(iii) Whether or not you agree with the statement of the marketing director in note (9) above. (5 marks)Professional marks for appropriateness of format, style. and structure of the report. (4 marks)

正确答案：
(d) One of the most widely used models to identify excellence is that of Peters and Waterman developed in their research into
excellent American companies. Interestingly, they agreed with Leavitt in that the companies identified as excellent, whether
they were manufacturers or service businesses, could be seen as offering an excellent service to their customers. This required
them to understand what their customers really valued and then put in place the resources, competences and decision making
processes that delivered the desired attributes. Excellence was positively associated with innovation. Using their checklist of
excellent attributes, Universal could see to be excellent in the following ways:
A bias for action – there is evidence to suggest that both Matthew and Simon are action orientated. They showed an admirable
willingness to experiment and develop a service that added significant value to the customer experience.
Hands-on, value driven – again, the commitment to deliver a quality service – one that they are totally familiar with and able
to deliver themselves – suggests that this value is communicated and shared with staff. The use of self employed installers
and sales people make this commitment particularly important.
Close to the customer – all the evidence points to a real and deep understanding of customer needs. The opportunity for the
business stems from the poor customer service provided by their small competitors. Systems are designed to achieve the ‘no
surprises’ service, which leads to significant levels of customer recommendation and advocacy.
Autonomy and entrepreneurship – there is evidence of a strong belief that individuals and teams should be encouraged to
compete with one another, but not in ways that compromise the quality of the service delivered.
Simple form. – lean staff – Universal is a small functionally managed firm. There is no evidence of creating a large
headquarters, since managers are closely involved with the day-to-day management of their function.
Productivity through people – people are key to the service provided and there is recognition that teams are crucial to the
firm’s growth and success.
Simultaneous loose-tight properties – more difficult to identify in a small company, but there is clearly commitment to shared
values and giving people the freedom to achieve results within this value framework.
These measures of excellence again show the importance of ‘hard’ and ‘soft’ factors in achieving outstanding performance.
An alternative interpretation is to see these attributes as critical success factors, which if achieved, are clearly linked to key
performance indicators. Universal’s growth shows the link between strategy and the qualities needed to achieve this growth.
The ubiquitous balanced scorecard could also be used to measure four key criteria of company performance and
benchmarking the company against the major installers could also provide evidence of excellence. The recent gaining of a
government award for Universal’s contribution to inner city job creation is also a useful indicator of all round excellence.

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(c) Corporate social responsibility (CSR) is concerned with business ethics and the company’s accountability to its stakeholders,
and about the way it meets its wider obligations. CSR emphasises the need for companies to adopt a coherent approach to
a range of stakeholders including investors, employees, suppliers, and customers. Beth has paid little regard to the promotion
of socially and ethically responsible policies. For example, the decision to not pay the SME creditors on the grounds that they
could not afford to sue the company is ethically unacceptable. Additionally, Beth pays little regard to local customs and
cultures in its business dealings.
The stagnation being suffered by Beth could perhaps be reversed if it adopted more environmentally friendly policies. The
corporate image is suffering because of its attitude to the environment. Environmentally friendly policies could be cost effective
if they help to increase market share and reduce the amount of litigation costs it has to suffer. The communication of these
policies would be through the environmental report, and it is critical that stakeholders feel that the company is being
transparent in its disclosures.
Evidence of corporate misbehaviour (Enron, World.com) has stimulated interest in the behaviour of companies. There has
been pressure for companies to show more awareness and concern, not only for the environment but for the rights and
interests of the people they do business with. Governments have made it clear that directors must consider the short-term
and long-term consequences of their actions, and take into account their relationships with employees and the impact of the
business on the community and the environment. The behaviour of Beth will have had an adverse effect on their corporate
image.
CSR requires the directors to address strategic issues about the aims, purposes, and operational methods of the organisation,
and some redefinition of the business model that assumes that profit motive and shareholder interests define the core purpose
of the company. The profits of Beth will suffer if employees are not valued and there is poor customer support.
Arrangements should be put in place to ensure that the business is conducted in a responsible manner. The board should
look at broad social and environmental issues affecting the company and set policy and targets, monitoring performance and
improvements.

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(b) There are several issues which have to be addressed if an international conceptual framework is to be successfully developed.
These are:
(i) Objectives
Agreement will be required as to whether financial statements are to be produced for shareholders or a wide range of
users and whether decision usefulness is the key criteria or stewardship. Additionally there is the question of whether
the objective is to provide information in making credit and investment decisions.
(ii) Qualitative Characteristics
The qualities to be sought in making decisions about financial reporting need to be determined. The decision usefulness
of financial reports is determined by these characteristics. There are issues concerning the trade-offs between relevance
and reliability. An example of this concerns the use of fair values and historical costs. It has been argued that historical
costs are more reliable although not as relevant as fair values. Additionally there is a conflict between neutrality and the
traditions of prudence or conservatism. These characteristics are constrained by materiality and benefits that justify
costs.
(iii) Definitions of the elements of financial statements
The principles behind the definition of the elements need agreement. There are issues concerning whether ‘control’
should be included in the definition of an asset or become part of the recognition criteria. Also the definition of ‘control’
is an issue particularly with financial instruments. For example, does the holder of a call option ‘control’ the underlying
asset? Some of the IASB’s standards contravene its own conceptual framework. IFRS3 requires the capitalisation of
goodwill as an asset despite the fact that it can be argued that goodwill does not meet the definition of an asset in the
Framework. IAS12 requires the recognition of deferred tax liabilities that do not meet the liability definition. Similarly
equity and liabilities need to be capable of being clearly distinguished. Certain financial instruments could either be
liabilities or equity. For example obligations settled in shares.
(iv) Recognition and De-recognition
The principles of recognition and de-recognition of assets and liabilities need reviewing. Most frameworks have
recognition criteria, but there are issues over the timing of recognition. For example, should an asset be recognised when
a value can be placed on it or when a cost has been incurred? If an asset or liability does not meet recognition criteria
when acquired or incurred, what subsequent event causes the asset or liability to be recognised? Most frameworks do
not discuss de-recognition. (The IASB’s Framework does not discuss the issue.) It can be argued that an item should be
de-recognised when it does not meet the recognition criteria, but financial instruments standards (IAS39) require other
factors to occur before financial assets can be de-recognised. Different attributes should be considered such as legal
ownership, control, risks or rewards.
(v) Measurement
More detailed discussion of the use of measurement concepts, such as historical cost, fair value, current cost, etc are
required and also more guidance on measurement techniques. Measurement concepts should address initial
measurement and subsequent measurement in the form. of revaluations, impairment and depreciation which in turn
gives rise to issues about classification of gains or losses in income or in equity.
(vi) Reporting entity
Issues have arisen over what sorts of entities should issue financial statements, and which entities should be included
in consolidated financial statements. A question arises as to whether the legal entity or the economic unit should be the
reporting unit. Complex business arrangements raise issues over what entities should be consolidated and the basis
upon which entities are consolidated. For example, should the basis of consolidation be ‘control’ and what does ‘control’
mean?
(vii) Presentation and disclosure
Financial reporting should provide information that enables users to assess the amounts, timing and uncertainty of the
entity’s future cash flows, its assets, liabilities and equity. It should provide management explanations and the limitations
of the information in the reports. Discussions as to the boundaries of presentation and disclosure are required.

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

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(iii) Importance of confidentiality in the financing of the project and the normal duty of transparency.
I have been asked to include a statement in my remarks on the balance between our duty to be transparent whenever
possible and the need for discretion and confidentiality in some situations. In the case of our initial working capital needs
for the Giant Dam Project, the importance of confidentiality in financing is due to the potential for adverse publicity that
may arise for the lender. It is important that R&M have the project adequately financed, especially in the early stages
before the interim payments from the client become fully effective.
In general, of course, we at R&M attempt to observe the highest standards of corporate governance and this involves
adopting a default position of transparency rather than concealment wherever possible. We recognise that transparency
is important to underpin investor confidence and to provide investors with the information they need to make fund
allocation decisions.
Whilst it is normal to disclose the amount of debt we carry at any given point (on the balance sheet), it is rarely normal
practice to disclose the exact sources of those loans. In the case of the financing of initial working capital for the Giant
Dam Project, I’m sure you will realise that in this unique situation, disclosure of the lender’s identity could threaten the
progress of the project. For this reason we must resist any attempts to release this into the public domain. We are aware
of one pressure group that is actively seeking to discover this information in order to disrupt the project’s progress and
we shall be taking all internal measures necessary to ensure they do not obtain the information.
Thank you for listening.

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(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.

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(ii) The statement of product profitability shows that CTC is forecast to achieve a profit of $2·185 million in 2008 giving a
profit:sales ratio of 11·9%. However, the forecast profit in 2009 is only $22,000 which would give a profit:sales ratio
of just 0·19%! Total sales volume in 2008 is 390,000 units which represent 97·5% utilisation of total annual capacity.
In stark contrast, the total sales volume in 2009 is forecast to be 240,000 units which represents 60% utilisation of
total annual capacity and shows the expected rapid decline in sales volumes of Bruno and Kong products. The rapid
decline in the sales of these two products is only offset to a relatively small extent by increased sales volume from the
Leo product. It is vital that a new product or products with healthy contribution to sales ratios are introduced.
Management should also undertake cost/benefit analyses in order to assess the potential of extending the life of Bruno
and Kong products.

正确答案：
(c) Inheritance tax payable by Adam
The gift by AS’s aunt was a potentially exempt transfer. No tax will be due if she lives until 1 June 2014 (seven years after
the date of the gift).
The maximum possible liability, on the assumption that there are no annual exemptions or nil band available, is ￡35,216
(￡88,040 x 40%). This will only arise if AS’s aunt dies before 1 June 2010.
The maximum liability will be reduced by taper relief of 20% for every full year after 31 May 2010 for which AS’s aunt lives.
The liability will also be reduced if the chargeable transfers made by the aunt in the seven years prior to 1 June 2007 are
less than ￡285,000 or if the annual exemption for 2006/07 and/or 2007/08 is/are available.

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(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.

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(b) (i) Materiality
The net book value of capitalised development costs represent 7% of total assets in 2007 (2006 – 7·7%), and is
therefore material. The net book value has increased by 13%, a significant trend.
The costs capitalised during the year amount to $750,000. If it was found that the development cost had been
inappropriately capitalised, the cost should instead have been expensed. This would reduce profit before tax by
$750,000, representing 42% of the year’s profit. This is highly material. It is therefore essential to gather sufficient
evidence to support the assertion that development costs should be recognised as an asset.
In 2007, $750,000 capitalised development costs have been incurred, when added to $160,000 research costs
expensed, total research and development costs are $910,000 which represents 20·2% of total revenue, again
indicating a high level of materiality for this class of transaction.
Relevant accounting standard
Development costs should only be capitalised as an intangible asset if the recognition criteria of IAS 38 Intangible Assets
have been demonstrated in full:
– Intention to complete the intangible asset and use or sell it
– Technical feasibility and ability to use or sell
– Ability to generate future economic benefit
– Availability of technical, financial and other resources to complete
– Ability to measure the expenditure attributable to the intangible asset.
Research costs must be expensed, as should development costs which do not comply with the above criteria. The
auditors must consider how Sci-Tech Co differentiates between research and development costs.
There is risk that not all of the criteria have been demonstrated, especially due to the subjective nature of the
development itself:
– Pharmaceutical development is highly regulated. If the government does not license the product then the product
cannot be sold, and economic benefits will therefore not be received.
– Market research should justify the commercial viability of the product. The launch of a rival product to Flortex
means that market share is likely to be much lower than anticipated, and the ability to sell Flortex is reduced. This
could mean that Flortex will not generate an overall economic benefit if future sales will not recover the research
and development costs already suffered, and yet to be suffered, prior to launch. The existence of the rival product
could indicate that Flortex is no longer commercially viable, in which case the capitalised development costs
relating to Flortex should be immediately expensed.
– The funding on which development is dependent may be withdrawn, indicating that there are not adequate
resources to complete the development of the products. Sci-Tech has failed to meet one of its required key
performance indicators (KPI) in the year ended 30 November 2007, as products valued at 0·8% revenue have
been donated to charity, whereas the required KPI is 1% revenue.
Given that there is currently a breach of the target KPIs, this is likely to result in funding equivalent to 25% of
research and development expenditure being withdrawn. If Sci-Tech Co is unable to source alternative means of
finance, then it would seem that adequate resources may not be available to complete the development of new
products.

正确答案：
(c) Briefing notes
To: Audit partner
From: Audit manager
Subject: Issues to consider regarding appointment as auditor of Medix Co
Introduction
Medix Co has recently invited our firm to become appointed as auditor. These briefing notes summarise the main issues we
should consider in deciding whether to take the appointment a stage further. My comments are based on a discussion held
with Ricardo Feller, finance director of Medix Co, a discussion with the current audit partner, and information provided in the
local newspaper.
Legal actions and investigations
There are several indications that Medix Co has a history of non compliance with law and regulations. The former finance
director is claiming unfair dismissal, and in the past the local authority has successfully taken legal action against the
company and has a current case pending. In addition, there have been two tax investigations in recent years hinting at noncompliance
with relevant tax regulations.
There are two problems for us in taking on a client with a propensity for legal actions and investigations. Firstly, the reputation
of the company must be considered. If we become associated with the company through being appointed as auditor, we could
be ‘tarred with the same brush’ and our own reputation also tarnished.
Secondly, we could become quickly exposed to an advocacy independence threat, which clearly should be avoided. Our
ethical status should not be compromised for the sake of gaining a new audit client. Mick Evans only ‘believes’ that the tax
matter has been resolved by the directors, and we should avoid taking on a new client which is involved in an on-going
investigation.
Public interest
The problems noted above are compounded by the bad publicity which the company is currently receiving. The local press
contained a recent article discussing Medix Co’s past and current breach of planning regulations. Given the current level of
public interest in environmental issues, and emphasis on corporate responsibility, it would seem that Medix Co has a poor
public perception, which we would not want to be associated with.
Potential liability to lender
The company is currently negotiating a significant bank loan, and the lender will be using the audited financial statements to
make a decision on whether to advance a loan, and the terms of any finance that might be advanced to Medix Co. This means
that our audit opinion for the forthcoming year end will be scrutinised by the lender, and our firm is exposed to a relatively
high risk of liability to a third party. Given that this will be our first audit, and the limited time we have available (discussed
below) our firm may feel that the risk of this audit engagement is too high. Should the appointment be accepted, disclaimers
should be put in place to ensure that we could not be sued in the event of the bank suffering a financial loss as a result of
their lending decision.
Timeframe. and resources
It is currently the last month of the financial year. If we are appointed as auditor we need to work quickly to develop a thorough
understanding of the business, and to begin to plan the assignment. We need to consider whether our firm has sufficient
resources to put together an audit team so quickly without detracting from other client work currently being conducted.
To make this matter worse, Mick Evans states that Medix Co likes ‘a quick audit’, and we need to consider how to manage
this expectation, as first year audit procedures such as systems documentation, and developing business understanding tend
to take a long time. We must be careful that the client does not pressure us into a ‘quick audit’, which could compromise
quality.
Medix Co operates in a reasonably specialist and highly regulated industry, so our firm should take care to ensure we have
expertise in this industry.
Potentially aggressive management style
There are several indicators that the management may take a confrontational approach, such as the unfair dismissal claim
brought against the company by the ex-finance director. In addition, the auditors prior to Mick Evans resigned following a
disagreement with management. This history shows that we may find it difficult to establish a good working relationship with
the management. As the company is owner managed the presence of a dominant managing director exacerbates this problem.
Management bias
There is incentive for the financial statements to be manipulated in order to secure bank finance. There is considerable risk
of material misstatement which our firm may consider to be unacceptably high.
Internal systems and controls
The current auditors have found systems and controls to be poor, and management has not acted upon recommendations
made by the auditors. Of course this does not mean that we should not take on the assignment – many companies have
weak controls. However, if we did take on the appointment, we would not be able to rely on controls or use a controls based
approach for the audit. We would need to take a substantive approach to the audit. One practical issue here is availability of
staff to conduct the audit testing, as substantive procedures tend to be more time consuming than if we could have taken a
systems based approach.
Opening balances
In all new audit assignments, work must be conducted to verify the opening balances. Given the possible fraud and poor
controls described above, we would need to perform. detailed testing on the opening balances as there is a high risk of fraud
and/or error in previous accounting periods. We may also wish to consider the competence of the previous auditors, who
appeared to disregard potential fraud indicator (two cash books) and had only one audit client.
Fees
Mick Evans has made it clear that Medix Co’s management likes to keep a tight control on costs, and it may put pressure on
us to charge a low audit fee. We need to bear in mind the risks associated with this engagement, as discussed above, and
only take on this high risk audit if the audit fee is high enough to compensate.
We should also consider the cash flow problems being experienced by the company. As a business we need to ensure that
we only take on clients with a good credit rating, and it seems that Medix Co, operating with an overdraft, may not be able
to pay our invoices.
Indication of fraud or money laundering
Surely the most serious issue to consider is that Jon Tate, the managing director, has kept two cash books. We need further
detail on this, but it clearly could indicate a fraud being perpetrated at the highest level of management. The fact that he has
maintained two cash books could indicate money laundering activites taking place, especially when considered in the context
of an owner-managed business with overseas operations. If this were the ONLY problem discovered it could be deemed
serious enough to bring to an end our appointment process. It would be reckless for our firm to take on a client where the
managing director is a fraudster.
Conclusion
Further information is needed in many areas before a final decision is made. However, from the information we have gathered
so far, it appears that Medix Co would represent a high risk client, and our firm must therefore be very careful to assess each
problem noted above before deciding whether to proceed with the appointment.

正确答案：
(ii) Recycling is an issue for both the current performance statements and the single statement. Recycling occurs where an
item of financial performance is reported in more than one accounting period because the nature of the item has in some
way changed. It raises the question as to whether gains and losses originally reported in one section of the statement
should be reported in another section at a later date. An example would be gains/losses on the retranslation of the net
investment in an overseas subsidiary. These gains could be reported annually on the retranslation of the subsidiary and
then again when the subsidiary was sold.
The main arguments for recycling to take place are as follows:
1. when unrealised items become realised they should be shown again
2. when uncertain measurements become certain they should be reported again
3. all items should be shown in operating or financing activities at some point in time as all items of performance are
ultimately part of operating or financing activities of an entity.
There is no conceptual justification for recycling. Once an item has been recognised in a statement of financial
performance it should not be recognised again in a future period in a different part of that statement. Once an item is
recognised in the statement there is an assumption that it can be reliably measured and therefore it should be recognised
in the appropriate section of the statement with no reason to show it again.
Gains and losses should not be based on the notion of realisation. Realisation may have been a critical event historically
but given the current financial exposures of many entities, such a principle has limited value. A realised gain reflects the
same economic gain as an unrealised gain. Items should be classified in the performance statement on the basis of
characteristics which are more useful than realisation. The effect of realisation is explained better in the cash flow
statement. Realisation means different things in different countries. In Europe and Asia it refers to the amount of
distributable profits but in the USA it refers to capital maintenance. The amount of distributable profits is not an
accounting but a legal issue, and therefore realisation should not be the overriding determinant of the reporting of gains
and losses.
An alternative view could be that an unrealised gain is more subjective than a realised gain. In many countries, realised
gains are recognised for distribution purposes because of their certainty because this gives more economic stability to
the payment of dividends.

正确答案：

(b) Provisions – IAS37
An entity must recognise a provision under IAS37 if, and only if:
(a) a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event)
(b) it is probable (‘more likely than not’), that an outflow of resources embodying economic benefits will be required to settle
the obligation
(c) the amount can be estimated reliably
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an enterprise having
no realistic alternative but to settle the obligation. A constructive obligation arises if past practice creates a valid expectation
on the part of a third party. If it is more likely than not that no present obligation exists, the enterprise should disclose a
contingent liability, unless the possibility of an outflow of resources is remote.
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation
at the balance sheet date, that is, the amount that an enterprise would rationally pay to settle the obligation at the balance
sheet date or to transfer it to a third party. This means provisions for large populations of events such as warranties, are
measured at a probability weighted expected value. In reaching its best estimate, the entity should take into account the risks
and uncertainties that surround the underlying events.
Expected cash outflows should be discounted to their present values, where the effect of the time value of money is material
using a risk adjusted rate (it should not reflect risks for which future cash flows have been adjusted). If some or all of the
expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be
recognised as a separate asset when, and only when, it is virtually certain that reimbursement will be received if the entity
settles the obligation. The amount recognised should not exceed the amount of the provision. In measuring a provision future
events should be considered. The provision for the warranty claim will be determined by using the expected value method.
The past event which causes the obligation is the initial sale of the product with the warranty given at that time. It would be
appropriate for the company to make a provision for the Year 1 warranty of $280,000 and Year 2 warranty of $350,000,
which represents the best estimate of the obligation (see Appendix 2). Only if the insurance company have validated the
counter claim will Macaljoy be able to recognise the asset and income. Recovery has to be virtually certain. If it is virtually
certain, then Macaljoy may be able to recognise the asset. Generally contingent assets are never recognised, but disclosed
where an inflow of economic benefits is probable.
The company could discount the provision if it was considered that the time value of money was material. The majority of
provisions will reverse in the short term (within two years) and, therefore, the effects of discounting are likely to be immaterial.
In this case, using the risk adjusted rate (IAS37), the provision would be reduced to $269,000 in Year 1 and $323,000 in
Year 2. The company will have to determine whether this is material.
Appendix 1
The accounting for the defined benefit plan is as follows:

正确答案：
(c) Companies can give the impression that they are generating more cash than they are, by manipulating cash flow. The way
in which acquisitions, loans and, as in this case, the sale of assets, is shown in the statement of cash flows, can change the
nature of operating cash flow and hence the impression given by the financial statements. The classification of cash flows
can give useful information to users and operating cash flow is a key figure. The role of ethics in the training and professional
lives of accountants is extremely important. Decision-makers expect the financial statements to be true and fair and fairly
represent the underlying transactions.
There is a fine line between deliberate misrepresentation and acceptable presentation of information. Pressures on
management can result in the misrepresentation of information. Financial statements must comply with International
Financial Reporting Standards (IFRS), the Framework and local legislation. Transparency, and full and accurate disclosure is
important if the financial statements are not to be misleading. Accountants must possess a high degree of professional
integrity and the profession’s reputation depends upon it. Ethics describe a set of moral principles taken as a reference point.
These principles are outside the technical and practical application of accounting and require judgement in their application.
Professional accountancy bodies set out ethical guidelines within which their members operate covering standards of
behaviour, and acceptable practice. These regulations are supported by a number of codes, for example, on corporate
governance which assist accountants in making ethical decisions. The accountant in Warrburt has a responsibility not to mask
the true nature of the statement of cash flow. Showing the sale of assets as an operating cash flow would be misleading if
the nature of the transaction was masked. Users of financial statements would not expect its inclusion in this heading and
could be misled. The potential misrepresentation is unacceptable. The accountant should try and persuade the directors to
follow acceptable accounting principles and comply with accounting standards. There are implications for the truth and
fairness of the financial statements and the accountant should consider his position if the directors insist on the adjustments
by pointing the inaccuracies out to the auditors.

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(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.

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(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.

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(b) A central feature of many performance measurement systems is the widespread use of league tables that display each
business unit’s performance relative to one another. In the case of service organisations such as TSC the use of league tables
emphasises the company’s critical success factors of profitability and quality of service by reporting results on a weekly basis
at the depot level. The fact that such league tables are used by management will actively encourage competition, in terms of
performance, among depots. The individual position of a business unit in the league table is keenly observed both by the
manager of that unit and his/her peers.
In theory, performance is transparent. In practice although each depot performs essentially the same function and is subject
to the same modes of measurement, circumstances pertaining to different business units may vary significantly. Some depots
may be situated near to the hub (main distribution centre), some may be located far away and some may be in urban zones
with well developed road networks whilst others may be in remote rural areas. Measuring performance via a league table
makes no allowance whatsoever for these relative differences, hence, inequality is built into the performance measurement
system.
Moreover, depot managers might be held responsible for areas over which they have no formal control. The network nature
of the business suggests that there will be a high degree of interdependence of depots; the depot responsible for collection
will very often not be the depot responsible for delivery. Therefore, it is frequently the case that business may be gained for
which the collecting depot receives the revenue, but for which the delivering depot bears the cost. Obviously this impacts
upon the profit statements of both depots. The formal system might not recognise such difficulties, the corporate view being
that ‘the business needs to be managed’; the depots should therefore see any such anomalies as mild constraints to work
around rather than barriers to break down. In such circumstances delivering depots and collecting depots should discuss such
problems on an informal basis. Such informal discussions are aided by close communications between depots recognising
the interdependencies of the business.

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(iii) Amy’s UK income tax position
Amy will remain UK resident and ordinarily resident as she is not leaving the UK permanently or for a complete tax year
under a full time contract of employment. Accordingly, she will continue to be subject to UK tax on her worldwide income
including her earnings in respect of the duties she performs for Cutlass Inc. The earnings from these duties will also be
taxable in Sharpenia as the income arises in that country.
The double tax treaty between the UK and Sharpenia will either exempt the employment income in one of the two
countries or give double tax relief for the tax paid in Sharpenia. The double tax relief will be the lower of the UK tax and
the Sharpenian tax on the income from Cutlass Inc.
Amy will not be subject to UK income tax on the expenses borne by Cutlass Inc in respect of her flights to and from
Sharpenia provided her journeys are wholly and exclusively for the purposes of performing her duties in Sharpenia.
The amounts paid by Cutlass Inc in respect of Amy’s family travelling to Sharpenia will be subject to UK income tax as
Amy will not be absent from the UK for a continuous period of at least 60 days.

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(c) Tax implications of there being a loan from Flores Ltd to Banda
Flores Ltd should have paid tax to HMRC equal to 25% of the loan, i.e. ￡5,250. The tax should have been paid on the
company’s normal due date for corporation tax in respect of the accounting period in which the loan was made, i.e. 1 April
following the end of the accounting period.
The tax is due because Flores Ltd is a close company that has made a loan to a participator and that loan is not in the ordinary
course of the company’s business.
HMRC will repay the tax when the loan is either repaid or written off.
Flores Ltd should have included the loan on Banda’s Form. P11D in order to report it to HMRC.
Banda should have paid income tax on an annual benefit equal to 5% of the amount of loan outstanding during each tax
year. Accordingly, for each full year for which the loan was outstanding, Banda should have paid income tax of ￡231
(￡21,000 x 5% x 22%).
Interest and penalties may be charged in respect of the tax underpaid by both Flores Ltd and Banda and in respect of the
incorrect returns made to HMRC
Willingness to act for Banda
We would not wish to be associated with a client who has engaged in deliberate tax evasion as this poses a threat to the
fundamental principles of integrity and professional behaviour. Accordingly, we should refuse to act for Banda unless she is
willing to disclose the details regarding the loan to HMRC and pay the ensuing tax liabilities. Even if full disclosure is made,
we should consider whether the loan was deliberately hidden from HMRC or Banda’s previous tax adviser.
In addition, companies are prohibited from making loans to directors under the Companies Act. We should advise Banda to
seek legal advice on her own position and that of Flores Ltd.

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(iii) Internal audit services
A self-review threat may be created when a firm, or network firm, provides internal audit services to a financial statement
audit client. Internal audit services may comprise:
■ an extension of the firm’s audit service beyond requirements of International Standards on Auditing (ISAs);
■ assistance in the performance of a client’s internal audit activities; or
■ outsourcing of the activities.
The nature of the service must be considered in evaluating any threats to independence. (For this purpose, internal audit
services do not include operational internal audit services unrelated to the internal accounting controls, financial systems
or financial statements.)
Services involving an extension of the procedures required to conduct a financial statement audit in accordance with
ISAs would not be considered to impair independence with respect to the audit client provided that the firm’s or network
firm’s personnel do not act or appear to act in a capacity equivalent to a member of audit client management.

When the firm, or a network firm, provides an audit client with assistance in the performance of internal audit activities
or undertakes the outsourcing, any self-review threat created may be reduced to an acceptable level by a clear separation
of:
■ the management and control of the internal audit by client management;
■ the internal audit activities.
Performing a significant portion of an audit client’s internal audit activities may create a self-review threat. Appropriate
safeguards should include the audit client’s acknowledgement of its responsibilities for establishing, maintaining and
monitoring the system of internal controls.
Other safeguards include:
■ the audit client designating a competent employee, preferably within senior management, to be responsible for
internal audit activities;
■ the audit client, audit committee or supervisory body approving the scope, risk and frequency of internal audit
work;
■ the audit client being responsible for evaluating and determining which recommendations of the firm should be
implemented;
■ the audit client evaluating the adequacy of the internal audit procedures performed and the resultant findings by
obtaining and acting on reports from the firm; and
■ appropriate reporting of findings and recommendations resulting from the internal audit activities to the audit
committee or supervisory body.
Consideration should also be given to whether such non-assurance services should be provided only by personnel not
involved in the financial statement audit engagement and with different reporting lines within the firm.

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(ii) If the directors agree to disclose the note, it should be reviewed by the auditors to ensure that it is sufficiently detailed.
In evaluating the adequacy of the disclosure in the note, the auditor should consider whether the disclosure explicitly
draws the reader’s attention to the possibility that the entity may not be able to continue as a going concern in the
foreseeable future. The note should include a description of conditions giving rise to significant doubt, and the directors’
plans to deal with the conditions. If the note provided contains adequate information then there is no breach of financial
reporting standards, and so no disagreement with the directors.
If the disclosure is considered adequate, then the opinion should not be qualified. The auditors should consider a
modification by adding an emphasis of matter paragraph to highlight the existence of the material uncertainties, and to
draw attention to the note to the financial statements. The emphasis of matter paragraph should firstly contain a brief
description of the uncertainties, and also refer explicitly to the note to the financial statements where the situation has
been fully described. The emphasis of matter paragraph should re-iterate that the audit opinion is not qualified.
However, it could be the case that a note has been given in the financial statements, but that the details are inadequate
and do not fully explain the significant uncertainties affecting the going concern status of the company. In this situation
the auditors should express a qualified opinion, disagreeing with the preparation of the financial statements, as the
disclosure requirements of IAS 1 have not been followed.