(iii) A statement on the importance of confidentiality in the financing of the early stage working capital needsand an explanation of how this conflicts with the duty of transparency in matters of corporategovernance. (6 marks)Professional marks for layou

正确答案：
(c) The advantage to a company of keeping its working capital cycle short is that fewer resources are tied up in working capital,
thus freeing them for other purposes.
(Other answers considered on their merits)

正确答案：

(c) (i) For the secrecy option
Important developments at SHC
This is an exciting time for the management and shareholders of Swan Hill Company. The research and development
staff at SHC have made a groundbreaking discovery (called the ‘sink method’) that will enable your company to produce
its major product at lower cost, in higher volumes and at a much higher quality than our competitors will be able to
using, as they do, the existing production technology. The sink process also produces at a lower rate of environmental
emissions which, as I’m sure shareholders will agree, is a very welcome development.
When considering the options following the discovery, your board decided that we should press ahead with the
investment needed to transform. the production facilities without offering the use of the technology to competitors under
a licensing arrangement. This means that once the new sink production comes on stream, SHC shareholders can, your
board believes, look forward to a significant strengthening of our competitive position.
The business case for this option is overwhelming. By pushing ahead with the investment needed to implement the sink
method, the possibility exists to gain a substantial competitive advantage over all of SHC’s competitors. It will place SHC
in a near monopolist position in the short term and in a dominant position long term. This will, in turn, give the company
pricing power in the industry and the likelihood of superior profits for many years to come. We would expect SHC to
experience substantial ‘overnight’ growth and the returns from this will reward shareholders’ loyalty and significantly
increase the value of the company. Existing shareholders can reasonably expect a significant increase in the value of
their holdings over the very short term and also over the longer term.
Ethical implications of the secrecy option
In addition to the overwhelming business case, however, there is a strong ethical case for the secrecy option. SHC
recognises that it is the moral purpose of SHC to make profits in order to reward those who have risked their own money
to support it over many years. Whilst some companies pursue costly programmes intended to serve multiple stakeholder
interests, SHC recognises that it is required to comply with the demands of its legal owners, its shareholders, and not
to dilute those demands with other concerns that will reduce shareholder returns. This is an important part of the agency
relationship: the SHC board will always serve the best economic interests of its shareholders: its legal owners. The SHC
board believes that any action taken that renders shareholder returns suboptimal is a threat to shareholder value and an
abuse of the agency position. Your board will always seek to maximise shareholder wealth; hence our decision to pursue
the secrecy option in this case. The secrecy option offers the possibility of optimal shareholder value and because
shareholders invest in SHC to maximise returns, that is the only ethical action for the board to pursue. Happily, this
option will also protect the employees’ welfare in SHC’s hometown of Swan Hill and demonstrate its commitment to the
locality. This, in turn, will help to manage two of the key value-adding resources in the company, its employees and its
reputation. This will help in local recruitment and staff retention in future years.
(ii) For the licensing option
Important developments at SHC
Your board was recently faced with a very difficult business and ethical decision. After the discovery by SHC scientists
of the groundbreaking sink production method, we had a choice of keeping the new production technology secret or
sharing the breakthrough under a licensing arrangement with our competitors. After a lengthy discussion, your board
decided that we should pursue the licensing option and I would like to explain our reasons for this on both business and
ethical grounds.
In terms of the business case for licensing, I would like shareholders to understand that although the secrecy option may
have offered SHC the possibility of an unassailable competitive advantage, in reality, it would have incurred a number
of risks. Because of the speed with which we would have needed to have acted, it would have necessitated a large
increase in our borrowing, bringing about a substantial change in our financial structure. This would, in turn, increase
liquidity pressures and make us more vulnerable to rising interest rates. A second risk with the secrecy option would
involve the security of the sink technology ‘secret’. If the sink process was leaked or discovered by competitors and
subsequently copied, our lack of a legally binding patent would mean we would have no legal way to stop them
proceeding with their own version of the sink process.
As well as avoiding the risks, however, the licensing option offers a number of specific business advantages. The royalties
from the licences granted to competitors are expected to be very large indeed. These will be used over the coming years
to extend our existing competitive advantage in the future. Finally, the ‘improvement sharing’ clause in the licensing
contract will ensure that the sink process will be improved and perfected with several manufacturers using the
technology at the same time. SHC’s sink production may, in consequence, improve at a faster rate than would have
been the case were we to have pursued the secrecy option.
Ethical implications of the licensing option
In addition to the business case, there is also a powerful ethical case for the decision we have taken. As a good,
responsible corporate citizen, Swan Hill Company acknowledges its many stakeholders and recognises the impacts that
a business decision has on others. Your board recognises that in addition to external stakeholders having influence over
our operations, our decisions can also affect others. In this case, we have carefully considered the likelihood that keeping
the new technology a secret from our competitors would radically reshape the industry. The superior environmental
performance of the sink process over existing methods will also mean that when fully adopted, the environmental
emissions of the entire industry will be reduced. SHC is very proud of this contribution to this reduction in overall
environmental impact.
There seems little doubt that the secrecy option would have had far-reaching and unfortunate effects upon our industry
and our competitors. The licensing option will allow competitors, and their employees and shareholders, to survive. It
is a compassionate act on our part and shows mercy to the other competitors in the industry. It recognises the number
of impacts that a business decision has and would be the fairest (and most just) option given the number of people
affected.

正确答案：
(iii) ‘If we implement a reward scheme then it is bound to be beneficial for BGL’.
The statement of the manufacturing director is not necessarily correct. Indeed there is much evidence to support the
proposition that the existence of performance-related reward schemes can encourage dysfunctional behaviour. This often
manifests itself in the form. of ‘budgetary slack’ which is incorporated into budgets in anticipation of subsequent cuts by
higher levels of management or to make subsequent performance look better.

正确答案：

(iii) The marketing director is certainly correct in recognising that success is dependent on levels of service quality provided
by HFG to its clients. However, whilst the number of complaints is an important performance measure, it needs to be
used with caution. The nature of a complaint is, very often, far more indicative of the absence, or a lack, of service
quality. For example, the fact that 50 clients complained about having to wait for a longer time than they expected to
access gymnasium equipment is insignificant when compared to an accident arising from failure to maintain properly a
piece of gymnasium equipment. Moreover, the marketing director ought to be aware that the absolute number of
complaints may be misleading as much depends on the number of clients serviced during any given period. Thus, in
comparing the number of complaints received by the three centres then a relative measure of complaints received per
1,000 client days would be far more useful than the absolute number of complaints received.
The marketing director should also be advised that the number of complaints can give a misleading picture of the quality
of service provision since individuals have different levels of willingness to complain in similar situations.
The marketing director seems to accept the current level of complaints but is unwilling to accept any increase above this
level. This is not indicative of a quality-oriented organisation which would seek to reduce the number of complaints over
time via a programme of ‘continuous improvement’.
From the foregoing comments one can conclude that it would be myopic to focus on the number of client complaints
as being the only performance measure necessary to measure the quality of service provision. Other performance
measures which may indicate the level of service quality provided to clients by HFG are as follows:
– Staff responsiveness assumes critical significance in service industries. Hence the time taken to resolve client
queries by health centre staff is an important indicator of the level of service quality provided to clients.
– Staff appearance may be viewed as reflecting the image of the centres.
– The comfort of bedrooms and public rooms including facilities such as air-conditioning, tea/coffee-making and cold
drinks facilities, and office facilities such as e-mail, facsimile and photocopying.
– The availability of services such as the time taken to gain an appointment with a dietician or fitness consultant.
– The cleanliness of all areas within the centres will enhance the reputation of HFG. Conversely, unclean areas will
potentially deter clients from making repeat visits and/or recommendations to friends, colleagues etc.
– The presence of safety measures and the frequency of inspections made regarding gymnasium equipment within
the centres and compliance with legislation are of paramount importance in businesses like that of HFG.
– The achievement of target reductions in weight that have been agreed between centre consultants and clients.
(Other relevant measures would be acceptable.)

正确答案：
(iii) Trading losses may not be carried forward where, within a period of three years there is both a change in the ownership
of a company and a major change in the nature or conduct of its trade. The transfer of work from Tay Limited to Trent
Limited is likely to constitute a major change in the nature or conduct of the latter’s trade. As a consequence, any tax
losses at the date of acquisition will be forfeited. Assuming losses were incurred uniformly in 2005, the tax losses at the
date of acquisition were ￡380,000 (300,000 + 2/3 x 120,000)). This is worth ￡114,000 assuming a corporation tax
rate of 30%.
Thus, Tay Limited should not consider transferring any trade to Trent Limited until after the third anniversary of the date
of the change of ownership i.e. not before 1 September 2008. As the trades are similar, there should be little problem
in transferring work from that date onwards.

正确答案：
(b) Related matters
(i) National insurance contributions in 2007/08
The profit for the period ending 31 March 2008 is expected to be ￡1,200 (￡400 x 3).
No class 2 contributions will be due as the profit is less than the small earnings exception limit of ￡4,465.
No class 4 contributions will be due as the profit is less than the lower profits limit of ￡5,035.
Tutorial note
Adam will have paid class 1 contributions in respect of his earnings from Rheims Ltd, thus preserving his entitlement
to state benefits and pension, and therefore there is no disadvantage in claiming the small earnings exemption from
class 2 contributions.
(ii) Purchase and renovation of the theatre
The theatre is a capital purchase that does not qualify for capital allowances as it is a building but not an industrial
building. Accordingly, the cost of purchasing the theatre will not give rise to a tax deduction for the purpose of computing
AS’s taxable trading income.
The tax treatment of the renovation costs may be summarised as follows:
– The costs will be disallowed if the renovations are necessary before the theatre can be used for business purposes.
This is because they will be regarded as further capital costs of acquiring appropriate premises.
– Some of the costs may be allowable if the condition of the theatre is such that it can be used in its present state
and the renovations are more in the nature of cosmetic improvements.
(iii) VAT position
The grant of a right to occupy the theatre in exchange for rent is an exempt supply. Accordingly, as all of AS’s activities
will be regarded as one for VAT purposes, AS will become partially exempt once he begins to rent out the theatre.
AS will be able to recover the input tax that is directly attributable to his standard rated supplies, i.e. those in connection
with the supply of children’s parties. He will also be able to recover a proportion of the input tax on his overheads; the
proportion being that of his total supplies that are standard rated.
The remainder of his input tax will only be recoverable if it is no more than ￡625 per month on average and no more
than 50% of his total input tax.
If AS were to opt to tax the theatre, the right to occupy the theatre in exchange for rent would then be a standard rated
supply. AS could then recover all of his input tax, regardless of the amount attributable to the rent, but would have to
charge VAT on the rent and on any future sale of the building.
The decision as to whether or not to opt to tax the theatre will depend on:
– the amount of input tax at stake; and
– whether or not those who rent the theatre are in a position to recover any VAT charged.

正确答案：
(b) Minimising capital gains tax on the sale of the paintings
Galileo will become resident and ordinarily resident from the date he arrives in the UK as he intends to stay for more than
three years. Prior to that date he will be neither resident nor ordinarily resident such that he will not be subject to UK capital
gains tax.
Galileo should sell the paintings before he leaves Astronomeria; this will avoid UK capital gains tax completely.
Tutorial note
The gains would be taxable on the remittance basis if the paintings were sold after Galileo’s arrival in the UK. However, this
would not help Galileo to minimise the capital gains tax due as he needs to bring the sales proceeds into the UK in order
to purchase a house.

正确答案：
6 DEVELOPMENTS AND CERTIFIED CHARTERED ACCOUNTANTS
Tutorial note: The answer which follows is indicative of the range of points which might be made. Other relevant material will
be given suitable credit.
(a) IFAC’s ‘Code of Ethics for Professional Accountants’
Since its issue in 1996, IFAC’s ‘Code of Ethics for Professional Accountants’ (‘The Code’) has undergone several revisions
(1996, 1998, 2001, 2004 and 2005). IFAC holds the view that due to national differences (of culture, language, legal and
social systems) the task of preparing detailed ethical requirements is primarily that of the member bodies in each country
concerned (and that they also have the responsibility to implement and enforce such requirements).
In recognizing the responsibilities of the accountancy profession, IFAC considers its own role to be in providing guidance and
promoting harmonization. IFAC has established ‘The Code’ to provide a basis on which the ethical requirements for
professional accountants in each country should be founded.
IFAC’s conceptual approach is principles-based. It provides a route to convergence that emphasises the profession’s integrity.
This approach may be summarised as:
■ identifying and evaluating circumstances and relationships that create threats (e.g. to independence); and
■ taking appropriate action to:
– eliminate these threats; or
– reduce them to an acceptable level by the application of safeguards.
If no safeguards are available to reduce a threat to an acceptable level an assurance engagement must be refused or
discontinued.
This approach was first introduced to Section 8 of The Code, on independence, and is applicable to assurance engagements
when the assurance report is dated on or after 31 December 2004.
Further to the cases of Enron, Worldcom and Parmalat, IFAC issued a revised Code in July 2005 that applies to all professional
accountants, whether in public practice, business, industry or government2.
A member body of IFAC may not apply less stringent standards than those stated in the Code. The Code is effective from
30 June 2006.
Practicing accountants and members in business must maintain the high standards of professional ethics that are expected
by their professional bodies (such as ACCA). These developments codify current best practice in the wake of the
aforementioned recent corporate scandals.
The developments in The Code have wider application in that it:
■ applies to all assurance services (not just audit);
■ considers the standpoints of the firm and of the assurance team.
Since ACCA is a member-body of IFAC the elevation of The Code to a standard will affect all Chartered Certified Accountants.
.

正确答案：
(d) Professional accountant’s liability
Liability for reporting on PFI
Independent accountants may be required to report on PFI for many reasons (e.g. to help secure a bank loan). Such forecasts
and projections are inherently unreliable. If the forecast or projection does not materialise, and the client or lenders (or
investors) consequently sustain financial loss, the accountant may face lawsuits claiming financial loss.
Courts in different jurisdictions use various criteria to define the group of persons to whom independent accountants may be
held liable for providing a report on an inaccurate forecast or projection. The most common of these are that an accountant
is liable to persons with whom there is proximity:
(i) only (i.e. the client who engaged the independent accountant);
(ii) or whose relationship with the accountant sufficiently approaches privity;
(iii) and to persons or members of a limited group of persons for whose benefit and guidance the accountant supplied the
information or knew that the recipient of the information intended to supply it;
(iv) and to persons who reasonably can be foreseen to rely on the information.
Measures to reduce liability
As significant assumptions will be essential to a reader’s understanding of a financial forecast, the independent accountant
should ensure that they are adequately disclosed and clearly stated to be the management’s responsibility. Hypothetical
assumptions should be clearly distinguished from best estimates.
The introduction to any forecast (and/or report thereon) should include a caveat that the prospective results may not be
attained. Specific and extensive warnings (‘the actual results … will vary’) and disclaimers (‘we do not express an opinion’)
may be effective in protecting an independent accountant sued for inaccuracies in forecasts or projections that they have
reported on.
Any report to a third party should state:
■ for whom it is prepared, who is entitled to rely on it (if anyone) and for what purpose;
■ that the engagement was undertaken in accordance with the engagement terms;
■ the work performed and the findings.
An independent accountant’s report should avoid inappropriate and open-ended wording, for example, ‘we certify …’ and ‘we
obtained all the explanations we considered necessary’.
Engagement terms to report on PFI should include an appropriate liability cap that is reasonable given the specific
circumstances of the engagement.
The independent accountant may be able to obtain indemnity from a client in respect of claims from third parties. Such ‘hold
harmless’ clauses obligate the client to indemnify the independent accountant from third party claims.

正确答案：
(c) Application of ethical principles to a fraud investigation
IFAC’s Code of Ethics for Professional Accountants applies to all ACCA members involved in professional assignments,
including forensic investigations. There are specific considerations in the application of each of the principles in providing
such a service.
Integrity
The forensic investigator is likely to deal frequently with individuals who lack integrity, are dishonest, and attempt to conceal
the true facts from the investigator. It is imperative that the investigator recognises this, and acts with impeccable integrity
throughout the whole investigation.
Objectivity
As in an audit engagement, the investigator’s objectivity must be beyond question. The report that is the outcome of the
forensic investigation must be perceived as independent, as it forms part of the legal evidence presented at court. The
investigator must adhere to the concept that the overriding objective of court proceedings is to deal with cases fairly and justly.
Any real or perceived threats to objectivity could undermine the credibility of the evidence provided by the investigator.
This issue poses a particular problem where an audit client requests its auditors to conduct a forensic investigation. In this
situation, the audit firm would be exposed to threats to objectivity in terms of advocacy, management involvement and selfreview.
The advocacy threat arises because the audit firm may feel pressured into promoting the interests and point of view
of their client, which would breach the overriding issue of objectivity in court proceedings. Secondly, the investigators could
be perceived to be involved in management decisions regarding the implications of the fraud, especially where the investigator
acts as an expert witness. It is however the self-review threat that would be the most significant threat to objectivity. The selfreview
threat arises because the investigation is likely to involve the estimation of an amount (i.e. the loss), which could be
material to the financial statements.
For the reasons outlined above, The Code states that the firm should evaluate threats and put appropriate safeguards in place,
and if safeguards cannot reduce the threats to an acceptable level, then the firm cannot provide both the audit service and
the forensic investigation.
Professional competence and due care
Forensic investigations will involve very specialist skills, which accountants are unlikely to possess without extensive training.
Such skills would include:
– Detailed knowledge of the relevant legal framework surrounding fraud,
– An understanding of how to gather specialist evidence,
– Skills in the safe custody of evidence, including maintaining a clear ‘chain’ of evidence, and
– Strong personal skills in, for example, interview techniques, presentation of material at court, and tactful dealing with
difficult and stressful situations.
It is therefore essential that forensic work is only ever undertaken by highly skilled individuals, under the direction and
supervision of an experienced fraud investigator. Any doubt over the competence of the investigation team could severely
undermine the credibility of the evidence presented at court.
Confidentiality
Normally accountants should not disclose information without the explicit consent of their client. However, during legal
proceedings arising from a fraud investigation, the court will require the investigator to reveal information discovered during
the investigation. There is an overriding requirement for the investigator to disclose all of the information deemed necessary
by the court.
Outside of the court, the investigator must ensure faultless confidentiality, especially because much of the information they
have access to will be highly sensitive.
Professional behaviour
Fraud investigations can become a matter of public interest, and much media attention is often focused on the work of the
forensic investigator. A highly professional attitude must be displayed at all times, in order to avoid damage to the reputation
of the firm, and of the profession. Any lapse in professional behaviour could also undermine the integrity of the forensic
evidence, and of the credibility of the investigator, especially when acting in the capacity of expert witness.
During legal proceedings, the forensic investigator may be involved in discussions with both sides in the court case, and here
it is essential that a courteous and considerate attitude is presented to all parties.

参考答案：C

正确答案：

You will be aware of the importance of accurate resource valuation to Worldwide Minerals (WM). Unfortunately, I have to
inform. you that the reserve of mallerite, one of our key minerals in a new area of exploration, was found to have been
overestimated after the purchase of a mine. It has been suggested that this information may have an effect on shareholder
value and so I thought it appropriate to write to inform. you of how the board intends to respond to the situation.
In particular, I would like to address two issues. It has been suggested that the overestimation arose because of issues with
the internal control systems at WM. I would firstly like to reassure you of the importance that your board places on sound
internal control systems and then I would like to highlight improvements to internal controls that we shall be implementing
to ensure that the problem should not recur.
(i) Importance of internal control
Internal control systems are essential in all public companies and Worldwide Minerals (WM) is no exception. If anything,
WM’s strategic position makes internal control even more important, operating as it does in many international situations
and dealing with minerals that must be guaranteed in terms of volume, grade and quality. Accordingly, your board
recognises that internal control underpins investor confidence. Investors have traditionally trusted WM’s management
because they have assumed it capable of managing its internal operations. This has, specifically, meant becoming aware
of and controlling known risks. Risks would not be known about and managed without adequate internal control
systems. Internal control, furthermore, helps to manage quality throughout the organisation and it provides
management with information on internal operations and compliance. These features are important in ensuring quality
at all stages in the WM value chain from the extraction of minerals to the delivery of product to our customers. Linked
to this is the importance of internal control in helping to expose and improve underperforming internal operations.
Finally, internal control systems are essential in providing information for internal and external reporting upon which, in
turn, investor confidence rests.
(ii) Proposals to improve internal systems at WM
As you may be aware, mineral estimation and measurement can be problematic, particularly in some regions. Indeed,
there are several factors that can lead to under or overestimation of reserves valuations as a result of geological survey
techniques and regional cultural/social factors. In the case of mallerite, however, the issues that have been brought to
the board’s attention are matters of internal control and it is to these that I would now like to turn.
In first instance, it is clear from the fact that the overestimate was made that we will need to audit geological reports at
an appropriate (and probably lower) level in the organisation in future.
Once a claim has been made about a given mineral resource level, especially one upon which investor returns might
depend, appropriate systems will be instituted to ask for and obtain evidence that such reserves have been correctly and
accurately quantified.
We will recognise that single and verbal source reports of reserve quantities may not necessarily be accurate. This was
one of the apparent causes of the overestimation of mallerite. A system of auditing actual reserves rather than relying
on verbal evidence will rectify this.
The purchase of any going concern business, such as the mallerite mine, is subject to due diligence. WM will be
examining its procedures in this area to ensure that they are fit for purpose in the way that they may not have been in
respect of the purchase of the mallerite mine. I will be taking all appropriate steps to ensure that all of these internal
control issues can be addressed in future.
Thank you for your continued support of Worldwide Minerals and I hope the foregoing goes some way to reassure you
that the company places the highest value on its investors and their loyalty.
Yours faithfully,
Tim Blake
Chairman

正确答案：
(d) Chairman’s statement at AGM
Thank you for coming to the annual general meeting of Rowlands & Mendeleev. I would like to make a statement in response
to the concerns that a number of our investors have made in respect to our appointment as the principal contractor for the
prestigious and internationally important Giant Dam Project. We are very pleased and honoured to have won the contract but
as several have observed, this does leave us in a position of having a number of issues and risks to manage.
As a project with obvious environmental implications, the board and I wish to reassure investors that we are aware of these
implications and have taken them into account in our overall assessment of risks associated with the project.
(i) A definition of ‘sustainable development’
One investor asked if we could explain the sustainability issues and I begin with addressing that issue. According to the
well-established Brundtland definition, sustainable development is development that meets the needs of the present
without compromising the ability of future generations to meet their own needs.
This definition has implications for energy, land use, natural resources and waste emissions. In a sustainable
development, all of these should be consumed or produced at the same rate they can be renewed or absorbed so as to
prevent leaving future generations with an unwanted legacy of today’s economic activity. We believe that our involvement
in the Giant Dam Project has implications for environmental sustainability and it is to these matters that I now turn.
Tutorial note: other relevant definitions of sustainability will be equally acceptable.

正确答案：
(c) It would appear that in operating a bus service to the Western region of Geeland that GBC is fulfilling a social objective since
a contribution loss amounting to $38,400 ($230,400 – $268,800) was made as a consequence of operating the route to
the Western region during 2007. As an organisation which is partially funded by the government it is highly probable that
GBC has objectives which differ from those of TTC which is a profit-seeking organisation.
The value of a social service such as the provision of public transport can be quantified, albeit, in non-financial times. It is
possible to apply quantitative measures to the bus service itself, the most obvious ones being the number of passengers
carried and the number of passenger miles travelled.
The cost of the provision of alternative transport to the Western region might also enable a value to be placed on the current
service by GBC.
It might be possible to estimate quantitatively some of the social benefits resulting from the provision of the transport facility
to and from the Western region. For example, GBC could undertake a survey of the population of the Western region in order
to help estimate the extent to which rural depopulation would otherwise have occurred had the transport facility not been
made.
The application of the technique of cost-benefit analysis makes it possible to estimate money values for non-monetary
benefits. Social benefits can therefore be expressed in financial terms. It is highly probable that the fact that the Western region
is served by GBC will increase the attractiveness of living in a rural area, which may in turn precipitate an increase in property
values in the Western region and the financial benefit could be expressed in terms of the aggregate increase in property values
in the region as a whole.

正确答案：

 

正确答案：
(ii) The income tax implications of the proposed financing arrangements
Mr Fencer has borrowed money from a UK bank in order to make a loan to Rapier Ltd, a close company. The interest
paid by Mr Fencer to the bank will be an allowable charge on income as long as he continues to hold more than 5% of
Rapier Ltd. Charges on income are deductible in arriving at an individual’s statutory total income.
Mr Fencer will receive interest from Rapier Ltd net of 20% income tax. The gross amount of interest will be subject to
income tax at either 10%, 20% or 40% depending on whether the income falls into Mr Fencer’s starting rate, basic rate
or higher rate tax band. Mr Fencer will obtain a tax credit for the 20% income tax suffered at source.

正确答案：
(iv) Stamp duty and stamp duty land tax
– The purchase of Tethys Ltd will give rise to a liability to ad valorem stamp duty of ￡1,175 (￡235,000 x 0·5%).
The stamp duty must be paid by Saturn Ltd within 30 days of the share transfer in order to avoid interest being
charged. It is not an allowable expense for the purposes of corporation tax.

正确答案：
(c) Extent of alleged fraud – Matters to be considered
■ Details reported to police: The managing director may have made some estimate of the possible extent of the fraud in
reporting the chief accountant’s disappearance to the police.
■ The minimum loss (assuming no insurance) would be sales for the three days before he left. If not known (e.g. because
the only record of them was in the cash book) a simple estimate might be 3/20 × total recorded revenue for a typical
month.
■ The pattern of cash bankings extracted from bank statements: A falling trend starting during the year might mark the
time from which the chief accountant began to misappropriate cash.
■ Whether other managers have voiced their suspicions, if any, on the chief accountant’s behaviour. For example, if there
was any marked change in his lifestyle. (what he appeared to spend his money on, the hours he worked, etc).
■ The prior year auditor’s report was unmodified. If this was appropriate the chief accountant’s alleged fraudulent activities
may have only started in the current year.
■ The amount of fidelity insurance cover (i.e. against employees handling cash) that Indigo has taken out to meet any
claim for fraud.
■ The likelihood, if any, of recovering misappropriated amounts. For example, if the chief accountant has assets (e.g. a
house) that can be used to settle Indigo’s claims against him in the event that he is caught/successfully prosecuted.

正确答案：
(b) Matters to be considered
Tutorial note: Candidates at this level must appreciate that the matters to be considered when planning the nature and
scope of the examination are not the same matters to be considered when deciding whether or not to accept an
engagement. The scenario clearly indicates that the assignment is being undertaken by the current auditor rendering any
‘pre-engagement’/‘professional etiquette’ considerations irrelevant to answering this question.
This PFI has been prepared to show an external user, the bank, the financial consequences of Cusiter’s plans to help the bank
in making an investment decision. If Cusiter is successful in its loan application the PFI provides a management tool against
which the results of investing in the plant and equipment can be measured.
The PFI is unpublished rather than published. That is, it is prepared at the specific request of a third party, the bank. It will
not be published to users of financial information in general.
The auditor’s report on the PFI will provide only negative assurance as to whether the assumptions provide a reasonable basis
for the PFI and an opinion whether the PFI is:
■ properly prepared on the basis of the assumptions; and
■ presented in accordance with the relevant financial reporting framework.
The nature of the engagement is an examination to obtain evidence concerning:
■ the reasonableness and consistency of assumptions made;
■ proper preparation (on the basis of stated assumptions); and
■ consistent presentation (with historical financial statements, using appropriate accounting principles).
Such an examination is likely to take the form. of inquiry, analytical procedures and corroboration.
The period of time covered by the prospective financial information is two years. The assumptions for 2008 are likely to be
more speculative than for 2007, particularly in relation to the impact on earnings, etc of the investment in new plant and
equipment.
The forecast for the year to 31 December 2007 includes an element of historical financial information (because only part of
this period is in the future) hence actual evidence should be available to verify the first three months of the forecast (possibly
more since another three-month period will expire at the end of the month).
Cusiter management’s previous experience in preparing PFI will be relevant. For example, in making accounting estimates
(e.g. for provisions, impairment losses, etc) or preparing cash flow forecasts (e.g. in support of the going concern assertion).
The basis of preparation of the forecast. For example, the extent to which it comprises:
■ proforma financial information (i.e. historical financial information adjusted for the effects of the planned loan and capital
expenditure transaction);
■ new information and assumptions about future performance (e.g. the operating capacity of the new equipment, sales
generated, etc).
The nature and scope of any standards/guidelines under which the PFI has been prepared is likely to assist the auditor in
discharging their responsibilities to report on it. Also, ISAE 3400 The Examination of Prospective Financial Information,
establishes standards and provides guidance on engagements to examine and report on PFI including examination
procedures.
The planned nature and scope of the examination is likely to take into account the time and fee budgets for the assignments
as adjusted for any ‘overlap’ with audit work. For example, the examination of the PFI is likely to draw on the auditor’s
knowledge of the business obtained in auditing the financial statements to 31 December 2006. Analytical procedures carried
out in respect of the PFI may provide evidence relevant to the 31 December 2007 audit.

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(c) There are several ethical and professional issues raised in relation to the inventory count of LA Shots Co.
Firstly, it was inappropriate of Brenda Mangle to offer the incentive to the audit juniors. As she is a new manager, it may be
that she didn’t realise how the incentive would be perceived. Brenda should be informed that her actions could have serious
implications.
The offer could be viewed as a bribe of the audit juniors, and could be perceived as a self-interest independence threat as
there is a financial benefit offered to members of the audit team.
The value of the ten bottles of ‘Super Juice’ should be considered, as it is only appropriate for a member of the audit team to
accept any goods or hospitality from the audit client if the value is ‘clearly insignificant’. Ultimately it would be the decision
of the audit partner as to whether the value is clearly insignificant. It is likely that this does not constitute a significant threat
to independence, however the offer should still be referred to the audit partner.
Also, if the juniors took ten bottles of ‘Super Juice’, this could interfere with the physical count of goods and/or with cut off
details obtained at the count. The juniors should therefore have declined the offer and informed a senior member of the audit
team of the situation.
There may be a need to adequately train new members of staff on ethical matters if the juniors were unsure of how to react
to the offer.
The work performed by the juniors at the inventory count must be reviewed. The audit procedures were performed very
quickly compared to last year and therefore sufficient evidence may not have been gathered. In an extreme situation the whole
inventory count may have to be reperformed if it is found that the procedures performed cannot be relied upon.
In addition, the juniors should not have attended the audit client’s office party without the permission of the audit manager.
The party appears to have taken place during work time, when the juniors should have been completing the inventory count
procedures. The two juniors have not acted with due professional consideration, and could be considered to lack integrity.
The actions of the juniors should be discussed with them, possibly with a view to disciplinary action.
There may also be questions over whether the direction and supervision of the juniors was adequate. As the two juniors are
both recent recruits, this is likely to be the first inventory count that they have attended. It appears that they may not have
been adequately briefed as to the importance of the inventory count as a source of audit evidence, or that they have
disregarded any such briefing that was provided to them. In either case possibly a more senior auditor should have
accompanied them to the inventory count and supervised their actions.

正确答案：