Paper P1 Governance, Risk and Ethics EXAM KIT - Kaplankaplan-publishing.kaplan.co.uk/SiteCollectionDocuments/acca-look... · PAPER P1 : GOVERNANCE, RISK AND ETHICS ii KAPLAN PUBLISHING

Professional Examinations Paper P1

Governance, Risk and Ethics

EXAM KIT

PAPER P1 : GOVERNANCE, R ISK AND ETHICS

i i KAPLAN PUBLISHING

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

Published by:

Kaplan Publishing UK

Unit 2 The Business Centre

Molly Millar’s Lane

Wokingham

Berkshire

RG41 2QZ

ISBN: 978-1-78415-232-1

© Kaplan Financial Limited, 2015

Printed and bound in Great Britain.

The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.

All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

Acknowledgements

The past ACCA examination questions are the copyright of the Association of Chartered Certified Accountants. The original answers to the questions from June 1994 onwards were produced by the examiners themselves and have been adapted by Kaplan Publishing.

We are grateful to the Chartered Institute of Management Accountants and the Institute of Chartered Accountants in England and Wales for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing.

KAPLAN PUBLISHING i i i

CONTENTS Page

Index to questions and answers v

Analysis of past papers xi

Exam technique xiii

Paper specific information xv

Kaplan’s recommended revision approach xix

Kaplan’s detailed revision plan xxi

Section

1 Practice questions – Section A 1

2 Practice questions – Section B 45

3 Answers to practice questions – Section A 111

4 Answers to practice questions – Section B 245

In addition to providing a wide ranging bank of real past exam questions, we have also included in this edition: • An analysis of all of the recent new syllabus examination papers. • Paper specific information and advice on exam technique. • Our recommended approach to make your revision for this particular subject as effective

as possible. This includes step by step guidance on how best to use our Kaplan material (Complete

text, pocket notes and exam kit) at this stage in your studies. • Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes

and exam technique tips from our experienced tutors. • Complementary online resources including full tutor debriefs and question assistance to

point you in the right direction when you get stuck.


iv KAPLAN PUBLISHING

You will find a wealth of other resources to help you with your studies on the following sites: www.mykaplan.co.uk www.accaglobal.com/students/

Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details, or follow the link to the feedback form in MyKaplan.

Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions.

KAPLAN PUBLISHING v

INDEX TO QUESTIONS AND ANSWERS

INTRODUCTION Paper P1: Governance, Risk and Ethics, was first tested in December 2007 under its previous name Professional Accountant. At that time it was a new paper, added to the syllabus to place ethics and governance prominently within the qualification.

Recent research and feedback from employers on ACCA's 2010 syllabus indicates risk is an important issue, especially in the current economic climate. It is therefore essential that this topic is adequately covered by the syllabus.

In the ACCA Qualification, introduced in 2007, ACCA increased the coverage of risk. However, based on employer feedback, ACCA has increased this even further in the revised syllabuses, first examined in June 2011.

To reflect this increased coverage of risk, ACCA considered it appropriate to change the name of Paper P1 from Professional Accountant to Governance, Risk and Ethics. This is a more accurate description of the syllabus content and will give employers the assurance that risk is adequately covered by the ACCA Qualification.

The paper name change came into effect June 2011.

Note that this kit contains past ACCA exam questions for this paper, which are labelled as such in the index.


vi KAPLAN PUBLISHING

KEY TO THE INDEX

PAPER ENHANCEMENTS We have added the following enhancements to the answers in this exam kit:

Key answer tips

All answers include key answer tips to help your understanding of each question.

Tutorial note

All answers include more tutorial notes to explain some of the technical points in more detail.

Tutor’s top tips

For selected questions, we ‘walk through the answer’ giving guidance on how to approach the questions with helpful ‘tips from a top tutor’, together with technical tutor notes.

These answers are indicated with the ‘footsteps’ icon in the index.

ONLINE ENHANCEMENTS

Timed question with Online tutor debrief

For selected questions, we recommend that they are to be completed in full exam conditions (i.e. properly timed in a closed book environment).

In addition to the examiner’s technical answer, enhanced with key answer tips and tutorial notes in this exam kit, online you can find an answer debrief by a top tutor that:

• works through the question in full

• points out how to approach the question

• how to ensure that the easy marks are obtained as quickly as possible, and

• emphasises how to tackle exam questions and exam technique.

These questions are indicated with the ‘clock’ icon in the index.


KAPLAN PUBLISHING vi i

Online question assistance

Have you ever looked at a question and not know where to start, or got stuck part way through?

For selected questions, we have produced ‘Online question assistance’ offering different levels of guidance, such as:

• ensuring that you understand the question requirements fully, highlighting key terms and the meaning of the verbs used

• how to read the question proactively, with knowledge of the requirements, to identify the topic areas covered

• assessing the detail content of the question body, pointing out key information and explaining why it is important

• help in devising a plan of attack

With this assistance, you should then be able to attempt your answer confident that you know what is expected of you.

These questions are indicated with the ‘signpost’ icon in the index.

Online question enhancements and answer debriefs will be available on MyKaplan:

www.mykaplan.co.uk


vi i i KAPLAN PUBLISHING

PRACTICE QUESTIONS – SECTION A Page number

Question Answer Past exam

(Adapted)

1 Manage Ltd 1 111

2 Worldwide Minerals 3 116 Dec 07 3 Hayho 5 124 Jun 12 4 Swan Hill Company 7 131 Dec 08 5 Coastal Oil 9 138 Dec 11 6 Fuel surcharges 12 146 7 AEI 13 151

8 Global-bank 14 157 Jun 09 9 Rowlands & Medeleev 16 164 Jun 08 10 Chemco 18 172 Pilot 07 11 Mary Jane 20 178 Dec 09 12 Hesket Nuclear 22 186 Jun 10 13 ZPT 25 193 Dec 10 14 Bobo Car Company 28 200 Jun 11 15 P&J 30 207 Dec 12 16 Hoppo 33 214 Jun 13 17 Wyland 35 221 Dec 13 18 Xaxa 38 230 Jun 14 19 Cheapkit 40 238 Dec 14

PRACTICE QUESTIONS – SECTION B Page number


(Adapted)

GOVERNANCE AND RESPONSIBILITY 20 Corporate governance guidelines 45 245 21 Geeland 46 248 Dec 11 22 KK 47 252 Dec 10 23 Multi-jurisdictional governance 48 255 Dec 07 24 Football club 48 260 Dec 07 25 Delcom 49 265

26 Vestel 50 267

27 Corporate governance 51 270

28 Laland 51 274 Jun 11 29 Oland 52 278 Dec 12 30 Lum Co 53 282


KAPLAN PUBLISHING ix

Page number


(Adapted)

31 Zogs 54 286 Jun 12 32 Rosh and Company 55 291 Jun 08 33 Corporate governance debate 56 294 Jun 08 34 Boom 57 297 35 Eastern Products 57 301 Pilot 07 36 TQ Company 58 304 Jun 09 37 Roles and relevance 59 307 38 Metto Mining 60 310 39 Sarbanes-Oxley 61 313 Dec 13 40 HWL 61 317 Dec 13 41 Badison 62 321 42 Chambon 63 323 Dec 14 43 NIC 64 326 Dec 14

INTERNAL CONTROL AND REVIEW 44 Ding 65 329 Dec 09 45 Tomato Bank 66 332 Jun 10 46 ABC Co 67 335 Pilot 07 47 Yaya 68 339 Dec 12 48 SPQ 68 343 49 Gluck and Goodman 69 346 Dec 08 50 YAHTY 70 350

51 Blup Co 71 355 Jun 13 52 FIS 72 359

53 RG 73 360

54 Supermarket 73 363 55 Treadway 74 366 Jun 10 56 FF Co 75 370 Pilot 07 57 Franks & Fisher 76 374 Pilot 07 58 CC & J 77 376 59 Loho 77 379 Dec 14

IDENTIFYING AND ASSESSING RISK 60 Landmass 78 382 61 Dubland 79 385 Jun 13 62 Ultra Uber 80 389 Dec 10 63 Regional police force 81 392

64 GHI Group 81 394

65 Bob Wong 82 397 Jun 14


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Page number


(Adapted)

CONTROLLING RISK 66 Chen Products 83 402 Dec 08 67 H&Z Company 84 406 Jun 09 68 Saltoc 85 410 Dec 09 69 BTS Company 86 413

70 Southern Continents Company 86 415 Dec 07 71 TASS 87 420

72 YGT 88 423 Jun 11 73 Doctors’ practice 89 427

PROFESSIONAL VALUES, ETHICS AND SOCIAL RESPONSIBILITY 74 Van Buren 90 430 Jun 08 75 Dundas 91 434 Dec 09 76 Happy and Healthy 92 438 Jun 10 77 Professional codes of ethics 93 442 Pilot 07 78 Pharma 93 444

79 Deontological ethics 94 447 80 RDC 95 449 Dec 12 81 Policy speech 96 453 Jun 09

82 INO Company 97 456

83 IFAC 98 460 84 Five ethical situations 98 464 85 Hogg Products Company 99 466 Dec 08 86 JH Graphics 100 470 Pilot 07 87 Carpets and floor coverings 101 473 88 Jojo Auditors 102 475 89 MATTI 103 479 90 Mahmood 104 481 Jun 14 91 Biggo Manufacturing 105 486 92 JGP Chemicals Ltd 106 490 Dec 10 93 Hum and Hoo 107 492 Jun 14 94 Bribery 108 496 95 Grindle 109 498

KAPLAN PUBLISHING xi

ANALYSIS OF PAST PAPERS

The table below summarises the key topics that have been tested in the examinations to date.

D07 J08 D08 J09 D09 J10 D10 J11 D11 J12 D12 J13 D13 J14 D14

Governance and responsibility

The scope of governance

Agency relationships and theories

The board of directors

Board committees

Directors' remuneration

Different approaches

Corporate governance and CSR

Reporting and disclosure

Internal control and review

Management control systems

Internal control, audit and compliance

Internal control and reporting

Management information in audit and internal control

Identifying and assessing risk

Risk and risk management process

Categories of risk

Identification, assessment and measurement of risk

Controlling risk

Targeting and monitoring risk

Controlling and reducing risk

Risk avoidance, retention and modelling

Professional values, ethics and social responsibility

Ethical theories

Different approaches to ethics and social responsibility

Professions and the public interest


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D07 J08 D08 J09 D09 J10 D10 J11 D11 J12 D12 J13 D13 J14 D14

Professional practice and codes of ethics

Conflicts of interest and the consequences of unethical behaviour

Ethical characteristics of professionalism

Social and environmental issues

KAPLAN PUBLISHING xi i i

EXAM TECHNIQUE

• Use the allocated 15 minutes reading and planning time at the beginning of the exam: – read the questions and examination requirements carefully, and – begin planning your answers. See the Paper Specific Information for advice on how to use this time for this paper.

• Divide the time you spend on questions in proportion to the marks on offer: – there are 1.8 minutes available per mark in the examination – within that, try to allow time at the end of each question to review your answer and

address any obvious issues Whatever happens, always keep your eye on the clock and do not over run on any part of any question!

• Spend the last five minutes of the examination: – reading through your answers, and – making any additions or corrections.

• If you get completely stuck with a question: – leave space in your answer book, and – return to it later.

• Stick to the question and tailor your answer to what you are asked. – pay particular attention to the verbs in the question.

• If you do not understand what a question is asking, state your assumptions. Even if you do not answer in precisely the way the examiner hoped, you should be given some credit, if your assumptions are reasonable.

• You should do everything you can to make things easy for the marker. The marker will find it easier to identify the points you have made if your answers are legible.

• Written questions: Your answer should have: – a clear structure – a brief introduction, a main section and a conclusion. Be concise. It is better to write a little about a lot of different points than a great deal about one or two points.

• Reports, memos and other documents: Some questions ask you to present your answer in the form of a report, memo, letter, press statement, briefing notes, management reporting narrative, presentation or other document. Make sure that you use the correct format – there are usually professional marks awarded for these styles, and they could be easy marks to gain here.


xiv KAPLAN PUBLISHING

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PAPER SPECIFIC INFORMATION

THE EXAM

FORMAT OF THE EXAM

Number of marks Section A: One compulsory question of 50 marks, based on a case study

scenario of several hundred words. Requirements will include several distinct tasks and will sample the syllabus broadly.

50

Section B: Two questions from a choice of three, each worth 25 marks. Short scenarios will be given, to which all questions relate, with each question likely to contain several tasks.

50

_______ 100 _______ Total time allowed: 3 hours plus 15 minutes reading and planning time.

Note that:

• Question 1 may contain requirements on any aspect of the syllabus. It will, however, always contain some aspects of ethics.

• From June 2011 onwards the examiner said “I am also introducing the possibility of introducing some simple arithmetic calculations into Paper P1 exam paper”

• Professional marks totalling 4–6 marks will usually be awarded in Section A (Question 1).

• Section B questions are likely to explore one part of the syllabus in a little more depth than Question 1. They will not, necessarily, examine only one part of the syllabus.

• Generally, at least one Section B question will be heavily focused on governance and at least one on ethics.

PASS MARK

The pass mark for all ACCA Qualification examination papers is 50%.


xvi KAPLAN PUBLISHING

READING AND PLANNING TIME Remember that all three hour paper based examinations have an additional 15 minutes reading and planning time.

ACCA GUIDANCE

ACCA guidance on the use of this time is as follows:

This additional time is allowed at the beginning of the examination to allow candidates to read the questions and to begin planning their answers before they start to write in their answer books. This time should be used to ensure that all the information and, in particular, the exam requirements are properly read and understood. During this time, candidates may only annotate their question paper. They may not write anything in their answer booklets until told to do so by the invigilator.

KAPLAN GUIDANCE

Since there is a choice of questions in Section B, you must decide which questions to attempt, and in which order.

During the 15 minutes of reading time you should be able to review the questions in Section B and decide which ones are most appealing. All students have different strengths and preferred topics, so it is impossible to give general advice on which questions should be chosen. When making this choice ensure that you are comfortable with all parts of the questions.

In relation to paper P1, we recommend that you take the following approach with your reading time:

• Skim through Section B, assessing the level of difficulty of each question. Try to decide if there is one question that looks very unappealing and ignore it straight away.

• If you haven’t managed to eliminate one question immediately, have a detailed look at the requirements for each of the Section B questions. Go through each part slowly and assess how well you could score, hence enabling you to make the choice as to which two questions you will be attempting. Ignore the other question from now on.

• Now focus on the Section B questions you will be attempting. For each of the questions, review the requirements for all parts (there are often two elements to one part) and decide if there is any theory or model that will help you tackle them.

• Turn to Section A requirements. Work carefully through the requirements, ensuring that you are clear on the headings you will be using and what the verb requires you to do.

• Write down on the question paper next to the mark allocation the amount of time you should spend on each part. Do this for each part of every question.

• Read through the scenario in Section A, noting any key issues in the given information.

• Decide the order in which you think you will attempt each question:

This is a personal choice and you have time on the revision phase to try out different approaches, for example, if you sit mock exams.

PAPER SPECIF IC INFORMATION

KAPLAN PUBLISHING xvi i

A common approach is to tackle the question you think is the easiest and you are most comfortable with first.

Others may prefer to tackle the longest question first, or conversely leave them to the last.

It is usual, however, that students tackle their least favourite topic and/or the most difficult question in their opinion last.

Whatever you approach, you must make sure that you leave enough time to attempt all questions fully and be very strict with yourself in timing each question.

• Now, for each question in turn, read the requirements and then the detail of the question carefully.

Always read the requirement first as this enables you to focus on the detail of the question with the specific task in mind.

Take notice of the format required (e.g. letter, memo, report, presentation – particularly since you will be awarded professional marks for these) and identify the recipient of the answer.

Plan your beginning, middle and end and the key areas to be addressed and your use of titles and sub-titles to enhance your answer.

Spot the easy marks to be gained in a question and parts which can be performed independently of the rest of the question. Make sure that you do these parts first when you tackle the question.

Don’t go overboard in terms of planning time on any one question – you need a good measure of the whole paper and an outline plan for all of the questions at the end of the 15 minutes.

With your plan of attack in mind, start answering your chosen question with your plan to hand, as soon as you are allowed to start.

Always keep your eye on the clock and do not over run on any part of any question!

DETAILED SYLLABUS The detailed syllabus and study guide written by the ACCA can be found at:

www.accaglobal.com/students/


xvi i i KAPLAN PUBLISHING

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KAPLAN’S RECOMMENDED REVISION APPROACH

QUESTION PRACTICE IS THE KEY TO SUCCESS Success in professional examinations relies upon you acquiring a firm grasp of the required knowledge at the tuition phase. In order to be able to do the questions, knowledge is essential.

However, the difference between success and failure often hinges on your exam technique on the day and making the most of the revision phase of your studies.

The Kaplan complete text is the starting point, designed to provide the underpinning knowledge to tackle all questions. However, in the revision phase, pouring over text books is not the answer.

Kaplan Online fixed tests help you consolidate your knowledge and understanding and are a useful tool to check whether you can remember key topic areas.

Kaplan pocket notes are designed to help you quickly revise a topic area, however you then need to practise questions. There is a need to progress to full exam standard questions as soon as possible, and to tie your exam technique and technical knowledge together.

The importance of question practice cannot be over-emphasised.

The recommended approach below is designed by expert tutors in the field, in conjunction with their knowledge of the examiner and their recent real exams.

The approach taken for the fundamental papers is to revise by topic area. However, with the professional stage papers, a multi topic approach is required to answer the scenario based questions.

You need to practise as many questions as possible in the time you have left.

OUR AIM Our aim is to get you to the stage where you can attempt exam standard questions confidently, to time, in a closed book environment, with no supplementary help (i.e. to simulate the real examination experience).

Practising your exam technique on real past examination questions, in timed conditions, is also vitally important for you to assess your progress and identify areas of weakness that may need more attention in the final run up to the examination.

In order to achieve this we recognise that initially you may feel the need to practise some questions with open book help and exceed the required time.

The approach below shows you which questions you should use to build up to coping with exam standard question practice, and references to the sources of information available should you need to revisit a topic area in more detail.

Remember that in the real examination, all you have to do is:

• attempt all questions required by the exam

• only spend the allotted time on each question, and

• get them at least 50% right!

Try and practise this approach on every question you attempt from now to the real exam.


xx KAPLAN PUBLISHING

EXAMINER COMMENTS We have included the examiner’s comments to specific examination questions in this kit for you to see the main pitfalls that students fall into with regard to technical content.

However, too many times in the general section of the report, the examiner comments that students had failed due to:

• “failure to read the question carefully enough”

• “failure to answer at the level of the verbs used in the questions”

• “expecting to be able to answer the exam using ‘book work’ or ‘rote learning’” and

• not appreciating that “marks will not be awarded for non-case based answers if this was the requirement of the question”.

Good exam technique is vital.

KAPLAN PUBLISHING xxi

THE KAPLAN PAPER P1 REVISION PLAN

Stage 1: Assess areas of strengths and weaknesses

Stage 2: Practice questions Follow the order of revision of topics as recommended in the revision table plan below and attempt the questions in the order suggested.

Try to avoid referring to text books and notes and the model answer until you have completed your attempt.

Try to answer the question in the allotted time.

Review your attempt with the model answer and assess how much of the answer you achieved in the allocated exam time.

Comfortable with the technical content

Not comfortable with the technical content

Read the relevant chapter(s) in Kaplan’s Complete Text

Attempt the Test your understanding

examples if unsure of an area

Attempt appropriate Online Fixed Tests

Review the pocket notes on this area

Determine whether or not the area is one with which you are comfortable

Review the topic listings in the revision table plan below


xxi i KAPLAN PUBLISHING

Fill in the self-assessment box below and decide on your best course of action. Note that:

The ‘footsteps questions’ give guidance on exam techniques and how you should have approached the question.

The ‘clock questions’ have an online debrief where a tutor talks you through the exam technique and approach to that question and works the question in full.

Stage 3: Final pre-exam revision

We recommend that you attempt at least one three hour mock examination containing a set of previously unseen exam standard questions.

It is important that you get a feel for the breadth of coverage of a real exam without advanced knowledge of the topic areas covered – just as you will expect to see on the real exam day.

Ideally this mock should be sat in timed, closed book, real exam conditions and could be:

• a mock examination offered by your tuition provider, and/or

• the last real examination paper (available shortly afterwards on MyKaplan with ‘enhanced walk through answers’ and a full ‘tutor debrief’).

Comfortable with question attempt Not comfortable with question attempts

Only revisit when comfortable with questions on all topic areas

Focus on these areas by: • Reworking test your understanding

examples in Kaplan’s Complete Text • Revisiting the technical content from

Kaplan’s pocket notes • Working any remaining questions on

that area in the exam kit • Reattempting an exam standard

question in that area, on a timed, closed book basis

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Ch

apte

r

Pock

et

note

Ch

apte

r

Que

stio

ns

to a

ttem

pt

Tuto

r gui

danc

e Da

te

atte

mpt

ed

Self-

asse

ssm

ent

Inte

rnal

con

trol

and

revi

ew

− in

tern

al c

ontr

ol

syst

ems

9 9

Q42

Q

44

Q46

Inte

rnal

con

trol

s has

bee

n ex

amin

ed

freq

uent

ly; s

omet

imes

in a

theo

ry q

uest

ion,

of

ten

requ

iring

app

licat

ion.

It i

s gen

eral

ly

part

of a

que

stio

n w

ith e

ither

aud

it or

risk

. Q

42 (a

) is g

ood

prac

tice

of th

e th

eory

in th

e ar

ea (t

ry it

late

r – o

nce

you

have

revi

sed

audi

t) w

ith Q

44 a

nd Q

46 m

ovin

g on

to a

n ap

plic

atio

n ty

pe q

uest

ion.

− in

form

atio

n re

quire

men

ts

9 9

Q47

Th

e to

pic

is ra

rely

exa

min

ed, f

ocus

sing

on

the

info

rmat

ion

need

s of m

anag

emen

t in

cont

rol,

risk

man

agem

ent a

nd re

view

. Q45

pr

ovid

es p

ract

ice

in th

is ar

ea.

− au

dit a

nd

com

plia

nce

10 (a

nd

part

of 6

) 10

(and

pa

rt o

f 6)

Q43

Q

42

Q43

cov

ers a

rang

e of

topi

cs w

ithin

this

area

. N

ote

the

over

lap

with

eth

ical

thre

ats i

n pa

rt (d

).

Q42

(c) p

rovi

des p

ract

ical

app

licat

ion

to a

gi

ven

scen

ario

. Try

Q42

in fu

ll an

d pr

actis

e yo

ur ti

me

man

agem

ent.

Iden

tifyi

ng a

nd a

sses

sing

risk

−

iden

tifyi

ng ri

sk

11

11

Q11

(b)

Q4(

b)

Risk

iden

tific

atio

n is

usua

lly a

sked

in a

bro

ad

ques

tion

requ

iring

you

to lo

ok w

ithin

a

scen

ario

for e

xam

ples

of r

isks –

this

can

be

seen

in Q

11 (b

). Ri

sk c

lass

ifica

tions

are

an

alte

rnat

ive

way

of

addr

essin

g th

e su

bjec

t, as

seen

in Q

4 (b

).

PAPE

R P

1 :

GO

VER

NA

NCE

, R

ISK

AN

D E

THIC

S

xxvi

KA

PLA

N P

UB

LISH

ING

Topi

c Co

mpl

ete

Text

Ch

apte

r

Pock

et

note

Ch

apte

r

Que

stio

ns

to a

ttem

pt

Tuto

r gui

danc

e Da

te

atte

mpt

ed

Self-

asse

ssm

ent

− ris

k as

sess

men

t 11

11

Q

9(b)

&(c

) Q

9 (b

)&(c

) loo

ks a

t the

nex

t sta

ges o

f the

risk

m

anag

emen

t pro

cess

, risk

ass

essm

ent,

requ

iring

a th

eore

tical

disc

ussio

n an

d th

en

appl

icat

ion

of th

e m

etho

d. T

his i

s a g

ood

ques

tion

to p

ract

ise in

full.

It

is us

eful

to b

e aw

are

of th

e ov

eral

l risk

m

anag

emen

t pro

cess

, but

be

prep

ared

for

ques

tions

to fo

cus o

n ju

st o

ne a

spec

t or

stag

e.

− co

ntro

lling

risk

12

(and

pa

rt o

f 6)

12 (a

nd

part

of

6)

Q54

Q

55

Q57

Q

58

Q59

Q

60

The

topi

cs in

this

area

tend

to b

e ex

amin

ed

toge

ther

in a

sing

le q

uest

ion.

Que

stio

n 54

lo

oks a

t risk

man

agem

ent s

trat

egie

s (a

popu

lar q

uest

ion)

. In

addi

tion

Q55

(c) l

ooks

as

the

conc

ept o

f em

bedd

ing

risk.

Q58

is

addi

tiona

l pra

ctic

e on

risk

man

agem

ent

stra

tegi

es.

Q59

and

Q60

pro

vide

pra

ctic

e on

the

over

all

risk

man

agem

ent p

roce

ss a

long

with

a

coup

le o

f oth

er sp

ecifi

c to

pics

– tr

y th

ese

ques

tions

in fu

ll, to

tim

e.

Prof

essi

onal

val

ues a

nd e

thic

s −

CSR

8 8

Q35

CS

R pu

lls o

n th

e go

vern

ance

and

eth

ics

sylla

bus a

reas

. It

has r

arel

y be

en e

xam

ined

di

rect

ly, b

ut is

form

ing

a sig

nific

ant p

art o

f th

e re

ality

of t

he b

usin

ess e

nviro

nmen

t. Q

37(c

) pro

vide

s pra

ctic

e in

this

area

.

KAPL

AN

'S D

ETA

ILED

REV

ISIO

N P

LAN

KAPL

AN

PU

BLI

SHIN

G

xxvi

i

Topi

c Co

mpl

ete

Text

Ch

apte

r

Pock

et

note

Ch

apte

r

Que

stio

ns

to a

ttem

pt

Tuto

r gui

danc

e Da

te

atte

mpt

ed

Self-

asse

ssm

ent

− St

akeh

olde

r th

eory

8

8 Q

9(a)

Q

8(d)

St

akeh

olde

rs a

re a

n im

port

ant p

art o

f thi

s ex

am, a

nd h

ave

been

test

ed fr

eque

ntly

. Ge

nera

lly q

uest

ions

requ

ire y

ou to

iden

tify,

or

cla

ssify

stak

ehol

ders

in a

scen

ario

, and

co

nsid

er th

eir c

laim

s in

som

e m

anne

r.

Q9(

a) is

a g

ood

ques

tion

to st

art p

ract

ising

on

. Onc

e yo

u ar

e ha

ppy

with

that

, mov

e on

an

d lo

ok a

t Q8(

d) a

nd a

ttem

pt th

is in

full.

− Et

hica

l the

orie

s 13

13

Q

67(c

) Q

78(c

) Q

8(a)

Q

21

Q4(

c)

Ther

e ar

e a

num

ber o

f eth

ical

theo

ries a

nd

at le

ast o

ne p

airin

g or

mod

el is

exa

min

ed in

ev

ery

diet

, hen

ce th

ere

are

man

y qu

estio

ns

to p

ract

ise o

n.

− re

lativ

ism/a

bsol

utism

: Q67

(c)

− de

onto

logi

cal/t

eleo

logi

cal:

Q70

(c) a

nd

Q78

(c)

− Ko

hlbe

rg’s

CM

D: Q

8(a)

−

Gray

, Ow

ens a

nd A

dam

s: Q

21.

The

latt

er h

as a

ppea

red

a co

uple

of t

imes

re

quiri

ng y

ou to

vie

w so

met

hing

from

the

pers

pect

ive

of a

par

ticul

ar so

cial

stan

ce.

This

is m

ore

chal

leng

ing,

so p

ract

ise Q

4(c)

to

time

and

revi

ew th

e so

lutio

n ca

refu

lly.

PAPE

R P

1 :

GO

VER

NA

NCE

, R

ISK

AN

D E

THIC

S

xxvi

ii

KAPL

AN

PU

BLI

SHIN

G

Topi

c Co

mpl

ete

Text

Ch

apte

r

Pock

et

note

Ch

apte

r

Que

stio

ns

to a

ttem

pt

Tuto

r gui

danc

e Da

te

atte

mpt

ed

Self-

asse

ssm

ent

− Pr

ofes

siona

l and

co

rpor

ate

ethi

cs

14

14

Q67

Q

68

Q69

(b)

Q70

Q

71(a

)

An u

nder

pinn

ing

conc

ept t

o th

e ro

le o

f a

prof

essio

nal i

s tha

t of p

ublic

inte

rest

. Se

e Q

71 (a

) for

an

exam

ple

of a

rece

nt q

uest

ion

on th

is.

The

role

of t

he p

rofe

ssio

nal i

s cov

ered

wel

l in

Q67

. Thi

s is a

n ex

celle

nt b

road

que

stio

n an

d w

orth

att

empt

ing

in fu

ll to

pra

ctise

m

any

area

s. Q

69 (b

) is a

noth

er e

xam

ple

of

ques

tion

in th

is ar

ea.

Prof

essio

nal c

odes

of e

thic

s can

be

seen

in

Q70

, and

cor

pora

te c

odes

in Q

75.

− Et

hica

l dec

ision

m

akin

g 15

15

Q

4(a)

Th

e tw

o ke

y m

odel

s her

e: A

AA a

nd T

ucke

r w

ere

the

subj

ect o

f an

artic

le b

y th

e ex

amin

er.

Tuck

er w

as su

bseq

uent

ly

exam

ined

in Q

4 (a

) – a

goo

d qu

estio

n to

pr

actis

e yo

ur u

nder

stan

ding

of t

he m

odel

.

− So

cial

and

en

viro

nmen

tal

issue

s

16

16

Q10

M

any

scen

ario

s, e

spec

ially

in S

ectio

n A,

co

ntai

n so

me

envi

ronm

enta

l ref

eren

ce, s

o it

ofte

n fo

rms p

art o

f a q

uest

ion.

Q10

(e) i

s a

good

exa

mpl

e of

this.

Th

e to

pic

of e

nviro

nmen

tal a

udit

can

be

revi

ewed

in Q

80(b

), al

ong

with

som

e re

visio

n of

oth

er a

udit

type

s.

For m

any

ques

tions

the

abov

e pr

ogra

mm

e co

vers

just

som

e pa

rt, o

r par

ts, o

f the

requ

irem

ents

. Yo

u sh

ould

com

plet

e al

l que

stio

ns th

at y

ou h

ave

star

ted

as a

go

od b

asis

for f

urth

er p

ract

ice.

Not

e: N

ot a

ll of

the

ques

tions

are

ref

erre

d to

in th

e pr

ogra

mm

e ab

ove.

The

rem

aini

ng q

uest

ions

are

ava

ilabl

e in

the

kit a

nd s

houl

d be

att

empt

ed fo

r ex

tra

prac

tice

for t

hose

who

requ

ire m

ore

ques

tions

on

som

e ar

eas.

KAPLAN PUBLISHING 1

Section 1

PRACTICE QUESTIONS – SECTION A

1 MANAGE LTD

Background information

Manage Ltd is a large family-owned private company operating in the UK in the contract services sector. The principle business that Manage undertakes is project management on large, long-term building projects in the UK. Manage Ltd has no overseas customers. The company provides a complete project management service, enabling the customers to deal just with Manage Ltd. Manage deal with all sub-contractors. The business has been very successful in recent years and as a result has become a potential acquisition target for a major international company, Utopia Inc, based in the US. Utopia Inc is listed on the New York Stock Exchange and is interested in furthering its businesses in Europe.

Some of the members of the family that own Manage Ltd (the Inglesons) are keen to dispose of their shares and it is therefore expected they will sell to Utopia if a suitable price can be agreed. The managing director of Manage, Jean Smith (not in the Ingleson family), is currently negotiating with the directors of Utopia over a price for the shares. Following the negotiation Jean will make a proposal to the Ingleson family. Jean and other selected staff have already been offered positions in Utopia if the acquisition proceeds.

Financing the acquisition

Utopia Inc have a corporate policy of financing their acquisitions through loans. In previous foreign acquisitions, they have used either US or foreign loans depending on their views on economic and political factors in the US and in the foreign markets. They have no strong views on where to raise finance. They expect to need to borrow in 4 months' time to finance the acquisition.

One factor that the directors of Utopia Inc do feel needs to be considered however is that they are considering selling an existing UK division within a year and the proceeds are expected to be in the region of the acquisition price for Manage Ltd. The disposal will definitely occur after the acquisition of Manage Ltd, probably six months later.

Corporate governance

In anticipation of Manage Ltd becoming part of the Utopia Group the group CFO, Bert Bailey, has forwarded to Jean Smith a memo he sent last year to all divisional CEOs on corporate governance. He told Jean that the same process would operate for Manage Ltd, but with the dates about a year on.


2 KAPLAN PUBLISHING

MEMO

To: Divisional CFOs and CEOs

From: Bert Bailey

Subject: SOX compliance

Date: 15 January 20X4

As you are all no doubt aware, we are implementing Sarbanes-Oxley (SOX) this year. This memo summarises the timetable; more detail on the processes and procedures required will follow later.

Feb – May Document key financial reporting systems and controls. Decide key controls and report any material design weaknesses in systems;

Jun – July Divisional management to test key controls to confirm compliance and the effectiveness of the systems;

Aug – Sept Group internal audit to review documentation and testing, and report on each division to the audit committee;

Oct – Nov External audit to conduct the majority of their attestation work;

Dec Management certification and assertions as required by sections 302 and 404.

The control framework the US companies will be using is the COSO framework. Overseas companies can use a local framework, if desired, provided it is approved in advance by the group SOX project team. Documentation must be standard across the group.

Required:

(a) Explain the difference between strategic and operational risks. (10 marks)

(b) Explain the risks that could exist for Utopia in making the investment in Manage Ltd and discuss how Utopia could assess their likely impact on the company. (15 marks)

Jean Smith does not understand the memo she has been sent. She knows that Sarbanes-Oxley is the American corporate governance requirements but has not heard of any ‘control frameworks’.

(c) (i) List some of the typical requirements for corporate governance in the areas of:

• directors and the board • accountability and audit. (10 marks)

(ii) Explain the elements of an effective internal control system (such as in the COSO framework or Turnbull report) giving practical examples of how Manage Ltd could demonstrate they have met all elements. (15 marks)

(Total: 50 marks)

PRACTICE QUESTIONS – SECTION A : SECTION 1

KAPLAN PUBLISHING 3

2 WORLDWIDE MINERALS (DEC 07) Walk in the footsteps of a top tutor

The board of Worldwide Minerals (WM) was meeting for the last monthly meeting before the publication of the yearend results. There were two points of discussion on the agenda. First was the discussion of the year-end results; second was the crucial latest minerals reserves report.

WM is a large listed multinational company that deals with natural minerals that are extracted from the ground, processed and sold to a wide range of industrial and construction companies. In order to maintain a consistent supply of minerals into its principal markets, an essential part of WM’s business strategy is the seeking out of new sources and the measurement of known reserves. Investment analysts have often pointed out that WM’s value rests principally upon the accuracy of its reserve reports as these are the best indicators of future cash flows and earnings. In order to support this key part of its strategy, WM has a large and well-funded geological survey department which, according to the company website, contains ‘some of the world’s best geologists and minerals scientists’. In its investor relations literature, the company claims that:

‘our experts search the earth for mineral reserves and once located, they are carefully measured so that the company can always report on known reserves. This knowledge underpins market confidence and keeps our customers supplied with the inventory they need. You can trust our reserve reports – our reputation depends on it!’

At the board meeting, the head of the geological survey department, Ranjana Tyler, reported that there was a problem with the latest report because one of the major reserve figures had recently been found to be wrong. The mineral in question, mallerite, was WM’s largest mineral in volume terms and Ranjana explained that the mallerite reserves in a deep mine in a certain part of the world had been significantly overestimated. She explained that, based on the interim minerals report, the stock market analysts were expecting WM to announce known mallerite reserves of 4.8 billion tonnes. The actual figure was closer to 2.4 billion tonnes. It was agreed that this difference was sufficient to affect WM’s market value, despite the otherwise good results for the past year. Vanda Monroe, the finance director, said that the share price reflects market confidence in future earnings. She said that an announcement of an incorrect estimation like that for mallerite would cause a reduction in share value. More importantly for WM itself, however, it could undermine confidence in the geological survey department. All agreed that as this was strategically important for the company, it was a top priority to deal with this problem.

Ranjana explained how the situation had arisen. The major mallerite mine was in a country new to WM’s operations. The WM engineer at the mine said it was difficult to deal with some local people because, according to the engineer, ‘they didn’t like to give us bad news’. The engineer explained that when the mine was found to be smaller than originally thought, he was not told until it was too late to reduce the price paid for the mine. This was embarrassing and it was agreed that it would affect market confidence in WM if it was made public.


4 KAPLAN PUBLISHING

The board discussed the options open to it. The chairman, who was also a qualified accountant, was Tim Blake. He began by expressing serious concern about the overestimation and then invited the board to express views freely. Gary Howells, the operations director, said that because disclosing the error to the market would be so damaging, it might be best to keep it a secret and hope that new reserves can be found in the near future that will make up for the shortfall. He said that it was unlikely that this concealment would be found out as shareholders trusted WM and they had many years of good investor relations to draw on. Vanda Monroe, the finance director, reminded the board that the company was bound to certain standards of truthfulness and transparency by its stock market listing. She pointed out that they were constrained by codes of governance and ethics by the stock market and that colleagues should be aware that WM would be in technical breach of these if the incorrect estimation was concealed from investors. Finally, Martin Chan, the human resources director, said that the error should be disclosed to the investors because he would not want to be deceived if he were an outside investor in the company. He argued that whatever the governance codes said and whatever the cost in terms of reputation and market value, WM should admit its error and cope with whatever consequences arose. The WM board contains three non-executive directors and their views were also invited.

At the preliminary results presentation sometime later, one analyst, Christina Gonzales, who had become aware of the mallerite problem, asked about internal audit and control systems, and whether they were adequate in such a reserve-sensitive industry. WM’s chairman, Tim Blake, said that he intended to write a letter to all investors and analysts in the light of the mallerite problem which he hoped would address some of the issues that Miss Gonzales had raised.

Required:

(a) Define ‘transparency’ and evaluate its importance as an underlying principle in corporate governance and in relevant and reliable financial reporting. Your answer should refer to the case as appropriate. (10 marks)

(b) Explain Kohlberg’s three levels of moral development and identify the levels of moral development demonstrated by the contributions of Gary Howells, Vanda Monroe and Martin Chan. (12 marks)

(c) Critically discuss FOUR principal roles of non-executive directors and explain the potential tensions between these roles that WM’s non-executive directors may experience in advising on the disclosure of the overestimation of the mallerite reserve. (12 marks)

(d) Draft a letter for Tim Blake to send to WM’s investors to include the following:

(i) why you believe robust internal controls to be important; and

(ii) proposals on how internal systems might be improved in the light of the overestimation of mallerite at WM.

Note: Four professional marks are available within the marks allocated to requirement (d) for the structure, content, style and layout of the letter. (16 marks)

(Total: 50 marks)