

PAGE 106

(b) Professional responsibility and liability

(i) fraud and error

(ii) professional liability (including

negligence)

(iii) misconduct

(iv) expectation gap

(v) professional indemnity insurance

(vi)insider dealing.

(c) Regulatory environment


(ii) Code of Best Practice

(iii) audit committees

(iv) internal financial control

effectiveness

(v) laws and regulations in an audit

of financial statements

(vi) money laundering.

2 Practice management

(a) Quality control practices and

procedures.

(b) Advertising, publicity and obtaining

professional work.

(c) Fees.

(d) Tendering.

(e) Terms of engagement.

3 Audit process

(a) Audit strategy including

(i) risk-based auditing

(ii) systems audits

(iii) balance sheet approach

(iv) revenue, expenditure and other

cycles

(v) directional testing

(vi) analytical procedures.

(b) Planning including

(i) materiality

(ii) risk assessments.

(c) Evidence including

(i) documentation

(ii) related parties

(iii) management representations

(iv) using the work of others.

(d) Evaluation and review including

(i) opening balances and

comparatives

(ii) other information

(iii) subsequent events

(iv) going concern.

4 Assignments

(a) Audit of financial statements.

(b) Group audits.

(c) Audit-related services including:

(i) reviews

(ii) agreed-upon procedures

(iii) compilations.

(d) Assurance services including:

(i) risk assessment

(ii) performance measurement

(iii) systems reliability

(iv) electronic commerce.

(e) Prospective financial information.

(f) Internal audit.

(g) Outsourced finance and accounting

functions.

(h) Social and environmental audits.

5 Reporting

(a) Auditor’s reports.

(b) Conclusions and reporting for

agreed-upon procedures and

assurance services.

(c) Reports to management.

6 Current issues and developments

(a) Professional ethics.

(b) Corporate governance.

(c) Fraud.

(d) Environmental issues.

(e) Information technology.

(f) Multinational accountancy firms.

(g) SMEs and audit exemption.

EXCLUDED TOPICS



• Stock Exchange Listing Requirements

• International Accounting Standards

Exposure Drafts

• effects on a company of insolvency law

and of employment and social security

law (e.g. wrongful trading and national

insurance contributions).



• rules of professional conduct

• quality control practices and procedures

• audit strategy

• assignments

• auditor’s reports

• current issues and developments.

Audit and Assurance Services (INT) (Continued)

PAGE 107


SYLLABUS


constructed in two sections. Questions in

both sections will be almost entirely

discursive. However, candidates will be

expected, for example, to be able to assess

materiality and calculate relevant ratios

where applicable.

Section A questions will be based on ‘case

study’ type scenarios. That is not to say

that they will be particularly long, rather

that they will provide a setting within

which a range of topics, issues and

requirements can be addressed. Different

types of question will be encountered in

Section B and will tend to be more

focussed on specific topics, for example

‘auditor’s reports’, ‘quality control’ and

topics of ISAs which are not examinable in

Paper 2.6 Audit and Internal Review. (This

does not preclude these topics from

featuring in Section A.) These questions

will have less scenario than in Section A

and one will be a discussion question.

Number

of marks




100











RELEVANT TEXTS




listed below:


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Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.




student accountant.


from the examination can be downloaded via

the Students section of www.accaglobal.com.


STUDY SESSIONS

1 Rules of professional conduct I

Candidates should be able to interpret,

apply and appraise specified statements

of professional ethics which govern the

auditor’s conduct and are included in

ACCA’s ‘Rules of Professional Conduct’

and IFAC’s ‘Code of Ethics for

Professional Accountants’.

(a) Integrity, objectivity and

independence

(i) revise the purpose of a professional

ethical code from Paper 2.6

(ii) compare and contrast the

Fundamental Principles of ACCA’s

‘Rules of Professional Conduct’

with those of IFAC’s ‘Code of Ethics

for Professional Accountants’

(iii) outline the contents of ACCA’s

and IFAC’s codes of ethics

(iv) identify and explain common

threats to independence and

explain how the risks may be

minimised or resolved

(v) discuss and evaluate the

effectiveness of available

safeguards

(vi) outline the practical implications

for an audit practice in relation to

quality control procedures

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(vii) discuss the benefits of providing

other services (including internal

audit) to audit clients and whether

the drawbacks (eg objectivity

impairment) can be overcome

(viii) define “specialist valuations”

and discuss how the objectivity

of the audit may be threatened

(ix)explain how and why an auditor

should respond to a request to

provide a second opinion

(b) Professional duty of confidence

(i) explain the importance of the role

of confidentiality to the auditor-

client relationship

(ii) distinguish between disclosure

and use of information

(iii) identify circumstances in which

disclosure is permitted or required

(iv)describe how a client’s

information should be protected

when the auditor also acts for a

competitor company

2 Rules of professional conduct II

(a) Changes in professional appointments

(i) discuss the reasons why entities

change their auditors

(ii) explain the matters to be

considered and the procedures

which an audit firm/professional

accountant should carry out

before accepting new clients and

new engagements

(iii) describe the procedures for

agreeing the terms of an

engagement

(iv) outline the procedures for the

transfer of books, papers and

information following a new

appointment

(b) Books, documents and papers

(i) explain the general principles

governing the ownership of, and

rights of access to, documents

and papers

(ii) explain the legal right of lien and

describe the circumstances in

which it may be exercised

(iii) discuss the extent to which

clients and third parties may

have access to documents and

papers

(c) Corporate financial advice and


(i) outline the role of auditors in

advising clients involved in take-

over bids and share issues and

explain how conflicts can arise

(ii) distinguish conflicts between

members’ and clients’ interests

from those between the interests

of different clients

(iii) describe how conflicts may be

avoided or managed with

safeguards

3 Professional responsibility and liability

(a) Fraud and error

(i) define and distinguish between

the terms “error”, “irregularity”,

“fraud” and “misstatement”


respective responsibilities of

management and auditors for

fraud and error

(iii) describe the matters to be

considered and procedures to be

carried out to investigate actual

and/or potential misstatements

(iv) explain how, why, when and to

whom fraud and error should be

reported and the circumstances

in which an auditor should

withdraw from an engagement

(v) discuss the current and possible

future role of auditors in

preventing, detecting and

reporting error and fraud

(b) Professional Liability

(i) identify the circumstances in which

auditors may have legal liability

(ii) describe the factors to determine

whether or not an auditor is

negligent in given situations

(iii) explain the other criteria for legal

liability to be recognised

(including “due professional care”

and “proximity”)

(iv) distinguish between liability to

client and liability to third parties

(v) comment on precedents of case

law

(vi) identify and evaluate the

practicability and effectiveness of

ways in which liability may be

restricted

(vii) discuss how the audit and other

opinions may be affected by

limiting audit liability

(viii) discuss the advantages and

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disadvantages of audit liability

claims being settled out of court

(c) Misconduct

(i) explain and illustrate what is meant

by professional misconduct

(ii) outline the penalties and

sanctions which may be imposed

by disciplinary bodies

(d) Expectation gap

(i) identify and discuss the factors

which contribute to the expectation

gap (e.g. responsibilities for fraud

and error, litigation)

(ii) suggest ways in which the gap

might be bridged

(e) Professional indemnity insurance

(i) explain the terms professional

indemnity insurance (PII) and

fidelity guarantee insurance (FGI)

(ii) discuss arguments for and

against mandatory cover

(f) Insider dealing

(i) explain the term “insider dealing”

and why it is damaging

(ii) relate the Fundamental Principles

to insider dealing

(iii) suggest measures to reduce the

exposure of partners and staff to

the risks arising


(a) Revise the Regulatory Framework

from Paper 2.6 including:

(i) the objective, relevance and

importance of corporate

governance

(ii) the relative merits and


and legislation for corporate

governance

(iii) the provisions of the Code of

Best Practice (based on the



(iv) the requirements of the

Combined Code (of the

Committee on Corporate

Governance) relating to directors’

and auditors' responsibilities

(v) the role of management and

auditors (internal and external) in

internal financial control

effectiveness

(b) Audit Committees

(i) revise the structure and roles of

audit committees, their benefits

and drawbacks




than law

(iii) discuss independence in respect

of non-executive directors

(c) Laws and Regulations in an Audit of

Financial Statements

(i) compare and contrast the



concerning compliance with laws

and regulations

(ii) describe the auditors

considerations of compliance and

audit procedures when possible

non-compliance is discovered

(d) Money laundering

(i) Define 'money laundering'

(ii) Outline the scope of criminal

offences of money laundering and

how professional accountants may

be protected from criminal and civil

liability

(iii) Describe how accountants meet

their obligations to help prevent

and detect money laundering

including record keeping and

reporting of suspicion to a financial

intelligence unit (FIU)

(iv) Understand the importance of

customer due diligence (CDD)

(v) Understand the need for ethical

guidance in this area

(vi) Appreciate the international

efforts to combat money

laundering

(vii) Describe the basic elements of an

anti-money laundering program

5 Practice management I

(a) General

(i) describe the risks to which

practices are exposed and the

steps which can be taken to

manage them

(b) Quality control practices and

procedures

(i) outline the regulatory framework

for ensuring quality services

(ii) outline the organization of

international accountancy

PAGE 110


practices

(iii) specify the objectives of quality

control policies

(iv) identify the factors which affect

the nature, timing and extent of

an audit firm’s quality control


(v) recommend policies and

procedures which can be

exercised internally at the level of

the audit firm and on individual

audits

(vi) describe review procedures

including second partner reviews

(vii) discuss the matters particularly

relevant to smaller firms relating

to quality control

6 Practice management II

(a) Advertising, Publicity, Obtaining

Professional Work and Fees

(i) explain the need for guidance in

these areas

(ii) illustrate the circumstances in

which advertising is acceptable

(iii) discuss the restrictions on practice

descriptions, the use of the ACCA

logo and the names of practising

firms

(iv)discuss the extent to which fees

may be referred to in promotional

material

(v) outline the determinants of fee-

setting and describe the bases on

which fees and commissions may

and may not be charged for

services

(vi)discuss the problems involved in

establishing and negotiating fees,

etc

(b) Tendering

(i) describe the matters to be

considered when a firm is invited

to submit a proposal or fee quote

for an audit

(ii) identify the information required

for the proposal

(iii) outline the content of an

engagement proposal document

(for both continuing and new

clients)

(iv) suggest the criteria which might

be used to evaluate tenders

received from audit firms

(v) suggest reasons why audit fees

may be lowered from the

previous year’s fees

(vi) describe “lowballing” and

discuss whether or not it impairs

independence

(c) Terms of engagement

(i) explain the key issues which

underlie the agreement of the

scope and terms of an audit

engagement with a client

7 Audit process I

(a) General (approaches to auditing)

(i) select and justify an appropriate

approach to a given assignment

(ii) explain the circumstances in

which a specified approach is not

appropriate

(b) Risk-based auditing

(i) describe the business risk approach

to auditing and its relationship to

the audit risk model

(ii) outline the reasons why it is

adopted in preference to other

methodologies

(iii) describe the consequences of

such a “top down” approach to

evidence gathering procedures

(e.g. tests of controls, analytical

procedures and test of detail)

(c) Systems audits

(i) describe the components of an

effective system of internal controls

(ii) identify the factors which

contribute to a strong control

environment

(iii) revise control objectives, control

procedures, walk-through tests and

tests of control (“compliance tests”)

8 Audit process II

(a) Balance sheet approach

(i) explain the importance of the

balance sheet as a primary

statement

(ii) discuss why this approach may

be more appropriate for the audit

of small businesses than a

business risk approach

(iii) discuss the limitations of this

approach

(b) Revenue, expenditure and other

cycles

(i) illustrate how accounting

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transactions can be analysed into

“cycles” which correspond to line

items in the balance sheet and

income statement

(ii) identify cycles relevant to a given

situation (e.g. the conversion cycle

for a manufacturing enterprise)

(iii) describe the approach to each

cycle

(c) Directional testing

(i) explain the concept of directional

testing as a methodology

(ii) describe how this approach helps

to detect misstatements and

determines the populations from

which samples are drawn

(iii) illustrate the use of directional

testing within cycles

(iv) discuss the advantages and

limitations of this approach

(d) Analytical procedures

(i) explain the nature and role of

analytical procedures in the

conduct of an assignment

(ii) recognise situations in which

analytical procedures may be

used extensively

(iii) describe the criteria for

assessing the extent to which

reliance can be placed on

substantive analytical procedures

9 Planning

(a) General

(i) identify and illustrate the matters

to be considered in planning an

assignment including:

– logistics (e.g. staff and client

management, multiple

locations, deadlines)

– use of IT in administration

– time budgets

– assignment objectives and

reports required

– preliminary materiality

– financial statement or other

assertions

– components of audit risk

– audit strategy

(b) Materiality

(i) define materiality and describe

how it is applied in financial

reporting and auditing

(ii) explain the criteria which

determine whether or not a

matter is material

(iii) discuss the use and limitations

of prescriptive rules in making

decisions about materiality

(c) Risk Assessments

(i) identify and distinguish between

assignment (eg audit) and

business risks

(ii) describe the factors which

influence the assessment of a

specified risk (e.g. inherent risk)

for a given assignment

(iii) explain how and why the

assessments of risks and

materiality affect the nature, timing

and extent of auditing procedures

(iv) critically appraise the audit risk

model

(v) recognise and assess the

implications of a specified

computer system (e.g. network)

on an assignment

10 & 11 Evidence

(a) General

(i) critically appraise the

appropriateness and sufficiency of

different sources of audit evidence

and the procedures by which

evidence may be obtained

including:

– management representations

– the work of others (including

internal auditors and experts )

– sampling techniques and

selection methods

– direct confirmation

– audit automation tools

(ii) identify and illustrate suitable

investigative methods (eg audit

procedures such as

enquiry and

observation) to obtain sufficient

evidence from identified sources

(iii) select and explain substantive

analytical procedures appropriate

to given financial and other data

(iv) identify and evaluate the audit

evidence expected to be available

to:

– verify specific assets,

liabilities, transactions and

events; and

– support financial statement

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assertions and accounting

treatments (including fair

values)

(b) Documentation

(i) explain the reasons for preparing

and keeping working papers and

the importance of reviewing them

(c) Related parties

(i) explain the specific audit

problems and procedures

concerning related parties and

related party transactions

(ii) recognise circumstances that may

indicate the existence of

unidentified related parties

(d) Management representations

(i) illustrate the use of written

management representations as

the primary source of audit

evidence and as complementary

audit evidence

(ii) discuss the implications of

contradictory evidence being

discovered

(e) Using the work of others

(i) explain when it is justifiable to

place reliance on the work of an

expert (e.g. a surveyor employed

by the audit client)

(ii) assess the appropriateness and

sufficiency of the work of internal

auditors

12 Evaluation and review I

(a) General

(i) explain review procedures

(including the use of analytical

procedures and checklists)

(ii) evaluate findings quantitatively

and qualitatively, e.g.

– the results of audit tests and

procedures

– the effect of actual and

potential misstatements

(b) Opening balances and comparatives

(i) describe how the auditor’s

responsibilities for corresponding

figures and comparative financial

statements are discharged

(ii) describe the further considerations

and audit procedures relevant to

initial engagements

(c) Other information

(i) explain the auditor’s

responsibilities for “other

information”

(ii) discuss the courses of action

available to an auditor if a

material inconsistency exists

(d) Subsequent events

(i) specify the nature and timing of

audit procedures designed to

identify subsequent events that

may require adjustment to, or

disclosure in, the financial

statements

13 Evaluation and review II

(a) Going concern

(i) give examples of indicators that

the going concern basis may be

in doubt and recognise mitigating

factors

(ii) evaluate the evidence which

might be expected to be available

and assess the appropriateness

of the going concern basis in

given situations

(iii) describe the disclosures in

financial statements relating to

going concern

(iv) understand the implications for

the auditor’s report where doubts

about the going concern basis

– have been resolved

– remain unresolved

(v) comment on the auditor's

responsibilities in respect of going

concern statements

14 & 15 Audit of financial statements

(a) Revise the statutory audit from

Paper 2.6 including:

(i) objectives, principal

characteristics and value

(ii) respective responsibilities of

auditors and management

(iii) limitations of assurance

(b) Evaluate the matters (e.g.

materiality, risk, relevant accounting

standards, audit evidence) relating

to:

(i) inventory

(ii) standard costing systems

(iii) cash flow statements

(iv) construction contracts

(v) deferred taxation

(vi) segmental information

(vii) fair value

(viii) leases

(ix) revenue recognition

PAGE 113


(x) government grants and

assistance

(xi) borrowing costs

(xii) related party transactions

(xiii) investments

(xiv) earnings per share

(xv) discontinued operations

(xvi) held for sale non-current assets

(xvii) impairment

(xviii) provisions, contingent


(xix) goodwill

(xx) brand valuations

(xxi) research and development

(xxii) other intangible assets

(This list is not exhaustive, in particular,

the audit of transactions, balances and

other events examined in Paper 2.6 is

now assumed knowledge.)

16 Group Audits

(a) Identify the specific matters to be

considered before accepting

appointment as principal auditor to a

group

(b) Explain the organization, planning,

management and administration

issues specific to group and joint audits

(c) Identify the specific audit problems

and describe audit procedures in

relation to:

(i) the correct classification of

investments

(ii) acquisitions and disposals

(iii) related party transactions

(iv) inter-company balances,

transactions and profits

(v) goodwill on consolidation

(vi) enterprises in developing countries

(vii) discuss support letters as audit

evidence

(viii) describe the matters to be

considered and the procedures to be

performed when a principal auditor

uses the work of another auditor

(ix) explain the implications for the

auditor’s report on the financial

statements of an entity where the

opinion on a component is qualified

or otherwise modified

17 “Audit-related” services

(a) General

(i) distinguish between audit and

audit-related services and the

comparative levels of assurance

provided by the auditor

(b) Reviews

(i) distinguish between an

attestation engagement and a

direct reporting engagement

(ii) describe, for example:

– a review of interim

financial information

– “due diligence” (when

acquiring a company,

business or other assets)

(iii) explain and illustrate the

importance of enquiry and

analytical procedures

(iv) Discuss the effectiveness of the

current “negative assurance” form

of reporting

(c) Agreed-upon procedures

(i) explain why these and

compilation engagements do not

(usually) meet the requirements

for an assurance engagement

(ii) illustrate the form and content of

a report of factual findings

(d) Compilations

(i) describe the general principles

and procedures relating to a

compilation engagement (e.g. to

prepare financial statements)


a compilation report

18 & 19 Assurance services

(a) General

(i) explain the need for a range of

assurance services and discuss to

what extent these can be

provided by auditors

(ii) explain the effects of assurance

services being provided by the

external auditor

(iii) describe how the level of

assurance (high or moderate)

provided by an engagement

depends on the subject matter

evaluated, the criteria used, the

procedures applied and the

quality and quantity of evidence

obtained

(iv) describe the form and content of

the professional accountant’s

report for an assurance

engagement

(v) discuss the situations in which it

PAGE 114


would be appropriate to express

a reservation or deny a

conclusion

(b) Risk assessment

(i) revise from Paper 2.6 including:

- the distinction between

management risk assessment and

auditor risk assessment

- risk thresholds

- types of risk

- ways in which risks

may be identified and analysed

- how management can respond

to risk

(ii) discuss the relative advantages

and disadvantages of qualitative

and quantitative risk assessment

methods

(c) Performance measurement

(i) describe the benefits of providing

assurance on business


(ii) discuss the relevance of

traditional financial accounting

performance measures and

operational measures

(iii) describe how the reliability of

performance information systems

is assessed (including

benchmarking)

(iv)describe the elements of a value

for money audit (i.e. economy,

efficiency and effectiveness) and

give examples of its use

(d) Revise systems reliability from Paper

2.6 including:

(i) the need for information

integrity and controls

(ii) the demand for reliable

and more timely reporting and

the benefits of providing

assurance to management and

external users

(iii) procedures for assessing internal

control effectiveness

(e) Electronic commerce

(i) describe and illustrate the ways

in which organizations are using

core technologies (e.g. EDI, E-

mail, Internet, World Wide Web)

(ii) explain how e-commerce affects

the business risk of an entity

(iii) describe the issues of privacy

and security of information for

transactions and communications

(iv) outline and illustrate the principles

and criteria which underlie web

assurance

20 Prospective financial information

(a) Define “prospective financial

information” and distinguish between

a “forecast” and a “projection”

(b) Describe the matters to be

considered before accepting an

engagement to report on prospective


(c) Discuss the level of assurance which

the auditor may provide and explain

the other factors to be considered in

determining the nature, timing and

extent of examination procedures

(d) Describe examination procedures to

verify forecasts and projections

relating to:

(i) capital expenditure

(ii) profits

(iii) cash flows

(e) Discuss the basis on which auditors

should form an opinion on

prospective financial information

21 Internal Audit:

(a) Revise internal audit and

(i) its role in corporate governance

(ii) its relationships (e.g. with audit

committees, external auditors)

(iii) the factors which determine the

extent to which reliance can be

placed on its work

(b) Compare the objectives and principal

characteristics of internal audit with

other assurance engagements

(c) Compare and contrast operational

and compliance audits

(d) Describe possible approaches to

multi-site operations (e.g. cyclical

compliance audits)

(e) Discuss the provision of outsourced

internal auditing services

22 Outsourced finance and accounting

functions

(a) Explain the different approaches to

“outsourcing” and compare with

“insourcing”

(b) Discuss the advantages and

disadvantages of outsourcing finance

PAGE 115


and accounting functions including:

(i) data (transaction) processing

(ii) pensions

(iii) information technology (IT)

(iv)internal auditing

(v) due diligence work

(vi)taxes

(c) Explain the impact of outsourced

functions on the conduct of an audit

23 Social and environmental audits

(a) Discuss the increasing importance of

policies which govern the

relationship of an organization to its

employees, society and the

environment

(b) Describe the difficulties in measuring

social and environmental

performance and give examples of

targets and sustainability indicators

(c) Explain the auditor’s main

considerations with respect to social

and environmental matters and give

examples of how they impact on

companies and their financial

statements (e.g. impairment of

assets, provisions and contingent

liabilities)

(d) Discuss how control over social and

environmental risks may be

exercised by management and

evaluated by the auditor

(e) Describe substantive procedures to

detect potential misstatements in

respect of socio-environmental

matters

(f) Explain what action may be taken by

the auditor in situations of non-

compliance with relevant laws and

regulations (e.g. environmental acts

and health and safety regulations)

(g) Discuss the form and content of an

independent verification statement

(e.g. on an environmental

management system (EMS) and a

report to society)

24 Auditor’s reports

(a) Explain and critically appraise the

form and content of a standard

unqualified auditor’s report

(b) Describe the factors to be taken into

account when forming an audit

opinion

(c) Make judgements and form audit

opinions which are consistent with

the results of audit procedures

relating to the sufficiency of audit

evidence and/or compliance with

accounting standards (including the

going concern basis)

(d) Discuss the implications for the

auditor's report on financial

statements which report compliance

with IFRSs

(e) Critically evaluate a proposed audit

opinion

(f) Discuss “a true and fair view”

(g) Describe and illustrate special

purpose auditors' reports (e.g. on

summarized financial statements)

25 Reports to Management

(a) Revise from Paper 2.6 reporting

systems weaknesses, their potential

effects and making appropriate


(b) Describe the criteria for evaluating the

effectiveness of a management letter

(c) Outline the content of a report to an

audit committee

(d) Explain the need for timely

communication, clearance, feedback

and follow up

(e) Discuss communication methods

26 Current Issues and Developments I

Candidates will be expected to

demonstrate the ability to discuss the

relative merits and the consequences of

different standpoints taken in current

debates and express opinions supported

by reasoned arguments.

(a) Professional ethics

(i) discuss the relative advantages of

an ethical framework and a

rulebook

(ii) comment on the adequacy of

existing ways in which objectivity

may be safeguarded and suggest

additional measures to improve

independence

(iii) suggest advantages and identify

the problems and safeguards

associated with ethical issues

(b) IFAC (IAASB) developments

(i) discuss the implementation and

adoption of International

Standards on Auditing (ISAs)

(ii) comment on IFAC's risk, fraud

and quality control standards as

PAGE 116


the foundation for all other ISAs

(c) Corporate governance

27 Current issues and developments II

(a) Multinational accountancy firms

(i) describe the different ways in

which the auditing profession

and audit markets are regulated

(ii) discuss the advantages and

disadvantages of partnership

status, limited liability

partnerships and incorporation of

audit firms

(iii) describe current developments in

the limitation of auditors’ liability

and the practical ways in which

the risk of litigation and liability

can be reduced

(iv) distinguish, for example,

between ‘global auditing firms’

and second tier firms

(v) discuss the impact of

globalisation on audit firms and

their clients

(vi) explain the advantages and

problems of current trends (e.g.

to merge, to divest consultancy

services)

(b) Information technology

(i) Describe recent trends in IT and

their current and potential impact

on auditors (e.g. identify and

discuss the audit implications of

financial reporting on the

Internet)

(ii) Explain how IT may be used to

assist auditors and discuss the

problems which may be

encountered in automating the

audit process

(c) SMEs

(i) state the case for and against

audit exemption for small

businesses

(ii) discuss how the potential

problems associated with the

audit of small enterprises may be

overcome

(iii) explain how ISAs affect smaller

firms

28 Revision

PAGE 117

AIM


judgement and apply techniques in the

analysis of matters relating to the provision

of audit and assurance services, and can

evaluate and comment on current practices

and developments.

OBJECTIVES


should be able to:

• demonstrate their ability to work within

a professional and ethical framework

• understand current issues and

developments relating to auditing and

the provision of audit-related and

assurance services

• explain and evaluate the auditor’s position

in relation to the acceptance and retention

of professional appointments

• evaluate and recommend quality control


• identify and describe the work required

to meet the objectives of audit and non-

audit assignments

• apply and evaluate the requirements of

relevant Statements of Auditing Standards

(International Standards on Auditing from

December 2005)

• evaluate findings and the results of

work performed and draft suitable

reports on assignments



OVERALL SYLLABUS

Candidates need a thorough understanding

Paper 3.1

Audit and Assurance Services(GBR)

of Paper 2.6 Audit and Internal Review

and knowledge of Paper 2.5 Financial

Reporting concerning the preparation and

presentation of financial statements. Paper

3.1 may draw on aspects of information

technology, covered in Paper 2.1

Information Systems, by considering its

impact on assignments.


in Paper 2.5 Financial Reporting by

introducing the audit implications of

accounting treatments.


in Paper 2.6 Audit and Internal Review by:

• extending the basic awareness of

professional codes and fundamental

principles to a detailed understanding of

rules of professional conduct

• introducing practice management

• extending the application of procedures

involved in planning, conducting and

reporting on audit assignments to group

audits, audit-related services and non-

audit assignments

• critically evaluating procedures and

reports

• introducing current issues and

developments.

SYLLABUS CONTENT

1 Professional and ethical considerations

(a) Rules of professional conduct

(i) integrity, objectivity and

independence

(ii) professional duty of confidence

(iii) changes in professional

appointments

(iv)books, documents and papers

(v) corporate financial advice

(vi) conflicts of interest.

(b) Professional responsibility and liability

(i) fraud and error

(ii) professional liability (including

negligence)

(iii) misconduct

(iv) expectation gap





PAGE 118

(v) professional indemnity insurance

(vi)insider dealing.

(c) Regulatory environment


(ii) Code of Best Practice

(iii) audit committees

(iv) internal financial control

effectiveness

(v) laws and regulations in an audit

of financial statements

(vi) money laundering.

2 Practice management

(a) Quality control practices and

procedures.

(b) Advertising, publicity and obtaining

professional work.

(c) Fees.

(d) Tendering.

(e) Terms of engagement.

3 Audit process

(a) Audit strategy including:

(i) risk-based auditing

(ii) systems audits

(iii) balance sheet approach

(iv)revenue, expenditure and other

cycles

(v) directional testing

(vi) analytical procedures.

(b) Planning including:

(i) materiality

(ii) risk assessments.

(c) Evidence including:

(i) documentation

(ii) related parties

(iii) management representations

(iv) using the work of others.

(d) Evaluation and review including:

(i) opening balances and comparatives

(ii) other information

(iii) subsequent events

(iv) going concern.

4 Assignments

(a) Audit of financial statements.

(b) Group audits.

(c) Audit-related services including:

(i) reviews

(ii) agreed-upon procedures

(iii) compilations.

(d) Assurance services including:

(i) risk assessment

(ii) performance measurement

(iii) systems reliability

(iv) electronic commerce.

(e) Prospective financial information.

(f) Internal audit.

(g) Outsourced finance and accounting

functions.

(h) Social and environmental audits.

5 Reporting

(a) Auditors’ reports.

(b) Conclusions and reporting for

agreed-upon procedures and

assurance services.

(c) Reports to management.


(a) Professional ethics.


(c) Fraud and litigation.

(d) Environmental issues.

(e) Information technology.

(f) Multinational accountancy firms.

(g) SMEs and audit exemption.

EXCLUDED TOPICS



• Stock Exchange Listing Requirements

• Financial Reporting Exposure Drafts

• Effects on a company of insolvency law

and of employment and social security

law (e.g. wrongful trading and national

insurance contributions)

• Joint Money Laundering Steering Group

(JMLSG) Guidance Notes

• Financial Services Authority's (FSA)

Money Laundering Sourcebook.



• rules of professional conduct

• quality control practices and procedures

• audit strategy

• assignments

• auditors’ reports

• current issues and developments.


SYLLABUS


constructed in two sections. Questions in

both sections will be almost entirely

discursive. However, candidates will be

expected, for example, to be able to assess

materiality and calculate relevant ratios

where applicable.

Audit and Assurance Services (GBR) (Continued)

PAGE 119

Section A will be based on ‘case study’

type scenarios. That is not to say that they

will be particularly long, rather that they

will provide a setting within which a range

of topics, issues and requirements can be

addressed. Different types of question will

be encountered in Section B and will tend

to be more focussed on specific topics, for

example ‘auditors’ reports’, ‘quality control’

and topics of SASs (ISAs from December

2005) from which are not examinable in

Paper 2.6 Audit and Internal Review. (This

does not preclude these topics from

featuring in Section A.) These questions

will have less scenario than in Section A

and one will be a discussion question.

Number

of marks




100











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the Students section of www.accaglobal.com.


STUDY SESSIONS

1 Rules of professional conduct I

Candidates should be able to interpret,

apply and appraise specified statements

of professional ethics which govern the

auditor’s conduct and are included in

ACCA’s ‘Rules of Professional Conduct’

and IFAC’s ‘Code of Ethics for

Professional Accountants’.

(a) Integrity, objectivity and independence

(i) revise the purpose of a professional

ethical code from Paper 2.6


Fundamental Principles of ACCA’s

‘Rules of Professional Conduct’ with

those of IFAC’s ‘Code of Ethics

for Professional Accountants’

(iii) outline the contents of ACCA’s

and IFAC’s codes of ethics

(iv) identify and explain common

threats to independence and

explain how the risks may be

minimised or resolved

(v) discuss and evaluate the

effectiveness of available

safeguards

(vi) outline the practical implications

for an audit practice in relation to

quality control procedures

(vii) discuss the benefits of providing

other services (including internal

audit) to audit clients and

whether the drawbacks (eg

objectivity impairment) can be

overcome

PAGE 120

(viii) define “specialist valuations”

and discuss how the objectivity

of the audit may be threatened

(ix)explain how and why an auditor

should respond to a request to

provide a second opinion

(b) Professional duty of confidence

(i) explain the importance of the role

of confidentiality to the auditor-

client relationship

(ii) distinguish between disclosure

and use of information

(iii) identify circumstances in which

disclosure is permitted or required

(iv)describe how a client’s

information should be protected

when the auditor also acts for a

competitor company

2 Rules of professional conduct II

(a) Changes in professional appointments

(i) discuss the reasons why entities

change their auditors

(ii) explain the matters to be

considered and the procedures

which an audit firm/professional

accountant should carry out

before accepting new clients and

new engagements

(iii) describe the procedures for

agreeing the terms of an

engagement

(iv)outline the procedures for the

transfer of books, papers and

information following a new

appointment

(b) Books, documents and papers

(i) explain the general principles

governing the ownership of, and

rights of access to, documents

and papers

(ii) explain the legal right of lien and

describe the circumstances in

which it may be exercised

(iii) discuss the extent to which

clients and third parties may

have access to documents and

papers

(c) Corporate financial advice and


(i) outline the role of auditors in

advising clients involved in take-

over bids and share issues and

explain how conflicts can arise

(ii) distinguish conflicts between

members’ and clients’ interests

from those between the interests

of different clients

(iii) describe how conflicts may be

avoided or managed with

safeguards

3 Professional responsibility and liability

(a) Fraud and error

(i) define and distinguish between

the terms “error”, “irregularity”,

“fraud” and “misstatement”



management and auditors for

fraud and error

(iii) describe the matters to be

considered and procedures to be

carried out to investigate actual

and/or potential misstatements

(iv) explain how, why, when and to

whom fraud and error should be

reported and the circumstances

in which an auditor should

withdraw from an engagement

(v) discuss the current and possible

future role of auditors in

preventing, detecting and

reporting error and fraud

(b) Professional liability

(i) identify the circumstances in

which auditors may have legal

liability

(ii) describe the factors to determine

whether or not an auditor is

negligent in given situations

(iii) explain the other criteria for legal

liability to be recognised

(including “due professional care”

and “proximity”)

(iv) distinguish between liability to

client and liability to third parties

(v) comment on precedents of case

law

(vi) identify and evaluate the

practicability and effectiveness of

ways in which liability may be

restricted

(vii) discuss how the audit and other

opinions may be affected by

limiting audit liability

(viii) discuss the advantages and

disadvantages of audit liability

claims being settled out of court

(c) Misconduct

(i) explain and illustrate what is


PAGE 121

meant by professional

misconduct

(ii) outline the penalties and

sanctions which may be imposed

by disciplinary bodies

(d) Expectation gap

(i) identify and discuss the factors

which contribute to the

expectation gap (e.g.

responsibilities for fraud and

error, litigation)

(ii) suggest ways in which the gap

might be bridged

(e) Professional indemnity insurance

(i) explain the terms professional

indemnity insurance (PII) and

fidelity guarantee insurance (FGI)

(ii) discuss arguments for and

against mandatory cover

(f) Insider dealing

(i) explain the term “insider dealing”

and why it is damaging

(ii) relate the Fundamental Principles

to insider dealing

(iii) suggest measures to reduce the

exposure of partners and staff to

the risks arising


(a) Revise the Regulatory Framework

from Paper 2.6 including:

(i) the objective, relevance and

importance of corporate

governance

(ii) the relative merits and


and legislation for corporate

governance

(iii) the provisions of the Code of

Best Practice (based on the



(iv) the requirements of the

Combined Code (of the

Committee on Corporate

Governance), relating to directors’

and auditors' responsibilities

(v) the role of management and

auditors (internal and external) in

internal financial control

effectiveness

(b) Audit Committees

(i) revise the structure and roles of

audit committees, their benefits

and drawbacks




than law

(iii) discuss independence in respect

of non-executive directors

(c) Laws and Regulations in an Audit of

Financial Statements

(i) compare and contrast the



concerning compliance with laws

and regulations

(ii) describe the auditors

considerations of compliance and

audit procedures when possible

non-compliance is discovered

(d) Money laundering

(i) Define 'money laundering'

(ii) Outline the principal offences under

relevant anti-laundering legislation

and the main defences to money

laundering charges

(iii) Describe how accountants meet

their obligations to help prevent

and detect money laundering

including the role of money

laundering reporting officer and

reporting of suspicion

(iv) Understand the importance of

client identification

(v) Understand the need for ethical

guidance in this area

(vi) Appreciate the international

efforts to combat money

laundering

(vii) Describe the basic elements of an

anti-money laundering program

5 Practice management I

(a) General

(i) Describe the risks to which

practices are exposed and the

steps which can be taken to

manage them

(b) Quality control practices and

procedures

(i) outline the regulatory framework

for ensuring quality services

(ii) outline the organisation of

international accountancy

practices

(iii) specify the objectives of

quality control policies

(iv) identify the factors which affect

the nature, timing and extent of


PAGE 122

an audit firm’s quality control


(v) recommend policies and

procedures which can be

exercised internally at the level of

the audit firm and on individual

audits

(vi)describe review procedures

including second partner reviews

(vii) discuss the matters particularly

relevant to smaller firms relating

to quality control

6 Practice management II

(a) Advertising, publicity, obtaining

professional work and fees

(i) explain the need for guidance in

these areas

(ii) illustrate the circumstances in

which advertising is acceptable

(iii) discuss the restrictions on

practice descriptions, the use of

the ACCA logo and the names of

practising firms

(iv) discuss the extent to which fees

may be referred to in promotional

material

(v) outline the determinants of fee-

setting and describe the bases on

which fees and commissions may

and may not be charged for

services

(vi)discuss the problems involved in

establishing and negotiating fees,

etc

(b) Tendering

(i) describe the matters to be

considered when a firm is invited

to submit a proposal or fee quote

for an audit

(ii) identify the information required

for the proposal

(iii) outline the content of an

engagement proposal document

(for both continuing and new

clients)

(iv) suggest the criteria which might

be used to evaluate tenders

received from audit firms

(v) suggest reasons why audit fees

may be lowered from the

previous year’s fees

(vi) describe “lowballing” and

discuss whether or not it impairs

independence

(c) Terms of engagement

(i) explain the key issues which

underlie the agreement of the

scope and terms of an audit

engagement with a client

7 Audit process I

(a) General (approaches to auditing)

(i) select and justify an appropriate

approach to a given assignment

(ii) explain the circumstances in

which a specified approach is not

appropriate

(b) Risk-based auditing

(i) describe the business risk approach

to auditing and its relationship to

the audit risk model

(ii) outline the reasons why it is

adopted in preference to other

methodologies

(iii) describe the consequences of

such a “top down” approach to

evidence gathering procedures

(e.g. tests of controls, analytical

procedures and test of detail)

(c) Systems audits

(i) describe the components of an

effective system of internal controls

(ii) identify the factors which

contribute to a strong control

environment

(iii) revise control objectives, control

procedures, walk-through tests and

tests of control (“compliance tests”)

8 Audit process II

(a) Balance sheet approach

(i) explain the importance of the

balance sheet as a primary

statement

(ii) discuss why this approach may

be more appropriate for the audit

of small businesses than a

business risk approach

(iii) discuss the limitations of this

approach

(b) Revenue, expenditure and other cycles

(i) illustrate how accounting

transactions can be analysed into

“cycles” which correspond to line

items in the balance sheet and

profit and loss account

(ii) identify cycles relevant to a given

situation (e.g. the conversion

cycle for a manufacturing

enterprise)


PAGE 123

(iii) describe the approach to each

cycle

(c) Directional testing

(i) explain the concept of directional

testing as a methodology

(ii) describe how this approach helps

to detect misstatements and

determines the populations from

which samples are drawn

(iii) illustrate the use of directional

testing within cycles

(iv) discuss the advantages and

limitations of this approach

(d) Analytical procedures

(i) explain the nature and role of

analytical procedures in the

conduct of an assignment

(ii) recognise situations in which

analytical procedures may be

used extensively

(iii) describe the criteria for

assessing the extent to which

reliance can be placed on

substantive analytical procedures

9 Planning

(a) General

(i) identify and illustrate the matters

to be considered in planning an

assignment including:

- logistics (e.g. staff and client

management, multiple locations,

deadlines)

- use of IT in administration

- time budgets

- assignment objectives and

reports required

- preliminary materiality

- financial statement or other

assertions

- components of audit risk

- audit strategy

(b) Materiality

(i) define materiality and describe

how it is applied in financial

reporting and auditing

(ii) explain the criteria which

determine whether or not a

matter is material

(iii) discuss the use and limitations

of prescriptive rules in making

decisions about materiality

(c) Risk assessments

(i) identify and distinguish between

assignment (e.g. audit) and

business risks

(ii) describe the factors which

influence the assessment of a

specified risk (e.g. inherent risk)

for a given assignment

(iii) explain how and why the

assessments of risks and

materiality affect the nature, timing

and extent of auditing procedures

(iv) critically appraise the audit risk

model

(v) recognise and assess the

implications of a specified

computer system (e.g. network)

on an assignment

10 & 11 Evidence

(a) General

(i) critically appraise the appropriateness

and sufficiency of different sources of

audit evidence and the procedures by

which evidence may be obtained

including:

– management representations

– the work of others (including

internal auditors and specialists)

– sampling techniques and

selection methods

– direct communication

– audit automation tools

(ii) identify and illustrate suitable

investigative methods (e.g. audit

procedures such as enquiry and

observation) to obtain sufficient

evidence from identified sources

(iii) select and explain substantive

analytical procedures appropriate to

given financial and other data

(iv) identify and evaluate the audit

evidence expected to be available to:

– verify specific assets, liabilities,

transactions and events; and

– support financial statement

assertions and accounting

treatments (including fair values)

(b) Documentation

(i) explain the reasons for preparing

and keeping working papers and

the importance of reviewing them

(c) Related parties

(i) explain the specific audit

problems and procedures

concerning related parties and


PAGE 124

related party transactions

(ii) recognise circumstances that may

indicate the existence of

unidentified related parties

(d) Management representations

(i) illustrate the use of written

management representations as

the primary source of audit

evidence and as complementary

audit evidence

(ii) discuss the implications of

contradictory evidence being

discovered

(e) Using the work of others

(i) explain when it is justifiable to

place reliance on the work of a

specialist (e.g. a surveyor

employed by the audit client)

(ii) assess the appropriateness and

sufficiency of the work of internal

auditors

12 Evaluation and review I

(a) General

(i) explain review procedures

(including the use of analytical

procedures and checklists)

(ii) evaluate findings quantitatively

and qualitatively, e.g.

– the results of audit tests and

procedures

– the effect of actual and

potential misstatements

(b) Opening balances and comparatives

(i) describe how the auditor’s

responsibilities for corresponding

figures and comparative financial

statements are discharged

(ii) describe the further considerations

and audit procedures relevant to

initial engagements

(c) Other information

(i) explain the auditor’s responsibilities

for “other information”

(ii) discuss the courses of action

available to an auditor if a

material inconsistency exists

(d) Subsequent events

(i) specify the nature and timing of

audit procedures designed to

identify subsequent events that

may require adjustment to, or

disclosure in, the financial

statements

13 Evaluation and review II

(a) Going concern

(i) give examples of indicators that

the going concern basis may be

in doubt and recognise mitigating

factors

(ii) evaluate the evidence which

might be expected to be available

and assess the appropriateness of

the going concern basis in given

situations

(iii) describe the disclosures in

financial statements relating to

going concern

(iv) understand the implications for

the auditor's report where doubts

about the going concern basis

– have been resolved

– remain unresolved

(v) comment on the auditor's

responsibilities in respect of going

concern statements

14 & 15 Audit of financial statements

(a) Revise the statutory audit from

Paper 2.6 including:

(i) objectives, principle

characteristics and value

(ii) respective responsibilities of

auditors and management

(iii) limitations of assurance

(b) Evaluate the matters (e.g.

materiality, risk, relevant accounting

standards, audit evidence) relating

to:

(i) inventory

(ii) standard costing systems

(iii) cash flow statements

(iv) construction contracts

(v) deferred taxation

(vi) segmental information

(vii) fair value

(viii) leases

(ix) revenue recognition

(x) government grants and

assistance

(xi) borrowing costs

(xii) related party transactions

(xiii) investments

(xiv) earnings per share

(xv) discontinued operations

(xvi) held for sale non-current assets

(xvii) impairment

(xviii) provisions, contingent


(xix) goodwill


PAGE 125

(xx) brand valuations

(xxi) research and development

(xxii) other intangible assets

(This list is not exhaustive, in particular,

the audit of transactions, balances and

other events examined in Paper 2.6 is

now assumed knowledge.)

16 Group audits

(a) Identify the specific matters to be

considered before accepting

appointment as principal auditor to a

group

(b) Explain the organisation, planning,

management and administration

issues specific to group and joint audits

(c) Identify the specific audit problems and

describe audit procedures in relation to:

(i) the correct classification of

investments

(ii) acquisitions and disposals

(iii) related party transactions

(iv) inter-company balances,

transactions and profits

(v) goodwill on consolidation

(vi) enterprises in developing countries

(d) Discuss support letters as audit

evidence

(e) Describe the matters to be

considered and the procedures to be

performed when a principal auditor

uses the work of another auditor

(f) Explain the implications for the

auditor's report on the financial

statements of an entity where the

opinion on a component is qualified

17 “Audit-related” services

(a) General

(i) distinguish between audit and

audit-related services and the

comparative levels of assurance

provided by the auditor

(b) Reviews

(i) distinguish between an

attestation engagement and a

direct reporting engagement

(ii) describe, for example:

– a review of interim financial

information

– “due diligence” (when

acquiring a company,

business or other assets)

(iii) explain and illustrate the

importance of enquiry and

analytical procedures

(iv) discuss the effectiveness of the

current “negative assurance” form

of reporting

(c) Agreed-upon procedures

(i) explain why these and

compilation engagements do not

(usually) meet the requirements

for an assurance engagement


a report of factual findings

(d) Compilations

(i) describe the general principles

and procedures relating to a

compilation engagement (e.g. to

prepare financial statements)


a compilation report

18 & 19 Assurance services

(a) General

(i) explain the need for a range of

assurance services and discuss to

what extent these can be

provided by auditors

(ii) explain the effects of assurance

services being provided by the

external auditor

(iii) describe how the level of

assurance (high or moderate)

provided by an engagement

depends on the subject matter

evaluated, the criteria used, the

procedures applied and the

quality and quantity of evidence

obtained

(iv) describe the form and content of

the professional accountant’s

report for an assurance

engagement

(v) discuss the situations in which it

would be appropriate to express

a reservation or deny a

conclusion

(b) Risk assessment

(i) revise from Paper 2.6 including:

- the distinction between

management risk assessment and

auditor risk assessment

- risk thresholds

- types of risk

- ways in which risks

may be identified and analysed

- how management can respond

to risk


PAGE 126

(ii) discuss the relative advantages and

disadvantages of qualitative and

quantitative risk assessment

methods

(c) Performance measurement

(i) describe the benefits of providing

assurance on business


(ii) discuss the relevance of

traditional financial accounting

performance measures and

operational measures

(iii) describe how the reliability of

performance information systems

is assessed (including

benchmarking)

(iv)describe the elements of a value

for money audit (i.e. economy,

efficiency and effectiveness) and

give examples of its use

(d) Revise systems reliability from Paper

2.6 including:

(i) the need for information

integrity and controls

(ii) the demand for reliable

and more timely reporting and

the benefits of providing

assurance to management and

external users

(iii) procedures for assessing internal

control effectiveness

(e) Electronic commerce

(i) describe and illustrate the ways

in which organizations are using

core technologies (e.g. EDI, E-

mail, Internet, World Wide Web)

(ii) explain how e-commerce affects

the business risk of an entity

(iii) describe the issues of privacy

and security of information for

transactions and communications

(iv) outline and illustrate the principles

and criteria which underlie web

assurance

20 Prospective financial information

(a) Define “prospective financial

information” and distinguish between

a “forecast” and a “projection”

(b) Describe the matters to be

considered before accepting an

engagement to report on prospective


(c) Discuss the level of assurance which

the auditor may provide and explain

the other factors to be considered in

determining the nature, timing and

extent of examination procedures

(d) Describe examination procedures to

verify forecasts and projections

relating to:

(i) capital expenditure

(ii) profits

(iii) cash flows

(e) discuss the basis on which auditors

should form an opinion on

prospective financial information

21 Internal audit

(a) Revise internal audit and:

(i) its role in corporate governance

(ii) its relationships (e.g. with audit

committees, external auditors)

(iii) the factors which determine the

extent to which reliance can be

placed on its work

(b) Compare the objectives and principal

characteristics of internal audit with

other assurance engagements

(c) Compare and contrast operational

and compliance audits

(d) Describe possible approaches to

multi-site operations (e.g. cyclical

compliance audits)

(e) Discuss the provision of outsourced

internal auditing services

22 Outsourced finance and accounting

functions

(a) Explain the different approaches to

“outsourcing” and compare with

“insourcing”

(b) Discuss the advantages and

disadvantages of outsourcing finance

and accounting functions including:

(i) data (transaction) processing

(ii) pensions

(iii) information technology (IT)

(iv) internal auditing

(v) due diligence work

(vi) taxes

(c) Explain the impact of outsourced

functions on the conduct of an audit

23 Social and environmental audits

(a) Discuss the increasing importance of

policies which govern the

relationship of an organisation to its

employees, society and the

environment


PAGE 127

(b) Describe the difficulties in measuring

social and environmental

performance and give examples of

targets and sustainability indicators

(c) Explain the auditor’s main

considerations with respect to social

and environmental matters and give

examples of how they impact on

companies and their financial

statements (e.g. impairment of

assets, provisions and contingent

liabilities)

(d) Discuss how control over social and

environmental risks may be

exercised by management and

evaluated by the auditor

(e) Describe substantive procedures to

detect potential misstatements in

respect of socio-environmental

matters

(f) Explain what action may be taken by

the auditor in situations of non-

compliance with relevant laws and

regulations (e.g. environmental acts

and health and safety regulations)

(g) Discuss the form and content of an

independent verification statement

(e.g. on an environmental

management system (EMS) and a

report to society)

24 Auditors’ reports

(a) Explain and critically appraise the

form and content of a standard

unqualified auditor's report

(b) Describe the factors to be taken into

account when forming an audit

opinion

(c) Make judgements and form audit

opinions which are consistent with

the results of audit procedures

relating to the sufficiency of audit

evidence and/or compliance with

accounting standards (including the

going concern basis)

(d) Discuss the implications for the

auditor's report on financial

statements which report compliance

with IFRSs

(e) Critically evaluate a proposed audit

opinion

(f) Discuss “a true and fair view”

(g) Describe and illustrate special

purpose auditors reports (e.g. on

summarised financial statements)

25 Reports to Management

(a) Revise from Paper 2.6 reporting

systems weaknesses, their potential

effects and making appropriate


(b) Describe the criteria for evaluating the

effectiveness of a management letter

(c) Outline the content of a report to an

audit committee

(d) Explain the need for timely

communication, clearance, feedback

and follow up

(e) Discuss communication methods

26 Current Issues and Developments I

Candidates will be expected to

demonstrate the ability to discuss the

relative merits and the consequences of

different standpoints taken in current

debates and express opinions

supported by reasoned arguments.

(a) Professional ethics

(i) discuss the relative advantages

of an ethical framework and a

rulebook

(ii) comment on the adequacy of

existing ways in which objectivity

may be safeguarded and suggest

additional measures to improve

independence

(iii) suggest advantages and identify

the problems and safeguards

associated with ethical issues

(b) IFAC (IAASB) developments

(i) discuss the implementation and

adoption of International

Standards on Auditing (ISAs)

(ii) comment on IFAC's risk, fraud

and quality control standards as

the foundation for all other ISAs

(c) Corporate governance

27 Current issues and developments II

(a) Multinational accountancy firms

(i) describe the different ways in

which the auditing profession

and audit markets are regulated

(ii) discuss the advantages and

disadvantages of partnership

status, limited liability

partnerships and incorporation

of audit firms

(iii) describe current developments

in the limitation of auditors’

liability and the practical ways in


PAGE 128


which the risk of litigation and

liability can be reduced

(iv) distinguish, for example,

between ‘global auditing firms’

and second tier firms

(v) discuss the impact of

globalisation on audit firms and

their clients

(vi) explain the advantages and

problems of current trends (e.g.

to merge, to divest consultancy

services)

(b) Information technology

(i) Describe recent trends in IT and

their current and potential impact

on auditors (e.g. identify and

discuss the audit implications of

financial reporting on the

Internet)

(ii) Explain how IT may be used to

assist auditors and discuss the

problems which may be

encountered in automating the

audit process

(c) SMEs

(i) state the case for and against

audit exemption for small

businesses

(ii) discuss how the potential

problems associated with the

audit of small enterprises may be

overcome

(iii) explain how auditing standards

affect smaller firms

28 Revision

PAGE 129

AIM

To ensure candidates can apply judgement

and technique in the provision of a range of

taxation services. In particular to equip

candidates with the ability to resolve

problems involving the computation of tax

liabilities, basic tax and financial planning

and which draw upon the interaction of a

wide range of taxes. The primary focus of

the paper will be based around taxation

issues.

OBJECTIVES


should be able to:

• prepare computations for and advise

clients on issues relating to the tax

liabilities of individuals arising from

income receipts, capital disposals and

transfers of value

• prepare computations for and advise

clients on issues relating to the tax

liabilities of corporations arising from

income generation and capital disposals

• provide advice on minimising or

deferring tax liabilities for individuals or

corporations by using exemptions and/or

reliefs

• evaluate a corporation's and individual's

financial position with particular regard

to the importance of taxation in decision

making and to recommend appropriate

personal financial plans

and


Paper 3.2

Advanced Taxation(United Kingdom)


OVERALL SYLLABUS

This is the final tax paper and builds upon

the knowledge acquired in Paper 2.3

Business Taxation concerning the taxation of

businesses and employees. A thorough

understanding of the Paper 2.3 syllabus is

therefore considered requisite for Paper 3.2.

Candidates also need to understand formats

of accounts used for sole traders, partnerships

and companies from Paper 1.1 and also the

need to have an understanding of some of the

financial reporting standards from Paper 2.5.

There is no substantial integration with other

papers in Part 3.

SYLLABUS CONTENT

1 Taxation of individuals

(a) Principles of income tax

(b) Income tax on property income

(c) Income tax on savings and

investment

(d) Income tax on income from

employment

(e) Income tax on income from self-

employment

(f) Capital gains tax

(g) Trusts

(h) Administration of income tax and

CGT

(i) Inheritance tax

(j) Overseas aspects of income tax,

capital gains tax, inheritance tax and

value added tax

(k) Value added tax

(l) National insurance contributions

(m) Stamp duty and stamp duty reserve

tax.

2 Taxation of corporate businesses

(a) Corporation tax on income and

chargeable gains of single companies

and groups of companies and consortia

trading in the UK and overseas

(b) Value added tax

(c) National insurance contributions



PAGE 130

(d) Stamp duty and stamp duty reserve

tax.

3 Financial planning

(a) Sources of finance

(b) Personal financial planning

(c) Financial services products

(d) The regulatory framework.

EXCLUDED TOPICS

Note that the labelling of excluded topics

relates to the relevant section of the

syllabus


(c) Income tax on savings and

investment income

(i) detailed knowledge of anti-

avoidance procedures


employment

(i) PAYE system

(ii) an employee share ownership

plan (ESOP) will not be examined

in its own right


employment

(i) averaging of farmers profits

(ii) averaging of profits for authors

and creative artists

(iii) the allocation of notional profits

and losses for a partnership

(iv)research and development

expenditure

(v) capital allowances for agricultural

buildings, patents, flats above

shops, scientific research and

know-how

(vi)in respect of industrial buildings

allowance: enterprise zones,

initial allowances and the sale of

an industrial building at less than

original cost following a period of

non industrial use (note that

sales for more than original cost

are examinable)

(vii) detailed anti-avoidance legislation.


(i) assets held at 31 March 1982

(ii) the grant of a lease or sub-lease

out of either a freehold, long

lease or short lease

(iii) a detailed knowledge of the

statements of practice on

partnership capital gains

(iv) retirement relief

(v) relief for losses on loans made to

traders.

(g) Trusts

(i) overseas aspects

(i) Inheritance Tax

(i) double grossing up on death

(ii) pre 18 March 1986 lifetime

transfers

(iii) woodlands relief

(iv)conditional exemption for

heritage property

(v) relief on relevant business

property and agricultural property

given as exempt legacies

(vi) valuation of an annuity or an

interest in possession where the

trust interest is subject to an

annuity

(v) detailed knowledge of the double

charges legislation

(vi)an accumulation and maintenance

trust ceasing to qualify

(vii) double taxation relief calculation

involving the formula

Ax C

A+B

(viii) IHT aspects of discretionary

trusts prior to 27 March 1974.

(k) Value added tax

(i) capital goods scheme

(ii) in respect of property and land

leases and do it yourself builders

(iii) flat rate scheme for farmers

(iv) special schemes for retailers.


(i) detailed calculation of director's

NIC on a month by month basis –

a knowledge of the annual

earnings period rules (including

where a person becomes a

director part way through a tax

year is, however, required)

(ii) offset of trading losses against

non-trading income (for Class 4

purposes).

2 Taxation of corporate businesses


chargeable gains of single

companies and groups of companies

and consortia trading in the UK and

overseas

(i) a detailed knowledge of anti-

avoidance provisions (with the

exception of those detailed in the

Advanced Taxation (United Kingdom) (Continued)

PAGE 131

Study Guide)

(ii) corporation tax rates on

companies in the process of

winding up

(iii) 51% groups and group income

elections

(iv) quarterly accounting for income

tax

(v) anti-avoidance provisions where

arrangements exist for a company

to leave a group

(vi)detailed knowledge of double

taxation agreements

(vii) migration of a UK resident company

(viii) mixer companies

(ix)expense relief in respect of

overseas tax

(x) detailed computational questions

on the carry back and carry

forward of unrelieved foreign tax

(xi)an awareness of these provisions

is required

(xii) detailed computational questions

on the 'onshore pooling' provisions

(xiii) again an awareness of these

provisions is all that is required.

(b) Value added tax

(i) as for individuals.


(i) detailed calculations of director's

NIC on a month by month basis –

a knowledge of the annual

earnings period rules (including

where a person becomes a

director part way through a tax

year is, however, required.)

3 Financial planning


(i) the mortgage code.


(i) detailed knowledge of the

conditions which must be met to

obtain Inland Revenue approval for

an occupational pension scheme

(ii) personal pension rules applicable

prior to 6 April 2001

(iii) knowledge of the different

maximum benefit regimes in

occupational schemes

(iv) calculation of maximum or

actual benefits available on early

or late retirement

(v) calculation of a pension cash

equivalent transfer value.


All areas of the syllabus may be regarded

as important.


SYLLABUS



Section A: Two compulsory scenario based

questions worth a total of 50 marks set in

the following areas:

• Non business income tax (although

including employment income)

• Capital gains tax

• Inheritance tax

• Overseas aspects of income tax,

inheritance tax and capital gains tax

• Taxation of trusts

The detailed syllabus areas that will feature

are those set out in italics within the Study

Guide. It is to be noted that these are

primarily the syllabus areas new to 3.2.

Section B: Four 25 mark scenario based

questions from which candidates will be

required to select and answer two. One of

these questions, at least, will focus upon

business taxation. One of the questions in

Section B will have as its main focus personal

financial planning. The other question will

be set on other areas of the syllabus.

The following further guidance should be

noted:

Section A

• To assist in the transition from paper 2.3

to paper 3.2 the compulsory questions,

whilst being set within a scenario involving

some elements of planning and tax

interaction, the emphasis will be on

computation (as an approximate guide

around 50%). A mainly discursive

question is therefore unlikely in Section A.

• As a general guide Section A questions

will primarily focus upon (non-business)

income tax, Inheritance tax and capital

gains tax (both business and non-

business aspects).

• Questions involving mainly financial

planning will not feature in Section A.

Note, however, that questions may


PAGE 132

involve the taxation elements of, for

example, investment or pension

products (for example calculating an

individual's maximum permissible

pension contributions).

• Whilst no detailed questions will be set

involving income tax aspects of businesses

this will not preclude the inclusion within

questions of, for example, a Schedule D

Case I figure (or possibly even series of

figures). Candidates will, however, not

be required to calculate those figures as

part of Section A questions.

• A question will not be set that exclusively

examines the taxation of trusts, stamp

duty or overseas taxation aspects although

these may feature as part of a question.

Section B

• The 25 mark format adopted in Section

B will allow more developed optional

questions.

• Questions can be set in any area of the

syllabus but within the broad overall

guidelines mentioned above.

• The question focusing upon financial

planning is likely to be scenario based,

including some taxation elements, with

candidates required to analyse a particular

set of circumstances and make sensible

financial planning recommendations going

forward. As a guide it is likely that the

pure financial planning elements of this

question will not exceed 50–60%.

• As a general rule it is likely that Section

B questions will examine letter or

report-writing skills to a greater extent

than Section A. Two marks will always

be allocated within one of the Section B

questions covering these skills.

The format of the paper is as follows:

Number

of marks


questions 50


(25 marks each) 50

100

Tax rates, allowances and relevant benefits

will be given in the examination paper.


ACCA adopts a six month rule in that

questions requiring an understanding of

new legislation will not be set until at least

six calendar months after the last day of

the month in which the legislation received

Royal Assent. The same rule applies to the

effective date of the provisions of an Act

introduced by Statutory Instrument. It

would however be considered inappropriate

to examine legislation it is proposed to

repeal or substantially alter.

Knowledge of section numbers will not be

needed to understand questions in this

paper, nor will students be expected to use

them in their answers. If students wish to

refer to section numbers they may do so

and will not be penalised if old, or even

incorrect, section numbers are used.

Names of cases or a detailed knowledge of

judgements are not required but knowledge

of the principles decided in leading cases is

required.



RELEVANT TEXTS




listed below:


publisher Contact number: +44 (0)118

989 0629. Website: www.financial-

training.com/new/foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.



textbooks useful:

A Homer, R Burrows Tolleys Tax Guide

Tolley Publishing ISBN 1860128319

Sonia Gable Taxbriefs Tax Guide

ISBN 1902824938


PAGE 133

(iv)timing of disposal (particularly in

the context of conditional

contracts)

(v) losses in the year of death

(vi)variations/disclaimers arising on

death

(vii) connected persons

(viii) payment of tax by instalments

(ix)part disposals

(x) principal private residence relief

(xi)matching rules for shares and

securities

(xii) basic reorganisations and

takeovers (particularly s135 TGGA

1992, the conditions, including

for

bona fide commercial purposes,

and the advance clearance

procedure)

(xiii) leases, chattels and wasting

assets

(xiv) compensation and insurance

receipts

(xv) EIS/VCT reinvestment relief

(xvi) appropriations to and from

trading stock

(xvii) gift relief where there is an

immediate charge to IHT (s260

CGTA 1992)

(g) Trusts

(i) define a trust

(ii) distinguish between interest in

possession trusts and

discretionary trusts

(iii) explain how income tax applies

to:

– interest in possession trusts


STUDY SESSIONS

Items in italics refer to syllabus areas that

can be examined within Section A.


(a) Principles of income tax

(i) paper 2.3 syllabus section 2a plus

(ii) schedular system

(iii) concept of independent taxation

and jointly held assets

(iv) personal allowances and reliefs

(v) non business charges on income

and Gift Aid

(b) Property income

(i) income liable

(ii) basis of assessment and

computation of property business

profits and loss

(iii) reverse premiums

(iv)premiums received on the grant

of a short lease

(v) furnished holiday lettings and

implications

(vi)rent a room relief

(c) Savings and investment income

(i) tax free investments

(ii) interest

(iii) taxation of savings and

investment income

(iv) accrued income scheme

(v) miscellaneous income

(vi)double taxation relief


employment

(i) paper 2.3 syllabus sections 3a(i),

(ii) and (iv) plus

(ii) share and share option incentive

schemes (approved and

unapproved schemes)

(iii) lump sum receipts

(iv)exempt benefits

(v) personal service companies


employment

(i) paper 2.3 syllabus sections 2c(i)

– (vii)

(ii) losses on shares in qualifying

companies (section 574 ICTA

1988)


(i) paper 2.3 section 2d (have

scope now for both business and

non business assets including

shares and securities) plus

(ii) exempt assets and disposals

(particularly on disposals arising

at death)

(iii) concept of independent taxation

and transfers between spouses

This book can be purchased by registered

students at a 50% discount of £24.50

(RRP £49), plus £6 postage and packing.

to UK addresses. Overseas postage will be

charged at cost. To order, quote your

student registration number and phone

+44 (0)20 7250 9067 or fax +44 (0)20

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student accountant.

PAGE 134

– discretionary trusts

(iv)explain how inheritance tax

applies to

– transfers of property into trusts

– transfers of property out of an

interest in possession trust

upon the termination of the

life tenant's interest

– discretionary trusts – ten year

charges and exit charge

(v) define accumulation and

maintenance trusts and explain

their advantages

(vi)explain how capital gains tax

applies to:

– transfers of property into trust

– disposals made by trustees of

settled property within trusts

to third properties

– disposals made by trustees of

settled property within trusts

to beneficiaries

(vii) explain how trusts can be used

in tax and financial planning.

(h) Administration of income tax and

capital gains tax

(i) paper 2.3 syllabus Section 2b

(i) Inheritance tax

(i) basic principles

– explain the terms transfer of

value, chargeable transfer,

potentially exempt transfer,

excluded property and

persons chargeable

– loss of donor principle

(ii) principle chargeable occasions

for IHT

– chargeable lifetime transfers

– potentially exempt transfers

becoming chargeable

– death

(iii)seven year cumulation principle

(iv)concept of grossing up

(v) how IHT is calculated on

chargeable lifetime transfers,

potentially exempt transfers

becoming chargeable and upon

death

(vi)exemptions available covering

lifetime gifts

(vii)concept of independent taxation

particularly in the context of

transfers between spouses

(viii) other exempt transfers (gifts to

charities, political parties, for

national purposes and to housing

associations)

(ix)tax treatment of transfers of

value by close companies

(x) principles of valuation:

– general open market

valuation rule

– specific rules

– related party rules

(xi)business property and

agricultural property relief and

the relevant conditions applying

(xii) quick succession relief

(xiii) tapering relief

(xiv) determine the value of an

individual's estate at death

including the liabilities and other

deductions that may be taken

into account


(xv) relief available for the

fall in value of assets the subject

of a chargeable lifetime transfer

(xvi) adjustments to the value of the

death state in respect of the sale

of assets following death and the

effect of reinvestment

(xvii) allocation of the estate at

death where:

– the entire estate is

chargeable and specific

gifts of UK property are

made

– there are exempt specific

gifts with a chargeable

residue and vice versa

(xviii) explain how wills can be

varied after death and the

conditions applying

(xix) explain the rules governing

gifts with reservation of

benefit

(xx) explain the rules relating to

associated operations

(xxi) explain the rules relating to

pre-owned assets

(xxii) administration of inheritance

tax

– who is responsible for

payment?

– instalment option –

property

– due dates

(j) Overseas aspects of income tax,

capital gains tax, inheritance tax and

value added tax

(i) explain the concepts of residence,

PAGE 135

ordinary residence and domicile

(ii) application of the rules at (i)

above to income tax

(iii) detailed rules in circumstances

where an individual comes to the

UK or leaves the UK

(iv)basis of assessment arising or

remittance

(v) overseas trades travelling

expenses

(vi)employment income - overseas

aspects

(vii) employees travelling and

subsistence expenses

(viii) double taxation relief

(ix)application of the rules at (i)

above to CGT

(x) temporary absence rules

(xi)overseas aspects of inheritance

tax:

– extended definition of domicile

for inheritance tax purposes

– rules governing location of

assets

– calculate double taxation relief

(xii) explain how VAT is applied to

imports and exports and to

acquisitions within the EU

(k) Value added tax

(i) paper 2.3 syllabus section 1j and

2e plus

(ii) explain the application of the

disaggregation rules

(iii) group registration and divisional

registration

(iv)second hand goods

(v) explain the consequences for

being partially exempt and

calculate the input tax recovery

for a partially exempt trader

(vi)explain in broad terms the

principal rules governing the

supply of land and buildings in

the UK


(i) paper 2.3 syllabus section 2f

and 3c

(m) Stamp duty , stamp duty land tax

and stamp duty reserve tax

(i) basic principles

(ii) chargeable occasions

(iii) exemptions

(iv)fixed duty.

2 Taxation of Corporate Businesses


chargeable gains of single

companies and groups of companies

and consortia trading in the UK and

overseas

(i) paper 2.3 syllabus sections 2.3

1a – i plus

(ii) determination of accounting

periods when a company is being

wound up

(iii) explain the treatment of returns

of capital to shareholders after a

company has commenced

winding up

(iv)treatment of a company's non

trading deficits on loan

relationships

(v) restrictions on the use of trading

loss reliefs (particularly upon a

change in ownership of an entity)

(vi)corporate venturing scheme

(vii) Rules governing the

transfer of a company's trade and

assets within a group situation

(viii) exemption for disposal

of substantial shareholdings

(ix)explain how intangible assets and

goodwill are treated within a

corporation tax environment

including the reinvestment relief

introduced by FA2002

(x) explain the rules governing the

treatment of controlled foreign

companies, including reporting

requirements

(xi)explain the terms consortium

owned company and consortium

member; operation of consortium

relief

(xii) explain the concept of

permanent establishment

(xiii) explain how profits chargeable

to corporation tax are determined

for an investment company

(xiv) explain the consequences of

being a close company and close

investment holding company

(xv) explain the taxation

consequences from a company

purchasing its own shares and

the conditions applying to satisfy

treatment as a capital distribution

(b) Value added tax

(i) as for individuals


(i) paper 2.3 syllabus section 3c


PAGE 136

(d) Stamp duty, stamp duty land tax and

stamp duty reserve tax

(i) as for individuals.

3 Financial Planning


(i) describe the sources of finance

available to:

– individuals

– companies

(ii) distinguish between the tax

implications of raising equity

finance and of raising loan finance

(iii) explain the tax implications

involved in the decision whether

to lease, use hire purchase or to

purchase outright

(iv)evaluation of the impact of

taxation on a business' cash flows

(v) describe the mortgage products

available to individuals involved

in purchasing their own home

(vi)identify circumstances in which it

is appropriate to repay/replace

borrowings

(b) Personal financial planning

(i) evaluating an individual's

financial position

– calculating an individual's net

worth having regard to future

capital taxation liabilities

– calculating an individual's net

of tax disposable income

– identify potential disaster

scenarios for both individuals

and businesses

– determining sensible

strategies to protect wealth

and income levels


(i) protection products

awareness of the basic structure,

types, risk that is being covered,

the form in which proceeds are

paid upon a valid claim being

made and the tax treatment of

the premiums and proceeds of

the following classes of product:

– life assurance

– health insurance

– provision for long-term care

– redundancy insurance

(ii) investment products

awareness of the basic structure,

types and tax treatment of the

following investments

– deposit based investments

(including cash mini ISAs)

– fixed interest securities

– packaged investments

– collective investments

(including ISAs)

– equities

– enterprise investment scheme

– venture capital trusts

– property

Note for section A purposes only

the tax treatment of the above is

examinable

(iii) constructing investment portfolios

having regard to such factors as

risk,

accessibility, liquidity, marketability,

flexibility and volatility

(iv)pension products

awareness of the main features

and tax treatment of premiums

payable (where applicable – by

both individuals and employers)

and eventual benefits in making

provision for retirement through

the following:

– occupational pension

schemes

– explain the difference

between defined benefits

and defined contribution

schemes

– explain the difference

between approved and

unapproved schemes

– explain the operation of

self-administered

occupational schemes

– describe the options upon

changing employment

– personal pension

(including stakeholder)

schemes

– explain the operation of

self-invested personal

pensions

– describe the options

available on reaching

retirement

– state pension schemes

Note for Section A only the tax

treatment of the items in italics

is examinable

(v) explain the options available as

regards pension rights on divorce


PAGE 137

(d) The regulatory framework

(i) describe the regulatory

framework in place

(ii) explain the meaning of

investment and investment

business

(iii) explain the regulations and 'best

practice' affecting investment

advice laid down by the FSA and

ACCA

(iv)explain the compensation and

redress available.


PAGE 138

AIM

To ensure candidates can apply judgement

and technique in the analysis of relevant

data to provide management with the

information required to contribute to a

range of strategic planning, control and

decision-making situations.

OBJECTIVES


should be able to:

• understand the objectives of preparing

management information and the need

to adapt techniques in a changing

commercial environment

• identify the information needs of

management and contribute to the

development of appropriate systems

• evaluate the strategic performance of a

business and recommend appropriate


• understand the significance of the

relationship between financial and non-

financial indicators of business

performance

• apply techniques to evaluate management

decisions in relation to costing, pricing,

product range and marketing strategy

• identify and apply appropriate budgeting

techniques to enable management to

control the business


Paper 3.3

Performance Management


OVERALL SYLLABUS

Candidates will require a thorough

understanding of the management accounting

section of Paper 2.4 Financial Management

and Control. Candidates will also be required

to apply the principles and techniques covered

in Paper 1.2 Financial Information for

Management. An understanding of

how to interpret accounting information, as

addressed in Paper 1.1 Preparing Financial

Statements and Paper 2.5 Financial

Reporting, is assumed.

SYLLABUS CONTENT

1 Developments in management

accounting

(a) Objectives of management

accounting information in relation to:

(i) short-term planning and strategic

planning

(ii) control and decision making

(iii) effective use of management

accounting techniques

(b) The conceptual framework for

changes in management accounting

(i) contingency theory

(ii) institutional theory

(c) Trends and developments in

management accounting techniques

and methods

(i) evaluation and promotion of

change in techniques and

methods used

(ii) evaluation of the effect of the rate

of change in technology and

products on management

accounting

(iii) current issues in management

accounting principles and their

relevance and application

(iv) activity-based management.

(d) Impact of changes in business

structures

(i) appraisal of continued use of

management accounting

techniques (e.g. standard costing)




PAGE 139

(ii) impact on management accounting

of changes in business processes

and management techniques

(iii) changes in business structure

and management accounting

(e.g. team/project focus).

2 Design of management accounting

systems

(a) System objectives and the uses of

information in relation to:

(i) short-term and strategic planning

(ii) control and decision making

(iii) effective use of management

accounting techniques.

(b) Sources of information

(i) from within the organisation

(ii) from suppliers and customers

(iii) by comparison with competitors

(iv)from government and other

statistical sources.

(c) Recording and processing methods

(i) collection and recording of

monetary and non-monetary

information

(ii) identification of requirements for

different purposes

(iii) influence of management

accounting principles and

techniques

(iv) influence of IT systems

(v) effect of type of business entity.

(d) Format of reports

(i) analysis and dissemination to

relevant individuals/groups

(iii) frequency, timing and degree of

accuracy

(iv) influence of trend, materiality

and controllability issues.


(a) Performance hierarchy

(i) mission statement and the

fulfilment of a vision

(ii) corporate planning and the

achievement of strategic objectives

(iii) the accomplishment of

operational plans

(iv) the attainment of specific

departmental targets.

(b) The scope of performance

measurement

(i) financial performance –

profitability, liquidity, activity and

gearing

(ii) non-financial business indicators

(iii) performance measurement for

non-profit seeking organisations

(iv) performance measurement for

public sector service provision

(v) long and short run performance

(vi) performance measurement models

such as the balanced scorecard (to

improve the range and linkage

between performance measures)

and the performance pyramid (to

relate strategy and operations).

(c) External considerations

(i) economic/market conditions

(ii) financial, environmental and

service quality regulation from

government agencies.

(d) Management impact on performance

measurement

(i) accountability issues

(ii) benefits and problems of


(iii) reward schemes and


(iv) management style and

performance measurement.

4 Planning and control

(a) Strategic management accounting

(i) corporate v operational strategy

(ii) life cycle issues

(iii) SWOT analysis

(iv) benchmarking

(v) consideration of risk and

uncertainty.

(vi) strategic management

accounting in the context of

multinational companies

(b) Budgeting and budgetary control

(i) the appraisal of alternative

approaches to budgeting

– incremental, rolling, ABB etc

(ii) budgeting as a planning and

control device

(iii) quantitative aids and risk analysis

(iv) behavioural aspects

(v) current developments in budgeting.

5 Decision making

(a) Pricing strategies and the evaluation

of pricing decisions

(i) price/demand relationships

(ii) relevant costs and pricing decisions

Performance Management (Continued)

(ii) effect of management structure

and style

PAGE 140

(iii) pricing and product life cycles

(iv) target costing and pricing

(v) transfer pricing and decision

making.

(vi) transfer pricing in the context of


(b) Information for decision making

(i) relevant costs analysis

(ii) CVP analysis and profit

maximisation

(iii) product profitability and limiting

factor analysis

(iv) customer profitability analysis,

including activity-based

(v) theory of constraints and

throughput accounting

(vi) accounting for uncertainty

(vii) DCF techniques.

EXCLUDED TOPICS






• the contribution of management

accounting systems towards the

achievement of corporate objectives

• identifying appropriate performance

indicators for particular business

situations

• abstracting relevant information from

financial reports to assess performance

• identifying and processing costs as an

aid to decision making.


SYLLABUS


constructed in two sections. The Section A

questions will contain a mix of


Section B questions will comprise at least

one question that is purely discursive and

other(s) will incorporate both

computational and discursive components.

Number

of Marks

Section A: Two compulsory questions


45 marks) 60



100




RELEVANT TEXTS




listed below:


publisher Contact number: +44 (0)118

989 0629. Website: www.financial-

training.com/new/foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.


Candidates may also find the following texts

useful:

D Ashton, T Hopper and R W Scapens

Issues in Management Accounting (2nd

Edition) Prentice Hall ISBN 0131892509

C Drury Management and Cost Accounting

(5th Edition) International Thomson Business

Press ISBN 1861525362

C Emmanuel, D Otley Accounting for

Management Control Chapman and Hall

ISBN 1861522118

J Hope, R Fraser Beyond Budgeting (Ist

Edition) Harvard Business School Press

ISBN 1578518660

M W E Glautier and B Underdown

Accounting Theory and Practice Pitman

ISBN 027362444X



student accountant.


PAGE 141

STUDY SESSIONS

1 Strategic Planning and Decision

Making

(a) Identify the characteristics of

strategic planning and decision

making

(b) Contrast strategic planning with

short term /operational planning

(c) Identify the areas of management

accounting information which are of

importance in strategic management

(d) Evaluate the relevance of discounted

cash flow principles in information

for strategic decision making

(e) Select and analyse costs and

revenues relevant to strategic

planning and decision making in a

range of situations

2 Short Run Decision Making and Control

(a) Explain the significance of

endogenous information sources in

relation to short run decision making

and control

(b) Identify the characteristics of short

term non-strategic activities

(c) Identify the areas of management

accounting information appropriate

for short term decision making

(d) Explain the differences between

management control and operational

control in the context of short run

decision making and control

3 Changes in management accounting

(a) Explain the contingency theory of

management accounting: Otley

(b) Explain how institutional theory

presents a framework for

understanding changes in, and the

implications for, management

accounting: Powell and Di Maggio

4 Trends in Management Accounting

Techniques and Methods

(a) Discuss the expansion in the scope

of management accounting in the

last 40 years

(b) Identify and discuss some recently

adopted management accounting

techniques

(c) Explain how new techniques may be

evaluated

(d) Discuss the ways in which

management accounting

practitioners are made aware of new

techniques

(e) Illustrate how an organisation’s

structure, culture and strategy will

influence the adoption of new

methods and techniques

(f) Assess the continuing effectiveness

of traditional techniques within a

rapidly changing business

environment

(g) Explain and demonstrate activity

based management

5 Technological Change and Management

Accounting

(a) Discuss the changing accounting

information needs of modern service

orientated business compared with

the needs of traditional

manufacturing industry

(b) Discuss how modern IT systems

provide the opportunity for instant

access to management accounting

data throughout an organisation

(c) Discuss how modern IT systems

facilitate the remote input of

management accounting data in an

acceptable format by non-finance

specialists

(d) Explain how modern information

systems provide instant access to

previously unavailable data that can

be used for benchmarking and

control purposes

(e) Discuss the need for businesses to

continually refine and develop their

management accounting systems if

they are to prosper in an increasingly

competitive and global market

6 Changes in Business Structure and

Management Accounting

(a) Identify the particular information

needs of organisations adopting a

team /project focus

(b) Discuss the concept of business

integration and the linkage between

people, operations, strategy and

technology


PAGE 142

(c) Explain the influence of Business

Process Re-engineering on systems

development

(d) Identify and discuss the required

changes in management accounting

systems as a consequence of

empowering staff to manage sectors

of a business

7 System Design and System Objectives

(a) Identify the accounting information

requirements for strategic planning,

management control and operational

control and decision making

(b) Describe, with reference to

management accounting, ways in

which the information requirements

of a management structure are

affected by the features of the

structure

(c) Evaluate the objectives of

management accounting and

management accounting information

(d) List and explain the attributes and

principles of management


(e) Explain the integration of


within an overall information system

(f) Define and discuss the merits of,

and potential problems with, open

and closed systems

(g) Suggest the ways in which

contingent (internal and external)

factors influence management

accounting and its use

(h) Illustrate how anticipated human

behaviour will influence the design

of a management accounting system

(i) Explain and discuss the impact of

responsibility accounting on


8 Internal Sources of Information

(a) Identify the principal internal sources

of management accounting

information

(b) Illustrate how these principal

sources of information might be used

for control purposes

(c) Identify the direct data capture and

process costs of internally generated


(d) Identify the indirect costs of

producing internal information

(e) Explain the principal controls

required in generating and

distributing internal information

(f) Discuss the factors that need to be

considered when determining the

capacity and development potential

of a system

(g) Explain the procedures that may be

necessary to ensure security of

highly confidential information that

is not for external consumption

9 External Sources of Information

(a) Identify common external sources of

information e.g. suppliers,

government, trade associations,

customers, database suppliers

(b) Identify the costs associated with

these external sources

(c) Discuss the limitations of using

externally generated information

(d) Identify the categories of external

information that are likely to be a

useful addition to an organisation’s

management accounting system

(e) Illustrate how the information might

be used in planning and control

activities e.g. benchmarking against

similar organisations

10 Recording and Processing Information

(a) Identify the stages in the information

processing cycle in the context of


(b) Identify how the collection and

analysis of information is influenced

by management accounting

principles and techniques being used

by the organisation

(c) Describe the systems involved in the

collection and recording of monetary

and non-monetary information

(d) Illustrate how the type of business

entity will influence the recording

and processing methods

(e) Explain how IT developments e.g.

spreadsheets, accountancy software

packages and electronic mail may

influence recording and processing

systems

(f) Discuss the difficulties associated

with recording and processing data

of a qualitative nature


PAGE 143

11 Performance hierarchy

(a) Discuss the purpose of a mission

statement and the pursuit of a vision

(b) Discuss the structure and content of

a mission statement

(c) Explain how high level corporate

objectives are developed

(d) Identify strategic objectives and how

they may be incorporated into the

corporate plan

(e) Explain how strategic objectives are

cascaded down the organisation via

the formulation of subsidiary

objectives

(f) Identify any relevant social and ethical

obligations that should be considered

in the pursuit of corporate objectives

(g) Discuss the concept of the ‘planning

gap’ and alternative strategies to ‘fill

the gap’

(h) Identify the characteristics of

operational performance

(i) Contrast the relative significance of

planning as against controlling

activities at different levels in the

performance hierarchy

12 Financial Performance in the Private

Sector

(a) Explain why the primary objective of

financial performance should be

concerned with the benefits of the

shareholders

(b) Discuss the crucial objectives of

survival and business growth

(c) Discuss the appropriateness of

differing measures of profitability

e.g. ROCE, EPS, ROI, sales margin,

EBITDA, Residual Income, NPV, IRR

(d) Explain why indicators of liquidity

and gearing need to be considered

alongside profitability

(e) Compare and contrast short and long

run financial performance and the

resulting management issues

(f) Contrast the traditional relationship

between profits and share value with

the long term profit expectations of

the stock market and recent financial

performance of new technology/

communication companies

13 Non-Financial Performance Indicators

for Business

(a) Discuss the interaction of NFPI’s

with financial performance indicators

(b) Discuss the implications of the

growing emphasis on NFPI’s

(c) Identify and comment on the

significance of NFPIs in relation to

employees e.g. staff turnover,

sickness rates

(d) Identify and comment on the

significance of NFPIs in relation to

product/service quality e.g. customer

satisfaction reports, repeat business

ratings, customer loyalty, access and

availability

(e) Discuss the difficulties in interpreting

data on qualitative issues

(f) Discuss the significance of brand

awareness and company profile

14 Performance Measurement For Non-

Profit Seeking Organisations

(a) Discuss the potential for diversity in

objectives depending on organisation

type

(b) Comment on the need to achieve

objectives with limited funds that

may not be controllable

(c) Identify and explain ways in which

performance may be judged in non-

profit seeking organisations

(d) Comment on the difficulty in

measuring outputs when

performance is not judged in terms

of money or an easily quantifiable

objective

(e) Explain how the combination of

politics and the desire to measure

public sector performance may result

in undesirable service outcomes

(f) Comment on ‘value for money’

service as a not-for-profit sector goal

15 Performance – A Broad Perspective

(a) Comment on the need to consider the

environment in which an organisation

is operating when assessing its

performance e.g. What are the

prevailing market conditions? Is

funding relatively easy or difficult to

secure? Does the strength of the

national currency impact on the

organisation's performance? Is the

prevailing political climate particularly

favourable or unfavourable towards

the

organisation currently? How have


PAGE 144

these issues changed over time?

(b) Consider the impact of governmental

regulation on the performance

measurement techniques used and the

performance levels achieved (for

example, in the case of utility services

and former state monopolies)

16 Alternative Views of Performance

Measurement

(a) Discuss the ‘balanced scorecard’ as a

way in which to improve the range and

linkage of performance measures

(b) Discuss the ‘performance pyramid’

as a way in which to link strategy

and operations

(c) Discuss the work of Fitzgerald and

Moon that considers performance

measurement in business services

using building blocks for dimensions,

standards and rewards

17 Management Behaviour and

Performance

(a) Explain the relationship between

performance measurement systems

and behaviour

(b) Discuss how performance

measurement systems can influence

behaviour

(c) Consider the accountability issues

arising from performance

measurement systems

(d) Identify the ways in which

performance measurement systems

may send the ‘wrong signals’ and

result in undesirable business

consequences

(e) Comment on the potential beneficial

and adverse consequences of linking

reward schemes to performance

measurement

(f) Explain how management style

needs to be considered when

designing an effective performance

measurement system

18 Strategic Planning and Control

(a) Compare strategic with operational

planning and control

(b) Explain how organisational survival

in the long term necessitates

consideration of life cycle issues

(c) Identify the role of corporate

planning in clarifying corporate

objectives, making strategic

decisions and checking progress

towards the objectives

(d) Explain the structure of corporate

planning

(e) Discuss the combining of strategic

planning with freewheeling

opportunism in a fast changing

business environment

(f) Comment on the potential conflict

between strategic plans and short

term localised decisions

(g) Explain the principles of SWOT

analysis

(h) Explain how SWOT analysis may

assist in the planning process

(i) Explain the principles of the

following strategic analysis models

and how they may assist in the

strategic planning process:

(i) Ansoff's growth vector matrix

(ii) Boston Consulting Group matrix

(iii) Porter's Five Forces model

(j) Comment on the benefits and

difficulties of benchmarking

performance with best practice

organisations

(k) Explain how risk and uncertainty

play an especially important role in

long term strategic planning that

relies upon forecasts of exogenous

variables

(l) Explain aspects of strategic

management accounting in the

context of multinational companies

19 Budgeting and Budgetary Control I

(a) Describe the internal and external

sources of planning information for

an organisation

(b) List the information used in the

preparation of the master budget

and in its functional components

(c) Contrast the information used in the

operation of zero based budgeting

and incremental budgeting

(d) Explain and illustrate the use of

budgeting as a planning aid in the

coordination of business activity

(e) Explain and illustrate the relevance

of budgeting in the coordination of

business activities

(f) Explain and quantify the application

of positive and negative feedback in

the operation of budgetary control

(g) Explain and quantify the application


PAGE 145

of feed-forward control in the operation

of budgeting

20 Budgeting and Budgetary Control II

(a) Identify quantitative aids which may

be used in budgetary planning and

control

(b) Discuss and evaluate methods for

the analysis of costs into fixed and

variable components

(c) Give examples to demonstrate the

use of forecasting techniques in the

budgetary planning process

(d) Explain the use of forecasting

techniques in the budgetary planning

process

(e) Describe the use of learning curve

theory in budgetary planning and

control

(f) Implement learning curve theory

(g) Identify factors which may cause

uncertainty in the setting of budgets

and in the budgetary control process

(h) Identify the effects of flexible

budgeting in reducing uncertainty in

budgeting

(i) Illustrate the use of probabilities in

budgetary planning and comment on

the relevance of the information thus

obtained

(j) Explain the use of computer based

models in accommodating

uncertainty in budgeting and in

promoting ‘what-if’ analysis

21 Budgeting and Budgetary Control III

(a) Identify the factors which affect

human behaviour in budgetary


(b) Compare and contrast ways in which

alternative management styles may

affect the operation of budgetary

planning and control systems

(c) Explain budgeting as a bargaining

process between people

(d) Explain the conflict between

personal and corporate aspiration

and its impact on budgeting

(e) Explain the application of

contingency theory to the budgeting

process

(f) Discuss the impact of political,

social, economic and technological

change on budgeting

(g) Critically review the use of budgetary


(h) Enumerate and evaluate the

strengths and weaknesses of

alternative budget models such as

fixed and flexible, rolling, activity

based, zero based and incremental

(i) Identify the effects on staff and

management of the operation of

budgetary planning and control

(j) Identify and appraise current

developments in budgeting

22 Short Run Decisions I

(a) Distinguish between relevant and

irrelevant information using

appropriate criteria

(b) Identify cost classification(s) in

decision making

(c) Explain how quantitative and

qualitative information is used in

decision making

(d) Evaluate and assess the frequency,

timing, format, and degree of

accuracy in the provision of decision

making information

(e) Describe the basic decision making

cycle for business decisions

(f) Classify problems for the purpose of

modelling into simple, complex and

dynamic problems

(g) Explain the relevance of endogenous

and exogenous variables, policies

and controls, performance measures

and intermediate variables in model

building

(h) Explain the nature of CVP analysis

and name planning and decision

making situations in which it may be

used

(i) Compare the accounting and

economic models of CVP analysis

(j) Explain the assumptions of linearity

and the principle of relevant range in

the CVP model

(k) Prepare breakeven charts and profit-

volume charts and interpret the

information contained within each,

including multi-product situations

(l) Comment on the limitations of CVP

analysis for planning and decision

making including multi-product

situations


PAGE 146

23 Short Run Decisions II

(a) Explain the use of avoidable cost,

incremental cost, marginal cost and

variable cost in decision making

(b) Describe the relationship between

fixed cost and the time horizon used

in a decision situation

(c) Explain how opportunity cost is used

in making decisions

(d) Identify and calculate relevant costs

for specific decision situations from

given data

(e) Explain the meaning of throughput

accounting and its use in decision

making

(f) Explain and illustrate the impact of

limiting factors in decision making

(g) Solve problems involving changes in

product mix, discontinuance of

products or departments

(h) Explain and demonstrate activity-

based customer profitability analysis

(i) Make decisions as to whether to

further process a product before sale

using relevant costs and revenues

(j) Use relevant costs and revenues in

decisions relating to the operation of

internal service departments or the

use of external services

24 Pricing I

(a) Identify and discuss market

situations which influence the

pricing policy adopted by an

organisation

(b) Explain and discuss the variables

(including price) which influence

demand for a product or service

(c) Explain the price elasticity of demand

(d) Manipulate data in order to

determine an optimum price/output

level

(e) Calculate prices using full cost and

marginal cost as the pricing base

(f) Compare the use of full cost pricing

and marginal cost pricing as

planning and decision-making aids

25 Pricing II

(a) Calculate prices using activity based

costing in the estimation of the cost

element

(b) Contrast and discuss the

implications of prices using the

activity based costing technique with

those using volume related methods

in assigning costs to products

(c) Take informed pricing decisions in

the context of special orders and

new products

(d) Discuss pricing policy in the context

of skimming, penetration and

differential pricing

(e) Explain the problems of pricing in

the context of short life products

(f) Explain the operation of target

pricing in achieving a desired market

share

26 Risk and Uncertainty

(a) Define and distinguish between

uncertainty and risk preference

(b) Explain ways in which uncertainty

may be allowed for by using

conservatism and worst/most likely/

best outcome estimates

(c) Explain the use of sensitivity analysis

in decision situations

(d) Explain the use of probability

estimates and the calculation of

expected value

(e) Explain and illustrate the use of

maximin, maximax and minimax

regrets techniques in decision

making

(f) Describe the structure and use of

decision trees

(g) Apply joint probabilities in decision

tree analysis

(h) Illustrate the use of decision tree

analysis in assessing the range of

outcomes and the cumulative

probabilities of each outcome

27 Transfer Pricing I

(a) Describe the organisation structure in

which transfer pricing may be

required

(b) Explain divisional autonomy,

divisional performance measurement

and corporate profit maximisation

and their link with transfer pricing

(c) Formulate the “general rule” for

transfer pricing and explain its

application

(d) Describe, illustrate and evaluate the

use of market price as the transfer

price


PAGE 147

(e) Assess where an adjusted market

price will be appropriate for transfer

business

(f) Assess the impact of market price

methods on divisional autonomy,

performance measurement and

corporate profit maximisation

(g) Calculate an appropriate transfer

price from given data

28 Transfer Pricing II

(a) Describe the alternative cost based

approaches to transfer pricing

(b) Identify the circumstances in which

marginal cost should be used as the

transfer price and determine its

impact on divisional autonomy,



(c) Illustrate methods by which a share

of fixed costs may be included in the

transfer price

(d) Comment on these methods and

their impact on divisional autonomy,



(e) Discuss the advantages which may

be claimed for the use of standard

cost rather than actual cost when

setting transfer prices

(f) Explain the relevance of opportunity

cost in transfer pricing

(g) List the information which must be

centrally available in order that the

profit maximising transfer policy may

be implemented between divisions

where intermediate products are in

short supply

(h) Illustrate the formulation of the

quantitative model for a range of

limiting factors from which the

corporate profit maximising transfer

policy may be calculated

(i) Analyse the concept of shadow price

in setting transfer prices for

intermediate products that are in

short supply

(j) Illustrate the corporate maximising

transfer policy where a single

intermediate resource is in short

supply and a limited external source

is available and explain the

information which must be available

centrally in order that the transfer

policy may be formulated

(k) Explain and demonstrate the issues

that require consideration when

setting transfer prices in


29 Long Term Decisions

(a) Define and illustrate the concepts of

net present value and internal rate of

return

(b) Calculate the net present value and

internal rate of return in the

evaluation of an investment

opportunity

(c) Explain the use of DCF techniques

for decisions involving cash outlays

over long periods

(d) Explain the relationship between net


present value and residual income

where annuity depreciation is used

in the residual income calculations

(e) Compare and contrast net present

value with payback and accounting

rate of return in the evaluation of

investment opportunities.

PAGE 148

Paper 3.4

Business Information Management

AIM

This paper aims to ensure that students

can exercise judgement and technique in

identifying, implementing and managing

information systems as part of the strategic

management of the organisation.

OBJECTIVES


should be able to:

• identify the information requirements of

different levels of management and

understand how information is used to

support the objectives of the organisation

• apply a coherent approach to business

analysis including the identification of the

current business situation and the gap

between that and the required business

objectives

• identify and implement desirable and

feasible changes resulting from business

analysis

• prepare a detailed business case to

support system changes and use the

appropriate tools to support business

analysis

• identify opportunities to use information

systems to improve the competitive

position of an organisation

• identify the impact of the development

of information systems on the

organisation and its environment.


OVERALL SYLLABUS

This paper assumes the knowledge and

understanding of the underpinning principles

of Paper 2.1 Information Systems.

SYLLABUS CONTENT

1 Organisational information

(a) From a business perspective an

information system is an

organisational and management

solution, based on information

technology, to any challenge posed

by the environment.

(b) Levels of management and types of

information/system required.

(c) The tasks of the manager. The

requirements for effective

information management.

(d) Types of information system

(i) strategic information systems

(ii) management information systems

(iii) transaction processing systems

(iv) automation and support systems

(v) batch processing.

2 Knowledge management and

information systems

(a) Data workers and knowledge workers

(i) distribute knowledge: office

automation systems

(ii) share knowledge: group

collaboration systems

(iii) create knowledge: knowledge

work systems

(iv) capture and codify knowledge:

artificial intelligence systems.

(b) Data management

(i) principles of database

management systems

(ii) principles of datamining and data

warehousing.

3 IS and the strategic planning process

(a) The organisation and information

management

(i) the business context



PAGE 149

(ii) new organisational structures and

information

(iii) information and organisational

strategy.

(b) PEST analysis.

(c) Strategic information systems

(i) alignment

(ii) using IS to create focus, support

linkages and develop information

leadership.

(d) Porter's value chain.

4 Business systems, systems thinking

and systems analysis

(a) Hard systems approach

(i) structured systems life-cycle

(ii) deliverables from each stage.

(b) Soft systems approach

(i) Checklands soft systems

methodology.

(c) Business process engineering

(i) Analysis, simplification and

redesign of business processes.

Radical business strategy.

5 Gap analysis and business case

development

(a) General framework:

(i) where we are W2R

(ii) where we want to be W32B

(iii) going to get there (GT)2.

(b) Business case development

(i) rationale, cost estimation and

timescales

(ii) estimating benefits

(iii) benefit realisation dependencies

(iv) sensitivity analysis

(v) justification.

(c) Applications portfolio / IT investment

decisions:

(i) portfolio analysis; risks and

benefits. An analysis of the

portfolio of potential applications

within a firm to determine the risks

and benefits and select from

alternatives for IS. Scoring model

(ii) determining the best fit with the

current system.

6 IS and competitive position

(a) SWOT analysis

(i) identify drivers for change

(ii) agree fundamental guiding

principles governing design of

change.

(b) IS/IT management partnership –

internal/outsourcing (in all its forms),

facilities management.

(c) Links between business strategy and

information systems strategy.

7 Electronic commerce, internet as a

strategic business tool

(a) Globalisation

(i) the virtual company

(ii) the Internet, intranet and extranet

(iii) security issues.

(b) The Internet

(i) the changing world of the

Internet

(ii) good practice requirements,

infrastructure required, change of

business functions/strategy

(iii) the Internet as a system,

integration with existing systems.

8 Implementing change

(a) Implementing new systems

(i) strategies for implementation

(ii) managing risk at implementation.

(b) Structuring the information systems

function

(i) managing the IT function

(ii) management of change.

(c) Project management.

(d) Commitment, coordination and

communication in change

management.

9 Impact of IT on work practices

(a) Using IT to manage individuals'


(i) design of critical success factors

(ii) identification of sources of data

capture

(iii) measurement of performance.

(b) Impact of IS/IT on employee/

employer relations

(i) shorter chain of command, flatter

structures

(ii) wider span of control

(iii) de-skilling of operatives

(iv)socio-technical design.

(c) Ethical issues in Information

Management.

EXCLUDED TOPICS



• program design, flowcharting, object

oriented design

• specific hardware platforms.

Business Information Management (Continued)

PAGE 150



• information resource management

• business analysis

• information systems and competitive

position

• information systems and the

organisation.


SYLLABUS

The examination is a three hour written

paper in two sections.

Section A is based on a case study. This

section will have three compulsory

questions from across the syllabus, which

relate to the scenario. Each question will

be worth between 10 to 25 marks giving a

total of 60 for this section.

Section B contains three independent

questions, drawn from across the syllabus.

Each question is worth 20 marks. The

candidate must answer two questions

giving a total of 40 marks for this section.

Number

of marks

Section A: 3 compulsory scenario

based questions (no single 60

question will exceed 25 marks)



100


The examination will assume the use of

specific and general modelling and analysis

tools and techniques: PEST analysis,

SWOT analysis, Porter's value chain,

Checklands soft systems methodology;

conceptual models, rich pictures and

CATWOE. Other models which are

assessable are identified in the study guide.

Some answers may draw on candidates'

own experience or an interpretation of a

topic, within the context of their own

organisation or an organisation that they

are familiar with.



RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.



texts useful:

Kenneth Laudon and Jane Laudon

Management Information Systems

(6th Edition) Prentice Hall

ISBN 0130156825

Micheal J Earl (Ed) Information

Management: The Organisational

Dimension, Oxford University Press

Kenneth Laudon and Jane Laudon

Essentials of Management Information

Systems

(4th Edition) Prentice Hall, 2000

ISBN 0130115061



student accountant.


PAGE 151


STUDY SESSIONS

ORGANISATIONAL INFORMATION

REQUIREMENTS

1 Levels of management

(a) Distinguish between strategic, tactical

and operational management and their

corresponding information

requirements.

(b) Describe the importance of making

information accessible.

(c) Discuss ways of ensuring the reliability

and accuracy of information, creating

secure information systems and

making information available at an

appropriate cost.

2 Categories of information systems

(a) Discuss the seven major types of

Information Systems: Executive

Support Systems (ESS), Management

Information Systems (MIS), Decision

Support Systems (DSS), Expert

Systems, Knowledge

Work Systems (KWS), Office

Automation Systems (OAS) and

Transaction Processing Systems (TPS).

(b) Describe examples of each of the

above in terms of an organisation's

strategic business position.

3 & 4 Strategic role of information

systems

(a) Explain the strategic role of


(b) Identify the major management

challenges to building and using

information systems in

organisations.

(c) Describe the central and crucial role

that information systems have within

an organisation.

(d) Evaluate information systems and

the strategic planning process.

(e) Identify opportunities for use in

forecasting, analysing competition,

scenario planning, generic strategies/

business positioning, improving

performance, measuring performance,

cost reduction, service

improvement, sales performance,

evaluating proposals.

(f) Explain Earl's IS, IT and IM Strategies.

5 Ethical issues

(a) Analyse the relationship among

ethical, social and political issues

raised by the impact of information

systems.

(b) Identify the major moral dimensions

of an information society.

(c) Apply an ethical analysis to scenarios.

(d) Discuss the design of organisational

policies for ethical conduct.

KNOWLEDGE MANAGEMENT AND

INFORMATION SYSTEMS

6 & 7 Knowledge management

(a) Describe the differences between

data workers and knowledge workers

and the appropriate types of

applications used by each. e.g.

(i) Distribute knowledge: Office

automation systems

(ii) Share knowledge: Group

collaboration systems

(iii) Create knowledge: Knowledge

work systems

(iv) Capture and codify knowledge:

Artificial intelligence systems.

7 & 8 Data Management

(a) Explain the principles of Database

Management Systems (DBMS).

(b) Describe the major characteristics of

Integrity, Independence and

Integration.

(c) Discuss the difference between logical

and physical data requirements.

Describe Logical models; hierarchical

and relational.

(d) Explain the principles of Datamining

and Data Warehousing.

(e) Discuss Datamining as the ability to

analyse large pools of data to find

patterns and rules that can be used

by an organisation to guide decision

making and predict future behaviour.

(f) Discuss Data warehousing as a

database with reporting and query

tools, that stores current and

historical data extracted from various

operational systems and

consolidated for management

reporting and analysis.

PAGE 152


IS AND THE STRATEGIC PLANNING

PROCESS

9 Organisational requirements

(a) Discuss the establishment of

organisational information

requirements.

(b) Link information systems to the

business plan.

(c) Discuss the requirement to

understand the business value of


10 Strategic Analysis

(a) Evaluate the importance of Political,

Economic, Social and Technological

influences on organisations. PEST

analysis as a tool for information

systems strategic planning

(b) Apply PEST analysis to scenarios

(c) Explain and apply Parson's six IS

strategies.

(d) Apply Porter's Five Forces Model to

scenarios.

11 Strategic information systems

(a) Discuss the role of Strategic Information

Systems, as computer systems within

an organisation that enables changes

to goals, processes, products, services

or environmental relationships.

(b) Discuss the alignment with business

strategy and apply Earl's 'Three Leg

Analysis'.

(c) Identify ways of using IS to create

Focus, support Linkages and develop

Information Leadership.

(d) Identify Rockart's Critical Success

Factors and describe their design.

(e) Identify sources of data.

(f) Identify key performance indicators

and how to measure performance.

12 Strategic impact of information systems

(a) Evaluate Porter's value chain.

(b) Apply Porter's value chain to scenarios.

BUSINESS SYSTEMS, SYSTEMS

THINKING AND SYSTEMS ANALYSIS

13 Business strategy

(a) Describe the stages in the development

of business systems and strategies.

(b) Explain the concept of business

automation.

(c) Explain the concept of business

rationalisation.

(d) Evaluate and discuss the principles

of business process engineering.

14 Hard Systems approach

(a) Evaluate the structured systems life-

cycle emphasising the deliverables

from each stage, clarifying the

importance of these from a

management perspective.

15 & 16 Soft Systems approach

(a) Evaluate the principles of

Checkland’s soft systems

methodology.

(b) Apply the major tools employed in

Checkland’s soft systems

methodology: Root definitions,

CATWOE, rich pictures, conceptual

models.

(c) Differenciate between Hard Systems

and Soft Systems approaches.

GAP ANALYSIS AND BUSINESS CASE

DEVELOPMENT

17 Business analysis

(a) Discuss the need for a general

framework in the development of a

business case:

Where we are W2R

Where we want to be W32B

Going to get there (GT)2

(b) Discuss Business Analysis vs. Systems

Analysis in terms of: A framework for

business analysis, exploring and

expressing problem situations,

understanding what people do – and

why they do it, modelling the current

situation, introduce the notion of Gap

Analysis, modelling the required

situation. Apply Earl's ‘Systems Audit

Grid’ and Peppard's ‘Strategic Grid’.

18 Business case development

(a) Discuss the major elements of a

business case development

concentrating on the strategic issues

of: estimating costs and timescales,

estimating benefits, benefit

realisation dependencies, sensitivity

analysis, and business justification.

PAGE 153

19 Gap analysis

(a) Discuss applications portfolio/IT

investment decisions.

(b) Evaluate Portfolio analysis; Risks

and benefits. Analyse the portfolio of

potential applications within a firm

to determine the risks and benefits

and select among alternatives for IS.

Scoring model.

(c) Describe determining the best fit

with the current system.

IS AND COMPETITIVE POSITION

20 Competitive position analysis

(a) Evaluate Strengths, Weaknesses,

Opportunities and Threats (SWOT

analysis) as a technique for

identifying opportunities for

information systems development.

(b) Apply SWOT analysis to scenarios

(c) Apply Mclaughlin et al's possible

SWOT responses to scenarios.

(d) Relate McFarlane's model to the

BCG matrix

(e) Describe and explain Nolan's ‘Stage

Hypothesis’ and Zuboff's ‘Automate,

Informate, Transformate’ model.

21 Linking business strategy and

information systems strategy

(a) Identify and discuss the links

between Business Strategy and

Information Systems Strategy using

IS/IT as an enabler: analysis of

external (competitive) environment,

SWOT output, identify drivers for

change, agree guiding principles,

infrastructure standards and

planning.

(b) Discuss the potential advantages

and disadvantages of IS/IT

management partnership - internal/

outsourcing (in all its forms),

facilities management.

(c) Evaluate advantages of package

solutions versus bespoke solutions.

ELECTRONIC COMMERCE, INTERNET AS

A STRATEGIC BUSINESS TOOL

22 Web based technology

(a) Discuss the business impact of the

Internet.

(b) Identify good practice requirements,

infrastructure requirements, and

changes of business functions/

strategy.

(c) Understand the Internet as a system.

(d) Explain how to integrate with

existing systems.

(e) Discuss and describe the uses of an

extranet and an intranet.

(f) Evaluate the problems associated

with using web based technology

and the issue of security.

23 Electronic commerce

(a) Discuss the impact of globalisation

on business strategy.

(b) Describe the implications of

globalisation in terms of:

management and control in a global

marketplace, competition in world

markets, global work groups, and

global delivery systems.

(c) Explain the Virtual Supply Chain

(VSC).

(d) Discuss Electronic Marketing.

IMPLEMENTING CHANGE

24 Success and failure

(a) Identify major problem areas when

implementing information systems.

(b) Apply organisational impact analysis.

(c) Identify the criteria needed to assess

whether a system is successful.

(d) Describe the principle causes of

information system failure and how

to overcome them.

(e) Discuss problems of implementation:

people-oriented theory, system

oriented theory, and interaction theory.

(f) Describe the relationship between

the implementation process and the

system outcome

(g) Explain and apply Lewin's “Three

Stage” change process.

25 Managing change

(a) Discuss the appropriate strategies to

manage the implementation process.

(b) Discuss formal planning control

framework and tools.

(c) Evaluate the impact of alternative

system building techniques and

tools.

(d) Explain how to manage risk.

(e) Understand the importance of having

a process to manage change in an


PAGE 154


organisation. Boehm's ‘Spiral Model’.

(f) Explain the importance of

commitment, coordination and

communication in the change

process.

IMPACT OF IT ON WORK PRACTICES

26 Individuals information requirements

(a) Discuss the use of IT to manage

individuals’ information

requirements.

(b) Identify how information systems can

support the tasks of the manager.

27 Employee/employer relations

(a) Discuss the impact of IS/IT on

employee/employer relations in

terms of: Shorter chain of command,

flatter organisational structures,

wider span of control, de-skilling of

operatives

(b) Describe the concept of Socio-

Technical design in respect to

employee/employer relations.

(c) Discuss the organisational

development issues resulting from

the need to develop and implement


28 Revision

PAGE 155

AIM


judgement and technique in strategic

business management to enable them to

contribute to the formulation of business

strategy, the development of products and

services and the maintenance of quality

throughout the organisation.

OBJECTIVES


should be able to:

• identify and apply the principal

concepts and ideas in the theory and

practice of strategic management

• understand the internal and external

factors affecting an organisation and

apply this knowledge to evaluate its

strategic position

• identify appropriate strategies based on

the evaluation of the organisation’s

objectives and position

• identify the appropriate methods of

implementing chosen strategies and

evaluate their impact on organisational

structures and operations

• understand the impact of globalisation

on strategic business planning

• integrate knowledge effectively and use

it creatively in applying concepts and

techniques

• analyse, interpret and apply data and

information and present reasoned

conclusions

• communicate analyses and conclusions

effectively for different purposes and

Paper 3.5

Strategic Business Planningand Development

contrasting audiences with due emphasis

on social expectations.


OVERALL SYLLABUS

Candidates should have a sound

understanding of Paper 1.1 Preparing

Financial Statements and 1.2 Financial

Information for Management, Paper 1.3

Managing People and Paper 2.1 Information

Systems. The information in these papers

will provide some of the basic material for

strategy analysis and development.

Paper 3.5 builds upon the knowledge

obtained in Paper 1.3 by

• reinforcing the importance of

recruitment and selection processes and

procedures

• examining the importance of training

and development and motivation within

a strategic context

• providing a more strategic view of

human resource issues

• extending the coverage of work

organisations.

Paper 3.5 develops parts of the knowledge

gained in Paper 1.1 and 1.2 by

• applying and interpreting financial

information for strategy evaluation and

strategy recommendation

• giving more emphasis on pricing


• examining performance measurement

criteria.

Paper 3.5 develops parts of the knowledge

obtained in Paper 2.1 by

• reinforcing the knowledge of managing

information systems at a strategic level.

Although much of the knowledge gained in

Part 3 will be specific to the individual

papers, Paper 3.5 will, by its very nature,

provide integration with most of the other

papers at this level.

In Paper 3.1 Audit and Assurance Services

there will be links with professional and

ethical considerations.

In Paper 3.3 Performance Management

there will be strong relationships with areas

on performance measurement and

decision-making.

In Paper 3.4 Business Information

Management there will be related material

on information resource management and

information systems and competition.

PAGE 156

In Paper3.7 Strategic Financial

Management there will be relationships

with objectives and corporate governance,

strategy formulation and the global economic

environment.

SYLLABUS CONTENT

1 Models of strategic management

(a) What is strategic management?

(i) corporate strategy

(ii) business strategy.

(b) Why is strategic management

important?

(c) The process, content and context of

strategic management.

(d) Process of strategy development

(i) deliberate or prescriptive strategies

(ii) emergent and incremental

strategies.

(e) Strategic content

(i) strategic analysis

(ii) strategic choice

(iii) strategic implementation.

(f) Strategic management in different

contexts

(i) configuration

(ii) culture.

2 External environmental scanning

(a) Analysis of the general environment

(i) PESTEL analysis

(ii) Porter’s diamond

(iii) forecasting and scenarios.

(b) Analysis of the customers and

markets – marketing research.

(c) Analysis of the competitive

environment

(i) five forces model

(ii) competition and collaboration

(iii) competitor intelligence for

business advantage

(iv)sustainable competitive advantage

and critical success factors.

3 Internal assessment

(a) Resource audit.

(b) Analysis of capabilities and core

competences.

(c) Adding competitive value – value

chain and value system

(d) Analysis of human resources

(e) Analysis of financial resources

(f) Analysis of operations resources.

4 The nature of strategy analysis and choice

(a) The purpose of the organisation

(i) stakeholder expectations

(ii) cultural context

(iii) mission, objectives and strategic

intent.

(b) Developing the strategy

(i) alternative directions for strategy

development

– resource based

– market based

– finance based

(ii) methods of strategy development

– internal development

– strategic alliances

– mergers and acquisitions.

(c) Strategy evaluation and selection

(i) analysis of suitability, feasibility

and acceptability

(ii) corporate/ business strategy

selection.

5 The nature of strategy implementation

(a) Marketing issues

(i) segmentation, targeting and

positioning

(ii) strategies for market leaders,

followers, challengers and nichers

(iii) development and application of

marketing mix strategies.

(iv) e-business, e-commerce and e-

marketing

(b) Finance issues

(i) performance evaluation

(ii) funding the implementation and

the resource allocation.

(c) Research and Development issues

(i) management of innovation

(ii) management and control of quality.

(d) IS/ IT issues

(i) IT/ IS as a strategic resource

(ii) the strategic management of

information systems in business

development.

(e) Strategic HR issues

(i) recruitment and selection

(ii) motivation and discipline

(iii) appraisal and performance

evaluation

(iv) staff training and development.

(f) Project management issues

(i) the project life cycle

(ii) objectives of project management

(iii) estimation of resource

requirements

(iv) tools and techniques of project

Strategic Business Planning and Development (Continued)

PAGE 157

management.

(g) Management of change issues

(i) understanding the types of

strategic change and their causes

(ii) development of a strategic

change programme

– power influence

– culture influence

(iii) management roles in the

strategy change process

(iv) managing the strategic change

process.

6 Matching structures with strategy

(a) Types of organisation structures

(i) simple

(ii) functional

(iii) divisional

(iv) matrix

(v) multinational

(vi) global

(vii) strategic business unit.

(b) Centralisation versus decentralisation.

(c) Organisational configurations.

7 The nature of global competition

(a) The role of traditional international

marketing.

(b) The development of the global

business

(i) market convergence

(ii) cost advantages

(iii) government pressures

(iv) currency volatility and trade barriers

(v) the emergence of global

competition.

(c) Global strategies

(i) standardisation versus

customisation

(ii) product positioning

(iii) channel management

(iv) the development of global brands.

(d) Managing a global company

(i) ethnocentric, polycentric or

geocentric orientation

(ii) cross cultural management and

leadership.

(e) Reaching global customers

(i) international marketing research

(ii) international market segmentation.

8 Outcomes of the strategic management

process

(a) Corporate versus business

performance

(b) Sustainable competitive advantage

(c) A learning organisation

(d) Alternative performance measures:

(i) financial

(ii) non financial

(iii) strategic.

9 Ethical considerations

(a) The importance of social

responsibility.


(c) The attitude towards ethics on

national and global scales.

EXCLUDED TOPICS





Although all the syllabus will be examined in

some form, the core areas will be focused on

the strategy formulation process. This

comprises the identification of corporate

objectives, strategic analysis, including

internal and external reviews, strategy

development, evaluation and implementation.


SYLLABUS

Primarily the subject – Strategic Business

Planning and Business Development – will

be considered at the strategic level. All

aspects will be considered in terms of

practical application. Wherever possible

the subject will be integrated and not

considered as a collection of isolated

topics. Operational activities will only be

introduced where they impinge upon

strategic considerations, such as IT and

human resource management.


two sections. Section A will be in the

format of one major case study, usually

with four question parts. This will be

compulsory and will focus on the core

material, previously described, although

other aspects of the syllabus could be

introduced here. Questions will be mainly


PAGE 158

discursive but there will usually be some

financial or other quantitative data included

here to be analysed. Candidates are

expected to closely relate all their answers

to the case scenario. Section B will consist

of a choice of two questions, each of two

parts, from a total of three available.

They will not be linked to the compulsory

case scenario, but may include short

scenarios to be discussed in context.

Number

of Marks


question 60



100




RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


STUDY SESSIONS

OVERVIEW OF STRATEGIC

MANAGEMENT

1 Introduction to strategic

management

(a) Strategic managment defined

(i) corporate strategy

– understand the strategic

perspective

– evaluate the overall purpose

and scope

– describe the expectations of

owners

– describe the expectations of

stakeholders

– explain the concept of added

value

(ii) business strategy

– be aware of the role of

business units

– identify market competition

(b) The importance of strategic

management

(i) define strategy and strategic

thinking

(ii) differentiate between policy,

strategy, tactics

(iii) understand the need for a long

term view

(iv) define long term objectives

(v) explain controlling the future

(vi) understand long term efficiency

(c) The process, content and context of

strategic management

(i) describe the present position of


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.



texts useful:

Johnson and Scholes Exploring Corporate

Strategy (7th edition) Prentice Hall Europe

ISBN 0273687344

Grant Contemporary Strategy Analysis:

Concepts, Techniques, Applications (4th

Edition) Brackwell Publisher ISBN

0631231366

Other texts which may be useful to

candidates:

Joyce and Woods Strategic Management

Kogan Page ISBN 0749435836

Wilson and Gilligan Strategic Marketing

Planning (2nd edition) Butterworth-

Heinemann ISBN 0750622466



student accountant.

Additional student support at

www.booksites.net/ecs

PAGE 159


the organisation

(ii) understand the external

environment

(iii) understand the organisation at

present

(iv)evaluate where does the

organisation want to be

(v) demonstrate how is the

organisation going to get there

(d) The process of strategy development

(i) identify deliberate strategies

(ii) identify prescriptive strategies

(iii) identify emergent and

incremental strategies

(iv) understand strategic planning

and strategic management

2 The rational model

(a) strategic analysis

(i) assess the strategic position

(ii) evaluate expectations and

influence of stakeholders

(b) strategic choice

(i) define underlying influences

which guide strategy

(ii) evaluate strategic options

(iii)understand evaluation and

selection procedures

(c) strategic implementation

(i) define resource planning

(ii) define corporate strategy

(iii) define business strategy

(iv) define operational and financial

strategy

3 Strategic management in context

(a) Strategic configuration

(i) understand logical incremental

model

(ii) understand rational command

model

(iii) understand cultural political

influences

(iv) understand political choice

4 Culture

(a) Define the meaning of culture

(b) Understand the determinants of

culture: Schein

(c) Describe the cultural web: Johnson

and Scholes

(d) Link culture with structure

(e) Discuss models of culture: Handy,

Miles and Snow, Peters and

Waterman, Mintzberg

(f) Understand changing organisational

culture: Kanter, Lewin

(g) Evaluate the link between culture

and strategic leadership

(h) Identify regional and national culture

5 External environmental scanning

(a) Analysis of the general environment

(i) PESTEL analysis

– be aware of the social impact

on the organisation

– be aware of the legal issues

and implications

– be aware of the role and

influence of the economy

– be aware of the political

environment

– be aware of the impact of

technology

– be aware of complexity,

dynamism and uncertainty

– understand systems thinking

– analyse the organisation as an

open system

– understand the focal zone analysis

(ii) Porter’s diamond

– explain firm strategy, structure

and rivalry

– explain demand conditions

– explain factor conditions

– explain related and supporting

industries

(iii) forecasting and scenarios

– understand strategic life cycles

– understand statistical forecasting

techniques

– understand the delphi technique

– understand scenario planning

6 Analysis of customers, markets and

marketing research

(a) Explain aggregate and sectoral

concentration

(b) Understand customer behaviour

(c) Understand the principles of

marketing research

(d) Explain market research as a

component of marketing research

(e) Discuss social change and social trends

(f) Discuss demographic factors

(g) Discuss population size

(h) Discuss demographic change

(i) Discuss social structure

PAGE 160

(j) Discuss economic change

(k) Analysis of the competitive

environment

(i) the five forces model

– understand the general model

– discuss intensity of rivalry

among existing competitors

– discuss bargaining power of

suppliers

– discuss bargaining power of

buyers

– discuss the threat of new

entrants

– discuss the threat of

substitutes

– evaluate the weaknesses of

the model

– explain the threat of potential

entrants

– understand the connection

with market structure

– discuss the role of government

and regulation

(ii) competition and collaboration

– review government regulation

– discuss the competition

commission

– compare different market

environments

– discuss cartels, oligopolies

(iii) e-business, e-commerce and e-

marketing

– environmental change

– strategic capability

– e-marketing mix

7 Competitor intelligence for business

advantage

(a) Understand the portfolio analysis

approach

(b) Describe the Boston Consulting

Group model

(c) Describe the Shell directional policy

matrix/nine cell grid

(d) Understand the importance of

understanding portfolio analysis

(e) Understand the product life cycle

(f) Explain competitor benchmarking

(g) Explain competitive positioning grid

(h) Sustainable competitive advantage

(i) define competitive advantage

(ii) explain competitive advantage

(iii) discuss generic strategies

(Porter)

(iv)understand different approaches

by management

(v) evaluate branding, patents,

copyrights and trademarks

(vi) identify national advantage

(Porter)

(vii) evaluate the strategic role of the

marketing mix

(i) Critical success factors

(i) define how to measure success

(ii) compare actual and relative

success factors

(iii) compare efficiency and

effectiveness

(iv) evaluate financial measures

(v) contrast the expectations of stock

holders and shareholders

(vi)discuss quality issues

(vii) evaluate success measurement

for non profit making

organisations

8 Internal assessment

(a) Resource audit

(i) identify the quality, nature and

extent of available resources

(ii) identify physical, human and

financial resources

(iii) identify intangible resources

(iv) understand unique resources

and competitive advantage

(v) evaluate internal control

systems

(vi) analyse departmental

organisation

(b) Analysis of capabilities and core

competencies

(i) formulate a SWOT analysis

(ii) interpret a SWOT analysis

(iii) describe the product life cycle

(iv) understand the seven ‘S’

approach

(v) demonstrate threshold

competencies

(vi) demonstrate core competencies

(vii) identify appropriate markets

(viii) review quality and reliability

(ix) explain product attributes

9 Adding competitive value

(a) Understand the value chain

(i) link the value chain with

organisational structure

(ii) explain the value system

(iii) discuss product and market


PAGE 161

differentiation

(iv) identify sources of differentiation

(v) assess innovation

(vi) understand technical

development

(vii) identify new target markets

(viii) identify new distribution

channels

(ix) identify new market segments

(x) be aware of sudden environmental

shocks

10 Human resource management

(a) Analysis of human resources

(i) understand skills and

competencies

(ii) discuss workforce adaptability

(iii) assess innovative capability

(b) Analysis of operations resources

(i) evaluate the availability of

resources

(ii) understand management

information and control systems

(iii) understand production control

systems

(iv) understand process control

(v) describe resource utilisation and

costs

11 Finance resource management

(a) Analysis of financial resources

(i) understand financial control

systems

(ii) understand capital structure

(iii) understand liquidity and gearing

(iv)define the “balanced scorecard":

Kaplan and Norton

PURPOSE OF ORGANISATIONS

12 The nature of strategy analysis and

choice

(a) Stakeholder expectations

(i) understand stakeholder power

and influence

(ii) be able to carry out stakeholder

mapping: Mendelow

(b) The cultural context

(i) identify national and local culture

(ii) understand organisational culture

and objectives

13 Corporate mission and strategic

objectives

(a) Mission, objectives and strategic intent

(i) define policy, strategy and tactics

(ii) define strategic vision

(iii) define the mission statement

(iv) define strategic intent: Hamel

and Prahalad

(v) define strategic scope

(vi) state implicit and explicit

objectives

(vii) evaluate the prime

organisational objective

(viii) evaluate the organisation’s

policy

(ix) understand marginalist theories

of organisational objectives

(x) explain the accounting concept of

profit

(xi) explain the economist concept of

profit

(xii) explain behaviourist theories of

organisational

(xiii) identify the expectations of the

owners

(xiv) evaluate the role of

stakeholders

14 Developing the strategy

(a) Alternative directions for strategy

development

evaluate PIMS analysis

(i) understand resource based

(ii) understand product value and

development

(iii) explain withdrawal strategy

(iv)explain consolidation strategy

(v) explain market based strategy

(vi) explain market development and

extension strategy

(vii) explain market penetration

strategy

(viii) explain market positioning

strategy

(ix) understand growth vector

analysis: Ansoff

(x) define the planning gap

(xi) define finance based strategies

(xii) understand the role of the

budgetary process


PAGE 162

15 Methods of strategy development

(a) Ccompare level one and level two

strategies

(b) Evaluate internal development

(c) Evaluate organic growth:

Greiner’s growth model

(d) Analyse joint ventures and

strategic alliances

(e) Review mergers and acquisitions

(f) Define concentric and

conglomerate diversification

(g) Define forward and backward

integration

(h) Be aware of the problems of

diversification and acquisition

16 Strategy evaluation and selection

Analysis of Suitability, feasibility and

acceptability.

(a) Suitability

(i) understand life cycle analysis

(ii) understand life cycle/portfolio

matrix

(iii) assess resources and

competencies

(iv) discuss business profile analysis

(v) understand strategy screening

(vi) be aware of decision trees

(b) Feasibility

(i) explain funds flow analysis

(ii) explain break even analysis

(iii) explain resource deployment

analysis

(c) Acceptability

(i) identify and justify expected

performance outcomes

(ii) review profitability analysis

(iii) review cost-benefit analysis

(iv) review risk analysis

(v) evaluate shareholder value

(vi) assess expectation of stakeholders

(d) Corporate and business strategy

selection

(i) formulate the role of planning

(ii) carry out a formal evaluation

(iii) analyse enforced choice

(iv) differentiate learning from

experience

(v) be aware of dominant

stakeholder selection

17 The nature of strategy implementation

(a) Marketing issues

(i) segmentation, targeting and

positioning

(ii) understand strategic group analysis

(iii) define strategic groups and

strategic space

(iv) describe market segmentation

analysis

(v) explain segmentation by factor,

market or organisation

(vi) describe targeting

(vii) distinguish between product and

market positioning

(b) Strategies for market leaders,

followers, challengers and

nichers

(i) understand the strategic clock:

Bowman

(ii) understand the market options

matrix

(iii) understand price based

strategies

(iv) understand added value and

differentiation strategies

(v) explain hybrid strategy

(vi) define focused differentiation

18 Development and application of

marketing mix strategies

(a) Discuss product strategy

(b) Discuss price strategy

(c) Discuss place strategy

(d) Discuss promotion strategy

19 Strategic support functions

(a) Finance issues

(i) performance evaluation

– explain ratio analysis

– be aware of financial

measures

– understand ROCE, ROI,

profitability

– apply balanced scorecard

(ii) funding the implementation and

allocation resources

– explain financial sources

– explain capital allocation

– explain shareholders' funds

(b) Research and Development issues

(i) management of innovation

– assess the role of research

and development in strategy

– evaluate acquisition of new


PAGE 163

technologies

– discuss exploitation of existing

technologies

– discuss innovation and

existing products

– discuss innovation and new

products

– explain innovation and

intrapreneurship

(ii) management and control of

quality

– discuss the role of quality in

strategy

– describe quality procedures

– explain quality assurance

– explain total quality

management

(c) IS/IT issues

(i) IS/IT as a strategic resource

– understand organisation and

control of the information

strategy

– define usefulness and

application of information

technology

– assess monitoring advances

and changes in information

technology

– describe current good practice

– describe costs and benefits

– discuss information and

organisational structure

20 Human Resource management

(a) Recruitment and selection

(i) define the strategic role of human

resources

(ii) formulate the strategic human

resource plan

identify and evaluate appropriate

recruitment strategies

(iii) advise on succession planning

(b) Motivation and discipline

(i) understand the appropriate

motivational and supportive

policies

(ii) describe the links between

organisational objectives,

appraisal, reward and motivation

(c) Appraisal and performance evaluation

(i) assess organisational and

individual objectives

(ii) assess appraisal methods

(iii) discuss appraisal and

competence assessment

(iv) staff training and development

strategies

(v) understand the importance of the

management of change

(vi) describe the management of

diversity

(vii) evaluate the role of

teamworking and empowerment

in pursuit of business objectives

21 Project management

(a) Define the project life cycle

(i) understand the objectives of

project management

(ii) make an estimation of resource

requirements

(iii) assess the efficient use of

resources

(iv) understand operational research

procedures

(b) Tools and techniques of project

management

(i) understand statistical approaches

(ii) describe statistical process control

(c) Operations management

(i) assess the strategic significance

of operations

(ii) link operations management and

strategy

(iii) understand purchasing and

inbound logistics

(iv) evaluate the manufacturing

processes

(v) understand distribution and

outbound logistics

(vi) describe quality and quality

regimes

(vii) have knowledge of just-in-time

supply management

(viii) discuss business process re-

engineering

22 Management of change

(a) Assess the motivation to change

(b) Evaluate attitudes to change

(c) Link together culture and change

(d) Understand the managing of

change: Lewin, System Intervention

Strategy

(e) Process of understanding types of

strategic change and their causes

(i) identify external environmental

change and shocks

(ii) identify internal environmental

change


PAGE 164

(iii) understand business

relationships

(iv) understand transformational change

(v) discuss enforced change

(vi) identify technological change

(vii) evaluate people issues

(f) Development of a strategic change

programme

(i) describe the Gemini 4Rs

framework

(ii) describe force field analysis

(iii) describe power influence

(iv) understand culture influence

(g) Management roles in the strategy

change process

(i) understand the importance of

communication and education

(ii) evaluate collaboration

(iii) evaluate intervention

(iv) assess the importance of direction

(v) describe routine change

(h) Managing the strategic change process

(i) evaluate changing identity of the

organisation

(ii) understand co-ordination and

transition

(iii) appreciate the need for control

(iv)describe the role of change

strategists

(v) describe the role of change

implementers

(vi) describe the role of change

recipients

ORGANISATIONAL STRUCTURE

23 Matching structures with strategy

(a) Types of organisation structures

(i) understand the determinants of

structure

(ii) evaluate the meaning of structure

(iii) describe the simple organisation

(iv) describe the entrepreneurial

organisation

(v) describe the functional

organisation

(vi) describe the divisional

organisation

(vii) describe the matrix organisation

(viii) describe the multinational

(ix) describe the global

(x) understand the holding company

(xi) evaluate the role of the strategic

business unit

(xii) assess intermediate and

variations in structure

(xiii) discuss advantages and

appropriateness of different

structures

(xiv) understand the process stage

towards globalisation Kenichi

Ohmai, Keegan

(b) Centralisation versus decentralisation

(i) evaluate issues in organisational

structural change

(ii) understand organic and

mechanistic structures: Burns

and Stalker

(iii) describe contingency theory

(iv) describe the virtual organisation

(c) Organisational configurations

(i) compare structural

configurations: Mintzberg

(ii) make a comparison of

organisational types

INTERNATIONAL BUSINESS

24 The nature of global competition

(a) The internationalisation of business

(i) understand the motivations

behind internationalisation

(ii) be aware of the concept of

globalisation as distinct from

international marketing

(iii) discuss the competitive

advantage of nations: Porter

(iv) understand absolute advantage

and comparative advantage

(v) evaluate implications for

organisational success

(vi) explain internationalisation

strategies

(vii) understand single markets and

trading blocks

(viii) explain multinational

organisations: Bartlett and

Ghoshal

(b) The development of the global

business

(i) discuss market convergence

(ii) explain cost advantages

(iii) explain government pressures

(iv) understand currency volatility

and trade barriers

(v) understand purchasing power

parity

(vi) understand the emergence of


PAGE 165

global competition

25 Global strategies

(a) Evaluate market entry strategies

(i) Compare standardisation versus

customisation

(ii) Understand product positioning

(iii) Discuss international channel

management

(iv) Analyse the development of

global brands

(b) Managing a global company

(i) describe the international

planning process

(ii) assess ethnocentric, polycentric

and geocentric orientation

(iii) explain cross cultural

management and leadership

(c) Reaching global customers

(i) international marketing research

– be able to assess value of

published statistics

– discuss comparability and

reliability of data

– assess national and local

information sources

– evaluate field sales force

(ii) international market

segmentation understand the

following:

– geographic

– ethnic

– economic

– technological capability


26 Outcomes of the strategic process

(a) Corporate and business

performance

(i) discuss sustainable competitive

advantage

(ii) evaluate critical success factors

(b) A learning organisation

(i) assess shared purpose and vision

(ii) understand challenging

experiences

(iii) explain the holistic view

(c) Alternative performance measures

(i) understand performance

standards

(ii) utilise financial indicators

(iii) utilise non financial indicators

(iv) formulate strategic success

measurements; Peters and

Waterman's excellence attributes

(d) Strategic failure

(i) assess strategic drift: the Icarus

Paradox

(ii) understand indicators of failure

(iii) analyse weak or inappropriate

strategic leadership

(iv) discuss Z scores: Altman


(a) The importance of social

responsibility

(i) evaluate the meaning of social

responsibility

(ii) discuss corporate social

responsibility

(iii) review business ethics

(iv)review ethical dilemmas

(b) Corporate governance

(i) assess corporate conduct

(ii) assess the governance

framework

(iii) discuss governance change

(iv)distinguish between rights,

duties and expectations of

stakeholders

(v) understand the role of executive

and non-executive directors

(vi)differentiate between functions

of a chairman and those of a

chief executive officer or

managing director

(c) The attitude towards ethics on

national and global scales

(i) the ethical stance

(ii) discuss at the national and

international level

(iii) explain at the corporate level

(iv) explain at the the manager level

(v) evaluate the cultural context

PAGE 166

Paper 3.6

Advanced Corporate Reporting(INT)





AIM


judgement and technique in corporate

reporting matters encountered by

accountants and can react to current

developments or new practice.

OBJECTIVES


should be able to:

• explain and evaluate the implications of

an accounting standard or proposed

accounting standard for the content of

published financial information

• explain and evaluate the impact on the

financial statements of business

decisions

• explain the legitimacy and acceptability

of an accounting practice proposed by a

company


complex business situations

• analyse financial statements and

prepare a report suitable for

presentation to a variety of users

• evaluate current practice in the context

of the needs of users and the objectives

of financial reporting

• evaluate current developments in

corporate reporting in the context of

their practical application, implications

for corporate reporting, and the

underlying conceptual issues

and



OVERALL SYLLABUS

This paper is the final assessment of the

candidates' skills in the area of corporate

reporting. The paper builds on the technical

skills studied in Paper 1.1 Preparing Financial

Statements and Paper 2.5 Financial Reporting

by requiring candidates to demonstrate the

high level technical and evaluatory skills

expected of an accountant.

The paper complements the skills acquired

in studying the other core papers in Part 3

of the ACCA examination structure.

SYLLABUS CONTENT

1 The International Accounting Standard

Board's (IASB) regulatory framework

(a) International Financial Reporting

Standards, International Accounting

Standards, Exposure Drafts,

Discussion Papers, Standard

Interpretations Committee and


Interpretations Committee

pronouncements, including

accounting for equity and liabilities,

assets, provisions and contingencies,

segments, related parties, financial

instruments, taxes, leases,

retirement benefit costs.

(b) The content of the IASB's regulatory

framework in a given range of

practical situations.

(c) The problems associated with the

IASB's regulatory framework including

measurement and recognition issues.

(d) The impact of current and proposed

regulations on the financial

statements of an entity.

(e) The effect of business decisions and

proposed changes in accounting

practice by the entity on the financial

statements.

(f) The legitimacy of current accounting

practice and its relevance to users of

corporate financial statements.

PAGE 167

2 Preparation of the financial statements

of complex business entities

(a) The financial statements of complex

groups including vertical and mixed

groups.

(b) Group cash flow statements.

(c) Accounting for group reorganisations

and restructuring including demergers,

take-overs and group schemes.

(d) Accounting for foreign currency

transactions and entities.

3 Preparation of reports for external and

internal users

(a) Appraisal of financial and related

information, the purchase of a

business entity, the valuation of shares

and the reorganisation of an entity.

(b) Appraisal of the impact of changes in

accounting policies and the regulatory

framework on shareholder value.

(c) Appraisal of the business performance

of the entity including quantitative and

qualitative measures of performance

and the potential for corporate failure.

(d) The assessment of the impact of

price level changes and available

methods of valuation on business

decisions and performance.

(e) The effectiveness of corporate

governance within an entity.


(a) The accounting impact of

environmental, cultural and social

factors on the entity.

(b) The impact of the content of financial

statements on users including changes

in design and content of interim and

year-end financial statements and

alternate ways of communicating

results to users.

(c) Proposed changes in the structure of

national and international regulation

and the impact on global

harmonisation and standardisation.

(d) The applicability of the IASB's

regulatory framework to small and

medium sized entities.

(e) Current developments in corporate

reporting.


(a) Ethics and business conduct.

EXCLUDED TOPICS

The syllabus content outlines the areas

of assessment. No areas of knowledge

are specifically excluded from the

syllabus.

Please refer to the list of examinable

documents set out in the exam notes.


Key topic areas are as follows:

• group accounting, group cash flow

statements and foreign currency

translation

• discussion papers, exposure drafts,

International Accounting Standards and


Standards

• problems with current International

Accounting Standards and International

Financial Reporting Standards and the

impact of changes therein on the entity

• preparation of reports in an advisory

capacity including share valuation, and

purchase of a business

• changes in organisational structure,

reconstructions, demergers, etc.

• problems with the business including

financial analysis and measurement of

corporate performance

• environmental and social accounting

and the impact of culture

• statements in financial reports

concerning operating performance

(management discussion and analysis)

• the move to the use of International


• current issues.

The main thrust of the syllabus will be the

preparation of a set of group financial

statements, advising clients on current

standards and changes therein, reporting

business performance including

environmental and social reporting and

appraising current issues. It is important to

realise that other areas of the syllabus will be

also examined.


SYLLABUS


Advanced Corporate Reporting (INT) (Continued)

PAGE 168


Section A will normally comprise one

compulsory question on group financial

statements including group cash flows and

foreign currency translation. This question

will be technically demanding and could

have a discursive element in it.

Section B will comprise four questions out of

which candidates should select three

questions. These questions will involve

advising, discussing and reporting on issues

and topics in corporate financial reporting.

The questions will view the subject matter

from the perspective of the preparer of

financial statements and from the perspective

of the accountant as an advisor. Invariably a

technical understanding of the subject matter

will be required and candidates will have to

apply their knowledge to given cases and

scenarios.

Advice as to current and future reporting

requirements and their impact on reported

corporate performance will be an important

element of these questions. Additionally

current issues and developments in

financial reporting will be examined on a

discursive basis.

Number

of marks


question 25



100











RELEVANT TEXTS




listed below:

FTC Foulks Lynch – ACCA's official publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222


Candidates may also find the following text

useful:

Abbas Ali Mirza, Graham Holt, Magnus

Orrell, Liesel Knorr International Financial


STUDY SESSIONS

1 Overview of the role of the


Board (IASB)

(a) Discuss the nature of the changing

role of the IASB

(b) Describe the applicability of


and International Financial Reporting

Standards for small companies

(c) Discuss the solutions to differential

financial reporting both nationally

and internationally

2 Management Discussion and Analysis

(a) Prepare reports relating to

corporate performance for external

shareholders

Reporting Standards (IFRS) Workbook:

Standard Outlines, Multiple-Choice

Questions and Case Studies with Solutions

(2005) John Wiley & Sons Inc, UK (ISBN:

0-4716-9742-7)



student accountant.

The web site of the International

Accounting Standards Board is a useful

source of information (www.iasb.org).

PAGE 169


3 Group financial statements I

(a) Review the basic principles of

acquisition accounting

(b) Explain and illustrate the principles

of measurement relating to the fair

value of the consideration and the

net assets acquired

(c) Discuss the nature of acquisitions

achieved in stages


statements where control is

established by an acquisition in stages

(e) Account for complex group structures

4 Group financial statements II

(a) Explain and illustrate the basic

principles relating to the disposal of

group companies

(b) Discuss and illustrate the treatment

of goodwill

(c) Apply the principles of accounting

for partial and deemed disposals

5 Group re-organisations and

restructuring

(a) Discuss the creation of a new

holding company

(b) Explain changes in the ownership of

companies within a group

(c) Discuss the nature of demergers and

divisionalisation

(d) Prepare group financial statements

after re-organisation and

reconstruction

(e) Appraise the benefits of re-

organisation and restructuring

6 Associates and joint ventures

(a) Account for associates and joint

ventures

(b) Apply the equity and proportionate

consolidation methods of accounting

(c) Prepare group financial statements

including accounting for associates

and joint ventures

(d) Evaluate current standards for

reporting interests in joint ventures

and similar arrangements

7 Foreign currency

(a) Discuss the recording of transactions

and retranslation of monetary/non-

monetary items at the balance sheet

date for individual entities

(b) Account for the treatment of

exchange differences re the above

(c) Discuss the nature of the accounting

for foreign entities

(d) Account for a net investment in a

foreign entity

(e) Prepare group financial statements

incorporating a foreign subsidiary/

associate

(f) Discuss problem areas in foreign

currency transactions for individual

and group companies

(g) Discuss the nature of financial

reporting in hyperinflationary

economics

8 Group cash flow statements

(a) Discuss the usefulness of cash flow

information

(b) Prepare group cash flow statements

classifying cash flows by standard

headings and including acquisition

and disposal of subsidiaries

(c) Deal with associates, joint ventures

and foreign currencies

9 Non current assets I

(a) Discuss the nature of impairment

and the impairment review

(b) Apply the impairment review and

deal with losses on assets

(c) Discuss and apply the principle of

'held for sale' non-current assets and

'disposal groups'

10 Non current assets II

(a) Account for revaluation gains and

losses and the depreciation of

revalued assets

(b) Account for the disposal of revalued

assets

(c) Discuss the effect of revaluations on

realised profits

(d) Account for investment properties

including fair value and cost models,

and definitional issues

11 Financial instruments I

(a) Account for debt instruments, equity

instruments and the allocation of

finance costs

(b) Account for fixed interest rate and

convertible bonds

(c) Discuss the definition and

classification of a financial instrument

12 Financial instruments II

PAGE 170


(a) Discuss the measurement issues

relating to financial instruments

(b) Explain and the recognition and

measurement rules for financial

instruments including the use of

current values, hedging, the

treatment of gains and losses and

derivatives

(c) Describe the nature of the disclosure

requirements relating to financial

instruments

(d) Discuss the key areas where

consensus is required on the

accounting treatment of financial

instruments

13 ‘Off balance sheet’ transactions

(a) Explain the nature of the ‘off balance

sheet’ problem and the principle of

substance over form

(b) Discuss common forms of ‘off

balance sheet’ finance and current

regulation in the area

(c) Discuss the perceived problems of

current requirements including

measurement and recognition issues

14 Leases

(a) Discuss problem areas in lease

accounting including classification,

termination and tax variation clauses

(b) Account for sale and leaseback

transactions and recognition of

income by lessors

(c) Discuss and account for proposed

changes in lease accounting and its

impact on corporate financial

statements

15 Segmental Reporting

(a) Discuss the problem areas in

segmental reporting including

definition of segments, common

costs, inter segment sales etc

(b) Discuss the different approaches

used to disclose segmental

information

(c) Discuss the importance of segmental

information to users of financial

statements

16 Accounting for retirement benefit costs

(a) Describe the nature of defined

contribution, multi-employer and

defined benefit schemes

(b) Explain the recognition of defined

benefit schemes

(c) Discuss the measurement issues

relating to defined benefit schemes

(d) Account for defined benefit schemes

including the amounts shown in the

balance sheet, income statement

and notes to the financial statements

(e) Discuss perceived problems relating

to accounting for retirement benefit

costs

17 Agriculture

(a) Demonstrate knowledge of the scope

of the current standard

(b) Discuss the recognition and

measurement criteria including

treatment of gains and losses, and the

inability to measure fair value reliably

(c) Demonstrate knowledge of the

treatment of government grants, and

the presentation and disclosure of

information relating to agriculture

(d) Account for biological assets,

agricultural produce at the point of

harvest and government grants

18 Taxation

(a) Discuss the different approaches

to accounting for deferred taxation

(b) Discuss the recognition of deferred

taxation in the balance sheet and

performance statements including

revaluations, unremitted earnings of

group companies and deferred tax

assets

(c) Explain the nature of the

measurement of deferred taxation

including tax rates and discounting

(d) Calculate deferred tax amounts in


19 Reporting financial performance and

earnings per share

(a) Discuss proposed changes to

reporting financial performance

(b) Explain the rationale behind the

proposed changes in reporting

financial performance

(c) Calculate diluted earnings per share

PAGE 171


by reference to dilutive potential

ordinary shares, loss per share and

particular types of dilutive

instruments including partly paid

shares, employee incentive schemes

and contingently issuable shares

20 Events after the balance sheet date,

provisions and contingencies

(a) Discuss the problems of accounting

for events after the balance sheet

date including reclassification,

window dressing etc

(b) Discuss the issues relating to


provisions including “best

estimates”, discounting, future

events

(c) Explain the use of restructuring

provisions and other practical uses

of provisioning

(d) Discuss the problems with current

standards on provisions and

contingencies including definitional

and discounting problems

21 Related parties and share based

payment

(a) Discuss the related party issue

(b) Identify related parties (including

deemed and presumed) and the

disclosure of related party transactions

(c) Discuss the effectiveness of current

regulations on disclosure of related

party transactions

(d) Describe and apply the current

standard for the recognition and

measurement of share-based

payment

(e) Show the impact of the share-based

payment standard on the

performance statements of the entity

and discuss the problems of applying

the standard

22 Preparation of reports I

(a) Calculate and appraise a range of

acceptable values for shares in an

unquoted company

(b) Advise a client on the purchase of a

business entity

(c) Analyse the impact of accounting

policy changes on the value and

performance on an entity

23 Preparation of reports II

(a) Discuss the financial and non-

financial measures of performance

(b) Describe the procedures in designing

an accounting based performance

measurement system

(c) Appraise the different performance

measures including return on

investment, residual income and

economic value added

(d) Compare target levels of

performance with actual

performance

24 Preparation of reports III

(a) Discuss alternative definitions of

capital employed and measurement

bases for assets

(b) Discuss the impact of price level

changes on business performance

25 The impact of environmental, social

and cultural factors on corporate

reporting

(a) Appraise the impact of

environmental, social and ethical

factors on performance

measurement

(b) Describe current reporting

requirements and guidelines for

environmental reporting

(c) Discuss the effect of culture on

accounting and the cultural relativity

of accounting

(d) Discuss why entities might include

socially orientated disclosures in

performance statements

(e) Evaluate ethical conduct in the

context of corporate reporting

26 International issues

(a) Evaluate the developments and the

impact on companies of global

harmonisation and standardisation

(b) Assess proposed changes to

international regulation

(c) Identify the reasons for major

differences in accounting practices

(d) Restate overseas financial

statements in line with International

Accounting Standards and


Standards


(a) Identify ways of improving

PAGE 172


communication of corporate

performance, current proposals

relating to year end financial reports

and business reporting on the

internet

(b) Identify problem areas in interim

reporting

(c) Discuss current issues in corporate

reporting

(d) Discuss current proposals to amend

International Accounting Standards /


Standards

e) Discuss the standard on accounting

for insurance contracts

(f) Outline the current standard on

'Exploration for and Evaluation of

Mineral Resources'

28 First-time adoption

(a) Apply the accounting standard on

first-time adoption of IFRSs,

including:

(i) definitions

(ii) adjustments

(iii) exceptions

(iv) estimates

(v) adoption dates

(vi) disclosure

PAGE 173

AIM


judgement and technique in corporate

reporting matters encountered by

accountants and can react to current

developments or new practice.

OBJECTIVES


should be able to:

• explain and evaluate the implications of

an accounting standard or proposed

accounting standard for the content of

published financial information

• explain and evaluate the impact on the

financial statements of business

decisions

• explain the legitimacy and acceptability

of an accounting practice proposed by a

company


complex business situations

• analyse financial statements and

prepare a report suitable for

presentation to a variety of users

• evaluate current practice in the context

of the needs of users and the objectives

of financial reporting

• evaluate current developments in

corporate reporting in the context of

their practical application, implications

for corporate reporting, and the

underlying conceptual issues

and



OVERALL SYLLABUS

This paper is the final assessment of the

candidates' skills in the area of corporate

reporting. The paper builds on the

technical skills studied in Paper 1.1

Preparing Financial Statements and Paper

2.5 Financial Reporting by requiring

candidates to demonstrate the high level

technical and evaluatory skills expected of

an accountant.

The paper complements the skills acquired

in studying the other core papers in Part 3

of the ACCA examination structure.

SYLLABUS CONTENT

1 The UK regulatory framework

(a) Financial Reporting Standards,

Financial Reporting Exposure Drafts,

Discussion Papers, Urgent Issues

Task Force pronouncements

including accounting for equity and

liabilities, assets, provisions and

contingencies, segments, related

parties, financial instruments, taxes,

leases, retirement benefits.

(b) The content of the UK regulatory

framework in a given range of

practical situations.

(c) The problems with the current and

proposed changes to the UK

regulatory framework including

measurement and recognition issues.

(d) The impact of current and proposed

regulations on the financial

statements of an entity.

(e) The effect of business decisions and

proposed changes in accounting

practice by the entity on the financial

statements.

(f) The legitimacy of current accounting

practice and its relevance to users of

corporate financial statements.





Paper 3.6

Advanced Corporate Reporting(GBR)

PAGE 174

2 Preparation of the financial statements

of complex business entities

(a) The financial statements of complex

groups including vertical and mixed

groups.

(b) Group cash flow statements.

(c) Accounting for group reorganisations

and restructuring including demergers,

take-overs and group schemes.

(d) Accounting for foreign currency

transactions and entities.

3 Preparation of reports for external and

internal users

(a) Appraisal of financial and related

information, the purchase of a

business entity, the valuation of shares

and the reorganisation of an entity.

(b) Appraisal of the impact of changes in

accounting policies and the regulatory

framework on shareholder value.

(c) Appraisal of the business performance

of the entity including quantitative and

qualitative measures of performance

and the potential for corporate failure.

(d) The assessment of the impact of

price level changes and available

methods of valuation on business

decisions and performance.

(e) The effectiveness of corporate

governance within an entity.


(a) The accounting impact of

environmental, cultural and social

factors on the entity.

(b) The impact of the content of financial

statements on users including changes

in design and content of interim and

year-end financial statements and

alternate ways of communicating

results to users.

(c) Proposed changes in the structure of

national and international regulation

and the impact on global

harmonisation and standardisation.

(d) The applicability of the regulatory

framework to small and medium

sized entities.

(e) Current developments in corporate

reporting.


(a) Ethics and business conduct.

EXCLUDED TOPICS




Please refer to the list of examinable

documents set out in the exam notes.


Key topic areas are as follows:

• group accounting, group cash flow

statements and foreign currency

translation

• discussion papers, financial reporting

exposure drafts and recent financial

reporting standards

• problems with current accounting

standards and the impact of changes

therein on the entity

• preparation of reports in an advisory

capacity including share valuation, and

purchase of a business

• changes in organisational structure,

reconstructions, demergers, etc

• problems with the business including

financial analysis and measurement of

corporate performance

• environmental and social accounting

and the impact of culture

• the Operating and Financial Review

• the move to the use of International


• current issues.

The main thrust of the syllabus will be the

preparation of a set of group financial

statements, advising clients on current

standards and changes therein, reporting

business performance including

environmental and social reporting and

appraising current

issues. It is important to realise that other

areas of the syllabus will be also examined.


SYLLABUS



Section A will normally comprise one

compulsory question on group financial

statements including group cash flows and

foreign currency translation. This question

will be technically demanding and could

Advanced Corporate Reporting (GBR) (Continued)

PAGE 175

have a discursive element in it.

Section B will comprise four questions out of

which candidates should select three

questions. These questions will involve

advising, discussing and reporting on issues

and topics in corporate financial reporting.

The questions will view the subject matter

from the perspective of the preparer of

financial statements and from the perspective

of the accountant as an advisor. Invariably a

technical understanding of the subject matter

will be required and candidates will have to

apply their knowledge to given cases and

scenarios.

Advice as to current and future reporting

requirements and their impact on reported

corporate performance will be an important

element of these questions. Additionally

current issues and developments in

financial reporting will be examined on a

discursive basis.

Number

of marks


question 25



100






RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch


International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.



regular study of relevant articles in

ACCA's student accountant.

The websites of the Accounting Standards

Board (www.asb.org.uk) and the

International Accounting Standards Board


STUDY SESSIONS

1 Overview of UK GAAP

(a) Discuss the nature of UK GAAP

(b) Describe the applicability of UK

GAAP for small companies

(c) Describe the issues relating to the

Financial Reporting

Standard for Smaller Entities (FRSSE)

(d) Discuss the solutions to differential

financial reporting

2 Operating and Financial Review

(a) Describe the nature and content of

the Operating and Financial Review

(OFR)

(b) Produce reports using the OFR

3 Group financial statements I

(a) Review the basic principles of

acquisition accounting

(b) Explain and illustrate the principles

of measurement relating to the fair

value of the consideration and the

net assets acquired

(c) Discuss the nature of step by step

acquisitions


statements where control is






(www.iasb.org.uk) are also useful sources

of information.

PAGE 176

established by a step by step acquisition

(e) Account for complex group structures

4 Group financial statements II

(a) Explain and illustrate the basic

principles relating to the disposal of

group companies

(b) Discuss and illustrate the treatment

of goodwill on disposal

(c) Apply the principles of accounting

for partial and deemed disposals

5 Group re-organisations and

restructuring

(a) Discuss of the creation of a new

holding company

(b) Explain changes in the ownership of

companies within a group

(c) Discuss the nature of demergers and

divisionalisation

(d) Prepare group financial statements

after re-organisation and

reconstruction

(e) Appraise the benefits of re-

organisation and restructuring

6 Associates, joint ventures and joint

arrangements that are not entities

(JANE)

(a) Account for associates, joint ventures

and JANEs

(b) Apply the equity and gross equity

methods of accounting

(c) Prepare group financial statements

including accounting for associates,

joint ventures and JANEs

(d) Evaluate current standards for

reporting interests in joint ventures

and similar arrangements

7 Foreign Currency

(a) Discuss the recording of transactions

and retranslation of monetary/non-

monetary items at the balance sheet

date for individual entities

(b) Account for the treatment of

exchange differences re the above

(c) Discuss the nature of the accounting

for foreign entities

(d) Account for foreign equity

investments

(e) Prepare group financial statements

incorporating a foreign subsidiary/

associate

(f) Discuss problem areas in foreign

currency transactions for individual

and group companies

(g) Discuss the nature of financial

reporting in hyperinflationary

economies

8 Group cash flow statements

(a) Discuss the usefulness of cash flow

information

(b) Prepare group cash flow

statements classifying cash flows by

standard headings and including

acquisition and disposal of subsidiaries

(c) Deal with associates, joint ventures,

joint arrangements and foreign

currencies

9 Fixed assets I

(a) Discuss the nature of impairment

and the impairment review

(b) Apply the impairment review and

deal with losses on assets

(c) Account for the amortisation of

goodwill and intangible assets

including impairment

10 Fixed assets II

(a) Account for revaluation gains and

losses and the depreciation of

revalued assets

(b) Account for the disposal of revalued

assets

(c) Discuss the effect of revaluations on

distributable profits

(d) Discuss and apply the principle of

'held for sale' non-current assets and

'disposal groups'

(e) Account for investment propoerties

11Financial Instruments I

(a) Account for debt instruments, share

capital and the allocation of finance

costs

(b) Account for fixed interest rate and

convertible bonds

(c) Discuss the definition and

classification of a financial

instrument

12 Financial Instruments II

(a) Discuss the measurement issues

relating to financial instruments

(b) Explain and apply the recognition

and measurement criteria for


PAGE 177

financial instruments including the

use of current values, hedging, the

treatment of gains and losses and

derivatives

(c) Describe the nature of the disclosure

requirements relating to financial

instruments

(d) Discuss the key areas where

consensus is required on the

accounting treatment of financial

instruments

13 ‘Off balance sheet’ transactions

(a) Explain the nature of the ‘off balance

sheet’ problem and the principle of

substance over form

(b) Discuss common forms of ‘off

balance sheet’ finance and current

regulatory requirements

(c) Discuss the perceived problems of

current regulatory requirements

including measurement and

recognition issues

14 Leases

(a) Discuss problem areas in lease

accounting including classification,

termination and tax variation clauses

(b) Account for sale and leaseback

transactions and recognition of

income by lessors

(c) Discuss and account for proposed

changes in lease accounting and its

impact on corporate financial

statements

15 Segmental reporting

(a) Discuss the problem areas in

segmental reporting including

definition of segments, common

costs, inter segment sales etc

(b) Discuss the different approaches

used to disclose segmental

information

(c) Discuss the importance of segmental

information to users of financial

statements

16 Accounting for Retirement Benefits

(a) Describe the nature of defined

contribution, multi-employer and

defined benefit schemes

(b) Explain the recognition of defined

benefit schemes

(c) Discuss the measurement issues

relating to defined benefit schemes

(d) Account for defined benefit schemes

including the amounts shown in the

balance sheet, statement of total

recognised gains and losses, profit

and loss account and notes to the


(e) Discuss perceived problems relating

to accounting for retirement benefits

17 Taxation

(a) Discuss the different approaches to

accounting for deferred taxation

(b) Discuss the recognition of deferred

taxation in the balance sheet and

performance statements including

revaluations, unremitted earnings of

group companies and deferred tax

assets

(c) Explain the nature of the

measurement of deferred taxation

including tax rates and discounting

(d) Calculate deferred tax amounts in


18 Reporting financial performance and

earnings per share

(a) Discuss proposed changes to

reporting financial performance

(b) Explain the rationale behind the

proposed changes in reporting

financial performance

(c) Calculate diluted earnings per share

by reference to dilutive potential

ordinary shares, loss per share and

particular types of dilutive

instruments including partly paid

shares, employee incentive schemes

and contingently issuable shares

19 Events after the balance sheet date,

provisions and contingencies

(a) Discuss the problems of accounting

for events after the balance sheet

date including reclassification,

window dressing etc

(b) Discuss the issues relating to


provisions including “best

estimates”, discounting, future


PAGE 178

events

(c) Explain the use of restructuring

provisions and other practical uses

of provisioning

(d) Discuss the problems with current

standards on provisions and

contingencies including definitional

and discounting problems

20 Related parties and share based

payment

(a) Discuss the related party issue

(b) Identify related parties (including

deemed and presumed) and the

disclosure of related party transactions

(c) Discuss the effectiveness of current

regulations on disclosure of related

party transactions

(d) Describe and apply the accounting

standard for the recognition and

measurement of share-based

payment

(e) Show the impact of the share-based

payment standard on the

performance statements of the entity

and discuss the problems of

applying the standard

21 Preparation of reports I

(a) Calculate and appraise a range of

acceptable values for shares in an

unquoted company

(b) Advise a client on the purchase of a

business entity

(c) Analyse the impact of accounting

policy changes on the value and

performance on an entity

22 Preparation of reports II

(a) Discuss the financial and non-

financial measures of performance

(b) Describe the procedures in designing

an accounting based performance

measurement system

(c) Appraise the different performance

measures including return on

investment, residual income and

economic value added

(d) Compare target levels of

performance with actual

performance

23 Preparation of reports III

(a) Discuss alternative definitions of

capital employed and measurement

bases for assets

(b) Discuss the impact of price level

changes on business performance

24 The impact of environmental, social

and cultural factors on corporate

reporting

(a) Appraise the impact of

environmental, social and ethical

factors on performance

measurement

(b) Describe current reporting

requirements and guidelines for

environmental reporting

(c) Discuss the effect of culture on

accounting and the cultural relativity

of accounting

(d) Discuss why entities might include

socially orientated disclosures in

performance statements

(e) Evaluate ethical conduct in the

context of corporate reporting

25 International issues

(a) Evaluate the developments and the

impact on companies of moves

towards global and regional

harmonisation and standardisation

(b) Assess proposed changes to national

and international regulation

(c) Identify the reasons for major

differences in accounting practices

(d) Restate overseas financial

statements in line with UK

accounting policies and UK

statements in line with given

information on IFRS


(a) Identify ways of improving

communication of corporate

performance, current proposals

relating to year end financial reports

and business reporting on the

internet

(b) Identify problem areas in interim

reporting

(c) Discuss current issues in corporate

reporting

27 First-time adoption

(a) Apply the accounting standard on

first-time adoption of IFRSs,

including:

(i) definitions

(ii) adjustments

(iii) exceptions


PAGE 179


(iv) estimates

(v) adoption dates

(vi) disclosure

28 Revision

PAGE 180

Paper 3.7

Strategic Financial Management




AIM


judgement and technique to make

commercial value added decisions in

strategic financial management and are

able to adapt to factors affecting those

decisions.

OBJECTIVES


should be able to:

• prepare reports for management

explaining and evaluating the financial

consequences of strategic decisions

• identify and evaluate appropriate

sources of finance, their risks and costs

• assess potential investment decisions

and strategies

• understand the impact of the global

business environment on national and

multinational organisations

• explain, demonstrate and recommend

suitable risk management techniques

• understand the significance of cash

management and the treasury function

in the commercial environment

• select the techniques most appropriate

to optimise the employment of financial

resources and critically evaluate such

techniques

• analyse and evaluate financial

information relating to past and future




OVERALL SYLLABUS

Candidates will require a thorough

understanding of the financial management

section of Paper 2.4 Financial Management

and Control. Candidates will also be

required to apply quantitative techniques

covered in earlier papers.

Paper 3.7 develops the financial

management elements of Paper 2.4 by:

• providing a more critical analysis of

corporate governance

• examining the strategic implications of

short-term and long-term financial

planning

• in-depth analysis of risk management in

both domestic and international contexts

• more rigorous analysis of investment

decisions and the cost of capital,

including CAPM and other models

• analysis of corporate growth and

restructuring through mergers,

acquisitions and other means

• introducing international dimensions of

the treasury function

• considering the global economic

environment and other influences on

financial management decisions

• analysis of global financial management

decisions

• introducing ethical considerations.

Paper 3.7 will draw upon strategic

management and business planning issues

covered in Paper 3.5 Strategic Business

Planning and Development in the context of

financial planning.

Paper 3.7 covers mergers, acquisitions and

corporate restructuring from a financial

perspective, areas covered from an

accounting perspective in Paper 3.6

Advanced Corporate Reporting.

PAGE 181

Strategic Financial Management (Continued)

SYLLABUS CONTENT

1 Objectives and corporate governance

(a) The aims and objectives of an

organisation and their impact on

business planning.

(b) Key stakeholders of an organisation:

shareholders, lenders, directors,

employees, customers, suppliers and

the government.

(c) Environmental issues and their

impact on corporate objectives and

governance.

(d) The concept of goal congruence and

how it might be achieved.

(e) Key aspects of governance in the UK

and internationally.

(f) The implications of corporate

governance for organisations.

2 Strategy formulation

(a) The strategic planning process and

its link with investment decisions

(i) the development and analysis of

financial plans to meet agreed

objectives

(ii) seeking, clarifying and confirming

information (e.g. on the current

or past business position through

ratios or other forms of analysis)

relevant to the achievement of

business objectives

(iii) advising clients on the strategies

that a company might use to

expand or maintain its current

market position, and on exit

strategies

(iv)long term financial planning

including measures of value,

profit, optimisation and utility

(v) the use of free cash flow in

financial planning

(vi)techniques for valuing individual

shares and other securities and

for valuing a business, including

EVA and SVA.

(b) Strategic planning for multinationals

(i) entry and exit barriers

(ii) competitive advantage.

3 Risk analysis

(a) Cost of capital

(i) the cost of equity (CAPM and

dividend growth model)

(ii) the cost of debt

(iii) the weighted average cost of

capital (WACC)

(iv) the impact of varying capital

structures on the cost of capital.

(b) Interest rate and foreign exchange risk

(i) the identification of interest rate

and foreign exchange exposure

(ii) yield curves and their significance

to financial managers

(iii) hedging risk using forwards,

futures, options, swaps, FRAs

and other products

(iv) the scope and benefit of

financial engineering.

4 Investment decisions

(a) Decision making techniques

(i) detailed knowledge of discounted

cash flow(NPV)

(ii) adjusted NPV (APV)

(iii) portfolio theory and CAPM and

their value to managers

(iv) options embedded in

investments (basic knowledge

only).

(b) Expansion strategies

(i) organic growth, mergers and

acquisitions

(ii) valuations for mergers and

acquisitions

(iii) takeover and defence strategies

(iv) planning for post-merger success

and audit.

(c) Corporate reorganisation

(i) divestments

(ii) buy-outs and buy-ins

(iii) corporate restructuring

(iv) going private

(v) share repurchases.

5 Treasury management and financial

forecasting

(a) Methods of financing short and long

term investment, including mergers

and acquisitions.

(b) The role of cash flow forecasting in

business planning

(i) development and analysis of

short-term financial plans.

(c) Role of treasury function

(i) activities of treasury managers

(ii) centralised versus decentralised

treasury functions.

(d) Dividend policy

(i) influences on dividend policy

PAGE 182


(ii) the effect of dividends on

company value.

6 The global economic environment

(a) International factors affecting

business developments

(i) trends in global competition

(ii) the role of multinational

companies in the world economy

(iii) free trade, protectionism, trade

agreements, common markets

(iv) role of World Bank and

International Monetary

Fund(IMF) and other

international organisations

(v) economic relations between

developed and developing

countries including problems of

debt and development

(vi)introduction of a single currency.

(b) Exchange rate determination

(i) influences on exchange rates

(ii) models of exchange rate

determination

(iii) different forms of exchange rate

system.

7 Global financial management

(a) Appraisal of overseas investment

decisions

(i) alternative forms of foreign

investment

(ii) the impact of overseas taxation

(basic principles only)

(iii) overseas cost of capital and

capital structure

(iv)forecasting future exchange rates

(v) political risk.

(b) Raising capital overseas

(i) international capital markets

including the Euromarkets

(ii) overseas domestic capital markets

(iii) international banking.

(c) Managing financial resources within

a multinational group

(i) financial control within a group

of companies

(ii) international cash management

(iii) international transfer pricing

(iv) performance measurement and

evaluation.

(d) Management of international trade

(i) the management of the risks of

international trade

(ii) the finance of international trade.


(a) Ethics and business conduct, including

international ethical considerations.

EXCLUDED TOPICS






• investment decisions

• risk analysis

• global financial management

• treasury management

• financial forecasting.


SYLLABUS


comprising a mix of computational and

discursive elements. The core questions

will normally be in the form of a case study

or case scenario.

Key areas of the syllabus will always be

tested in the compulsory questions, and

may be tested in the elective questions.

Number

of marks




100




RELEVANT TEXTS




listed below:


publisher

Contact number: +44 (0)118 989 0629.


foulkslynch

PAGE 183



International

Contact number: +44 (0)141 880 6469.


BPP

Contact number: +44 (0)20 8740 2222.



general texts useful:

R H Pike, C W Neale Corporate Finance

and Investment FT/Prentice Hall

ISBN 0273651382

Richard Brealey, Stewart Myers Principles

of Corporate Finance McGraw Hill ISBN

007115144-3

Glen Arnold Corporate Financial

Management FT/Prentice Hall ISBN

0273687263

For international aspects of the syllabus:

I Demirag, S Goddard Financial

Management for International Business

McGraw Hill ISBN 0077078691

or

D. Eiteman, A. Stonehill, M. Moffett

Multinational Business Finance ISBN

032120470-0

Students wishing to broaden their

understanding of Paper 3.7 are

recommended to consider:

STUDY SESSIONS

1 & 2 Objectives and Corporate

Governance

(a) Objectives of organisations

(i) identify the possible aims and

objectives of organisations, both

profit seeking and non-profit

seeking.

(ii) discuss the impact of alternative

objectives for business planning.

(iii) identify key stakeholders of

organisations including

shareholders, lenders, directors,

employees, customers,

suppliers and the

government and the

importance of each group of

stakeholders to organisations.

(iv)be aware of different

environmental issues that may

influence corporate objectives

and governance.

(b) Conflicts of interest and their

resolution

(i) describe the goals of different

interest groups.

(ii) identify directors’ powers and

behaviour, including the

significance of creative

accounting, off-balance sheet

finance and the influence of the

threat of take-over.

(iii) understand the principles of

agency theory and their

contribution to the debate on

governance.

(iv) understand the potential for

conflict between owners,

directors, managers and other

interest groups.

(v) discuss the meaning of goal

congruence, and understand how

it might be achieved through the

use of alternative reward systems

including share option schemes

and profit related pay.

(c) Corporate Governance

(i) understand the significance of

changing share ownership

patterns for the company.

(ii) define the meaning of corporate

governance from a UK

perspective and briefly contrast

between UK practices and those

of other countries especially the

USA, Continental Europe and the

Far East.

(iii) understand the debate regarding

corporate governance, including

developments from the Cadbury,

J Stern, D Chew (eds) The Revolution in

Corporate Finance Blackwell

ISBN 0631185542.



student accountant and journals such as

the Journal of Applied Corporate Finance.

PAGE 184


Greenbury and Hampel reports.

(d) The implications of corporate

governance for organisations

(i) identify the role of auditors, audit

committees, remuneration

committees, non-executive

directors etc. in corporate

governance.

(ii) discuss the role of non-executive

directors, administrators etc. with

respect to the organisation.

(iii) discuss the possible effects of

corporate governance on

corporate financial strategy.

3 & 4 Strategies

(a) Strategy formulation

(i) understand how business plans

are developed and analysed to

meet specified objectives.

(ii) analyse past, current and

expected future performance of

the organisation through ratios

and other techniques to provide

relevant information for business

planning.

(iii) compare actual and expected

performance, highlighting areas

for further investigation.

(iv) understand the relationship

between short-term and long-

term financial planning, and the

potential conflict between short-

term and long-term

objectives.

(b) Expansion and market maintenance

strategies

(i) describe alternative strategies for

long-term growth, organic growth

versus external growth, and the key

dimensions of strategy that need

to be addressed if a business is

considering organic growth and/or

the maintenance of market share.

(ii) describe top down versus bottom

up planning systems.

(iii) understand the use of budgets to

influence the success of financial

planning.

(iv) discuss the relationship of

investment decisions to long-term

planning.

(v) review the nature of financial

control. The three levels of

control: strategic, tactical and

operational.

5 & 6 The valuation of securities

(a) Understand models for the valuation

of shares, including dividend growth

models, earnings growth models,

Shareholder Value Added (SVA),

Economic Value Added (EVA), and

Market Value Added (MVA) and use

such models to estimate value from

given information.

(b) Be aware of the theoretical and

practical limitations of such models.

(c) Discuss the relevance of accounting

(d) Information to share valuation.

(e) Be aware of practical influences on

share price, including reasons why

share prices differ from their

theoretical values, including the

evidence for market efficiency.

(f) Understand and apply models for the

valuation of debt and other

securities.

(g) Understand the meaning of free cash

flow and estimate the relevant free

cash flow for use in financial

planning and valuing companies.

7 & 8 Investment decisions

(a) Net present value

(i) revise NPV analysis, including

the identification of relevant cash

flows, and the impact of price

level changes and taxation.

(ii) understand the significance of

market efficiency to financial

decision-making based upon

NPV.

(b) Portfolio theory

(i) understand the benefits of

portfolio diversification.

(ii) estimate the risk and return of

portfolios.

(iii) understand the meaning of mean-

variance efficiency for two asset

portfolios and portfolios of

many assets, efficient portfolios

and the efficient frontier.

(iv) understand the concept of utility

and its importance to portfolio

selection.

(v) explain portfolio selection when

PAGE 185


both risky and risk free assets

are available.

(vi) discuss the nature and

significance of the Capital

Market Line.

(vii) discuss the relevance of

portfolio theory to practical


(viii) discuss the limitations of

portfolio theory.

9 The Capital Asset Pricing Model

(a) Understand the meaning and

significance of systematic and

unsystematic risk.

(b) Discuss the Security Market Line.

(c) Understand what is meant by alpha

and beta factors, their interpretation

and how they are calculated.

(d) Discuss the problems of using

historic data as the basis for future

decision-making, and evidence of

the stability of beta over time.

(e) Describe the assumptions of CAPM.

(f) Understand the uses of the model in


(g) Discuss the limitations of the model,

including some of the instances

when it does not perform as

expected, (e.g. low beta investments,

low PE investments, day of week

effects etc.)

10 The cost of capital

(a) Estimate the cost of equity, using the

CAPM and dividend valuation models.

(b) Estimate the cost of debt, for both

redeemable and irredeemable debt.

(c) Understand the weighted average

cost of capital of a company, and

how it is estimated.

(d) Discuss the theories of Modigliani

and Miller including their

assumptions, and the value and

limitations of their theories.

(e) Discuss alternative theories of

capital structure including the State

Trade off. Pecking Order and

Behavioural theories.

(f) Evaluate the impact of varying

capital structures on the cost of

capital.

(g) Estimate the cost of capital for

individual investments and divisions,

including use of the ‘pure play’

method with ungearing and

regearing beta.

(h) Discuss the relevance of the cost of

capital for unlisted companies and

public sector organisations.

(i) Explain the practical problems of

estimating an appropriate discount

rate, and understand the margin of

error that is involved in cost of

capital estimates.

11 Adjusted present value and options

(a) Adjusted present value

(i) understand the interaction of

investment and financing

decisions

(ii) understand the adjusted present

value technique of investment

appraisal including how to

estimate the base case NPV and

the financing side effects of an

investment.

(iii) discuss the practical problems of

using the APV technique.

(iv) discuss alternatives to the

capital asset pricing model,

including the Arbitrage Pricing

Theory. (N.B. detailed knowledge

is not required)

(b) Options embedded in investments

(i) understand the types of option

that might be embedded in a

capital investment decision, and

the limitations of NPV analysis

in valuing such options.

12 Mergers and acquisitions

(a) Understand the arguments for and

against mergers and acquisitions.

(b) Contrast merger and acquisition

activity in the UK and USA with

activity in continental Europe and

Japan, and discuss the implications

of the differences that exist.

(c) Describe the alternative strategies and

tactics of mergers and acquisitions.

(d) Discuss how possible acquisition

targets may be identified using

financial or other information.

(e) Estimate the value of potential target

companies.

(f) Distinguish between the various

methods of financing mergers and

PAGE 186


acquisitions – cash, debt, equity and

hybrids – and assess the

attractiveness of different financing

alternatives to vendors.

(g) Evaluate the various defences

against take-overs, and be aware of

any restrictions on their use as

specified by the City Code.

(h) Identify key issues that influence the

success of acquisitions, and

recommend appropriate actions for a

given situation.

(i) Understand the importance of post-

audit and monitoring of post-

acquisition success.

13 & 14 Corporate reorganisation

(a) Divestments

(i) describe the nature of, and

reasons for, divestments.

(ii) describe ‘unbundling’and ‘de-

merging’ of quoted companies.

(iii) evaluate, using given

information, whether or not

divestment is likely to be

beneficial.

(b) Management buy-outs and buy-ins

(i) discuss the advantages of buy-

outs, and understand the issues

that a management team should

address when preparing a buy-

out proposal.

(ii) identify situations in which a

management buy-out is likely to

offer the best value for a

disposer.

(iii) evaluate alternative sources of

finance for buy-outs.

(iv) assess the viability of buy-outs

from the viewpoint of both the

buy-out team and the financial

backers.

(v) identify the advantages and

disadvantages of management

buy-ins.

(c) Capital reconstruction schemes

(i) identify and justify when a

capital reconstruction may be

required or appropriate.

(ii) be aware of the importance of

taking into account the interests

of the various suppliers of capital

in a reconstruction situation.

(iii) formulate a feasible

reconstruction from given

information.

(d) Going private

(i) understand the arguments for

and against a quoted company

going private

(e) Share repurchases

(i) be aware of the regulations

regarding share repurchases

(ii) understand the possible effect of

share repurchases on share price

(iii) practise a detailed investment

appraisal question or mini-case.

15 Interest rate and foreign exchange risk

(a) Be aware of recent international

volatility of interest rates and

exchange rates.

(b) Describe the main instruments that

are available to help manage the

volatility of such rates.

(c) Identify the interest rate and foreign

exchange exposure faced by an

organisation.

(d) Explain the meaning of the term

structure of interest rates, including

the forms of the yield curve and the

expectations, liquidity preference

and market segmentation theories.

(e) Understand the significance of yield

curves to financial managers.

(f) Explain the workings of the foreign

exchange markets, types of

quotation, spot and forward rates.

(g) Discuss the types of currency risk-

transaction, translation and

economic exposure, and their

importance to companies.

16, 17 & 18 Hedging risk

(a) Hedging Strategies

(i) evaluate alternative strategies

that companies might adopt with

respect to interest rate and

currency exposure.

(ii) discuss and evaluate traditional

methods of currency risk

management, including currency

of invoice, leading and lagging,

netting, matching, and internal

asset and liability management.

(iii) evaluate hedging strategies using

forward foreign exchange

PAGE 187


contracts.

(b) Futures markets and contracts

(i) explain the nature of futures

contracts.

(ii) discuss the use of margin

requirements and the functions of

futures Clearing Houses.

(iii) explain how price movements

are recognised within futures

markets.

(iv) describe the major interest rate

futures (short-term and long

term) and currency futures

contracts.

(v) understand and estimate basis

and basis risk.

(vi)evaluate hedging strategies with

both interest rate and currency

futures using given information.

(vii) contrast the use of futures with

forward contracts, FRAs etc.

(c) Options

(i) describe the main features of

options including puts and calls,

the exercise price, American and

European options, in and out of

the money.

(ii) differentiate between traded

options and over-the-counter

(OTC) options.

(iii) discuss the determinants of

option prices, including the

Black-Scholes model and its

limitations.

(iv) use the Black-Scholes model to

price basic call and put options,

including put-call parity.

(v) explain the nature of the ‘Greeks’:

delta, gamma, vega, theta and

rho and their significance to

hedging using options.

(vi)undertake a basic delta hedge.

(vii) explain the advantages and

disadvantages of options compared

to futures.

(viii) describe the various types of

interest rate options, including

short-term options, caps, collars

and floors, and the nature of

currency options.

(ix)be aware of the nature and

benefits of low cost or zero cost

options.

(x) evaluate alternative hedging

scenarios using interest rate and

currency options.

(d) SWAPS

(i) describe nature of interest rate

and currency swaps.

(ii) understand the value of swaps to

the corporate treasurer.

(iii) understand the role of banks in

swap activity.

(iv) describe the various types of risk

that are associated with swaps.

(v) evaluate hedging scenarios using

swaps and swaptions.

(e) Forward rate agreements (FRAs)

(i) understand the nature of FRAs

and how their prices are quoted.

(ii) evaluate an interest hedge using

FRAs

(f) Financial Engineering

(i) understand how various derivative

products may be combined to

financially engineer products

suitable for risk management (basic

knowledge only).

(ii) describe hybrid forms of

instruments such as swaptions.

19 Treasury management and financial

forecasting -Short-term financial

planning

(a) Understand the information

needs of short-term financial

planning and how short-term

financial plans might be developed.

(b) Generate a short-term financial

plan from given information.

(c) Explain how budgeting, monitoring

and controlling cash flows, including

pricing, repaying debt etc. may be

used to meet short and medium term

financial objectives.

(d) Discuss the methods of financing

short-term and long-term

investment including temporary

financing for mergers and

acquisitions 5a.

20 The treasury function

(a) Role of Treasury Function

(i) understand the key activities

undertaken by treasury managers

(ii) understand the arguments for

and against centralised treasury

management

(b) Corporate dividend policy

(i) describe the practical influences

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on dividend policy, including the

possible effects of both corporate

and personal taxation.

(ii) discuss the role of dividends as

signals of future prospects.

(iii) discuss the alternative

arguments with respect to the

effect of dividend policy on share

prices.

21 International Trade

(a) The Global Economic Environment:

Multinational companies and trends

in global competition.

(i) Understand the nature, size and

significance of multinational

companies in the world economy.

(ii) discuss the influence of exchange

rates, international capital

markets and changes in global

competition patterns on the

strategies of multinational

companies, with particular

reference to the EU, USA and

other major countries.

(b) International trade and protectionism

(i) understand the theory and

practice of free trade, and the

problems of protectionism,

through tariff and non-tariff

barriers.

(ii) describe the major trade

agreements and common

markets (the European

Union, ASEAN,

North American Free Trade Area

etc.)

(iii) understand the nature and

significance of the balance of

payments and the possible

effects of national balance of

payments problems on the

financial decisions of companies.

(iv) explain the objectives and

function of the World Trade

Organisation (WTO).

Self study

Most of these items, especially

where descriptions of the

institutional framework is concerned,

could be undertaken by self-study.

22 International finance

(a) The international financial system

(i) understand the role of the major

international financial

institutions, including the IMF,

The Bank for International

Settlements and the

International Bank for

Reconstruction and Development

(The World Bank)

(ii) understand economic relations

between developed and

developing countries, including

the nature of the ‘Global Debt‘

problem and its effects on

relations between developed and

developing countries.

(iii) be aware of the role of

international financial markets

and institutions in the global debt

problem, and the effect of the

problem on multinational

companies and international

banks.

(iv) be aware of the methods that

have been suggested for dealing

with the problem.

(b) Exchange rate determination

(i) be aware of the major influences,

economic and otherwise, on

exchange rates.

(ii) discuss the relationship between

foreign exchange rates and

interest rates in different

countries.

(iii) explain the meaning and

significance of the purchasing

power parity theory.

(iv) discuss whether exchange rates

may be successfully forecast

using modelling or other

techniques.

(v) describe the major developments

in exchange rate systems since

Bretton Woods, including the

introduction of a single currency

in the European Union

(vi) be aware of the different types of

exchange rate system that exist

(e.g. fixed, floating, crawling peg,

currency bloc, currency board)

and the influence of different

exchange rate systems on

exchange rates.

(vii) understand the meaning and

significance of financial contagion

with respect to exchange rate

movements.

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23 & 24 Appraisal of overseas

investment decisions

(a) International operations

(i) describe the forms of entity that

are available for international

operations, including the relative

merits of branch, subsidiary, joint

venture, and licensing.

(ii) describe the factors that might

influence the strategic plans of

multinational companies.

(iii) be aware of the barriers to

market entry and exit.

(iv) understand how multinationals

might achieve and maintain

competitive advantage.

(b) Foreign direct investment

(i) discuss the additional

complexities of foreign direct

investment.

(c) International capital budgeting

(i) estimate the international cost of

capital for an organisation, using

the CAPM.

(ii) discuss how adjusted present

value (APV) might be used in

international investment

appraisal.

(iii) discuss the impact of blocked

funds and restrictions on the

remittance of funds to the parent

company, and the use of

royalties, management charges

etc. to avoid restrictions on

remittances

(iv) illustrate the effect of taxation

on international investment,

including the possibility of

double taxation.

(v) discuss the nature and possible

use of tax havens in international

tax planning

(d) The international capital structure

decision.

(i) discuss the factors that influence

the type of finance used in

international operations.

(ii) describe the strategic

implications of international

financing, with respect both to

the type of finance used, and

the currency in which the

financing is denominated.

(iii) undertake a detailed appraisal of

an international capital investment

proposal using given information.

This could be either by organic

growth or acquisition.

(e) Political risk

(i) discuss the possible forms and

implications of political risk and

its importance to the investment

decision process.

(ii) discuss how a company might

forecast and attempt to manage

political risk.

25 Raising capital overseas

(a) International capital markets

(i) describe the nature and

development of the Euromarkets,

including the Eurocurrency,

Eurobond and Euroequity

markets.

(ii) explain the types of financing

instruments that are available to

corporate treasurers on the

Euromarkets, for both borrowing

and financial investment.

(iii) understand the role of domestic

capital markets, especially stock

exchanges, in financing the

activities of multinational

companies.

(b) International banking

(i) understand the workings of

international money markets.

(ii) outline the major factors affecting

thedevelopment of international

banking.

(iii) understand the role of

international banks in

international finance, including

international bank lending

through syndication and multi-

option facilities and other means.

26 Financial control within a multinational

group of companies

(a) The treasury function

(i) discuss the merits of defining the

treasury as a cost centre or profit

centre.

(ii) discuss the arguments for the

centralisation versus

decentralisation of international

treasury activities.

PAGE 190


(b) International cash management

(i) describe the main forms of

international cash transfer

mechanisms.

(ii) describe the short-term

investment opportunities that

exist in international money

markets and in international

marketable securities.

(iii) discuss the benefits of

centralised depositories and

international holding companies.

(iv) discuss and evaluate how

multilateral netting might be of

benefit to multinationals.

(c) International transfer pricing

(i) explain the importance of transfer

pricing to multinational

companies.

(ii) understand the legal regulations

affecting transfer pricing,

particularly with respect to the

attitude of tax authorities.

(iii) discuss the use of tax havens to

try to maximise the benefits of

transfer pricing.

(iv) explain the potential adverse

motivational effects of transfer

pricing on individual subsidiaries

or divisions.

(d) Performance measurement

(i) describe the guidelines

appropriate to the regular

financial reports required from

overseas operations.

(ii) evaluate the performance of all

or part of an international

group of companies using ratio

and other forms of analysis.

27 & 28 International trade and ethics

(a) The management of international

trade

(i) advise clients on the alternative

methods of exporting and

importing.

(ii) understand the risks of foreign

trade, currency, credit /

commercial, political, physical

and cultural.

(iii) explain the advantages and

disadvantages of using

documentary letters of credit,

bills of exchange, acceptances

etc. in foreign trade.

(iv) describe the insurance that is

available to protect against the

risks of foreign trade.

(v) describe and evaluate the sources

of finance for foreign trade,

including forfeiting and

international factoring.

(f) Describe the main features of

countertrade, and various

alternatives that exist for foreign

trade deals other than for monetary

payments.

(b) Ethics and business conduct

(i) Be aware of the major ethical

issues affecting the conduct of

business both domestically and

internationally.

ACCA Study Guide

Documents

furnished

abbas ali

centralisation

fidelity guarantee

occupational

fourth generation

standards

corporate