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.
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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.
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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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.
INDEX TO QUESTIONS AND ANSWERS
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
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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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
Question Answer Past exam
(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
INDEX TO QUESTIONS AND ANSWERS
KAPLAN PUBLISHING ix
Page number
Question Answer Past exam
(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
Question Answer Past exam
(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
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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
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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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.
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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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%.
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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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/
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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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.
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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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
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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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
KAPL
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KAPL
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PAPE
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1 :
GO
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xxiv
KA
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arks
. Q
19 p
rovi
des c
over
age
of sh
areh
olde
r in
terv
entio
n an
d so
me
othe
r gov
erna
nce
topi
cs –
a g
ood
reca
p qu
estio
n.
KAPL
AN
'S D
ETA
ILED
REV
ISIO
N P
LAN
KAPL
AN
PU
BLI
SHIN
G
xxv
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
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.
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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.
PAPER P1 : GOVERNANCE, R ISK AND ETHICS
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)