ACCA Professional Level Paper P1 Professional Accountant Course Examination 1

Question Paper Time allowed Reading and Planning Writing SECTION A 7.5 minutes 1.5 hours This question is compulsory. In the real exam it will be worth 50 marks. This question is compulsory. In the real exam TWO questions out of THREE to be attempted.

SECTION B

During reading and planning time only the question paper may be annotated

Instructions:
Please attempt this exam under test conditions and attach the frontsheet complete with your name and address to your script. The completed package should be sent to BPP Professional Education. Take a few moments to review the notes on the inside of this page titled, Get into good exam habits now! before attempting this exam.

DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS

Get into good exam habits now!

Take a moment to focus on the right approach for this exam.

Effective time management

Watch the clock, allocate 1.8 minutes to each mark and move on if you get behind. Take a few moments to think what the requirements are asking for and how you are going to answer them.

Effective planning
You should read through the paper and plan the order in which you will tackle the questions. Always start with the one you feel most confident about. Read the requirements carefully: focus on mark allocation, question words (see below) and potential overlap between requirements. Identify and make sure you pick up the easy marks available in each question.

Effective layout
Present your numerical solutions using the standard layouts you have seen. Show and reference your workings clearly. With written elements try and make a number of distinct points using headings and short paragraphs. You should aim to make a separate point for each mark. Ensure that you explain the points you are making ie why is the point a strength, criticism or opportunity? Give yourself plenty of space to add extra lines as necessary, it will also make it easier for the examiner to mark.

Common terminology
Advise Analyse Assess Calculate/compute Compare and contrast Construct the use Define Describe Discuss Distinguish Evaluate Explain Identify Interpret Justify List Prepare Recommend Summarise To counsel, inform or notify Give reasons for the current situation or what has happened Determine the strengths/weakness/importance/significance To ascertain or reckon mathematically Show the similarities and/or differences Present the arguments in favour, supported by evidence Give the exact meaning of Communicate the key features of To examine in detail by argument Highlight the differences between To appraise or assess the value of in the light of the arguments for and against Make clear or intelligible/state the meaning of Recognise, establish or select after consideration Process information to explain its meaning To produce reasons in support of State short pieces of information on separate lines To make or get ready for use To advise on a course of action To express the most important facts of

SECTION A This ONE question is compulsory and MUST be attempted 1 Stoy Toys
Business background Stoy Toys, a limited company, is a long-established manufacturer and distributor of childrens toys. The company has expanded significantly over the last few years. The board is now contemplating seeking a stock market listing, probably in about 18 months time. The majority (about 85%) of shares are held by members of the Stoy family who founded the company, although none of the Stoy family now take an active role in its management. The dividends paid to shareholders over the last few years have represented a fairly constant proportion of profits after tax. As well as a marketing function, Stoy also has a product development function that researches the childrens market and develops new toys. As a result the company has launched several new cuddly toys into the market over the last few years, aimed at younger children. However none of the other products launched have had sell-out success or achieved long-term appeal. The most recent product concept to be developed by the product development function has been Attitude Girl. This represents their biggest product launch to date. Attitude Girl represents diversification for Stoy in terms of: Products the company has not previously manufactured and sold dolls before Market sector the dolls are aimed at an older age range than previous products

In addition Attitude Girls will be sold in a package, complete with a number of accessories; the dolls will not be sold separately. The product launch will be tied in with the start of a cartoon series on European and American television about Attitude Girls and will coincide with the normal start of the increase in demand for toys leading up to Christmas. As with previous launches, the toys will be marketed extensively on major television channels; Stoy has not normally bought much advertising on smaller digital channels. One or two of the directors have doubts about this product. The view was expressed at the last board meeting that Attitude Girls would not be a major revenue earner and, 'We'd be better off buying the licence to manufacture Bagpuss.' Board of Stoy Toys The board of Stoy Toys currently consists of six executive directors, each with functional responsibilities. The board is chaired by the chief executive; there is no separate chairman. Stoy Toys auditors have advised the board that if the company gains a listing, the local stock market governance code will require that at least half of the board are independent non-executive directors. The chief executive has strongly expressed his unhappiness at this, saying that All non-executive directors will do is poke their noses in and interfere; they wont serve any purpose and will destroy board unity. However some of the shareholders would like to see non-executive directors appointed whether or not Stoy Toys gains a listing. They have been increasingly unhappy about the way the board has been run over the last couple of years, believing that the other directors defer far too much to the chief executives views. The shareholders suspect that a strong presence of non-executive directors could be a useful control on the activities of the board.

Directors remuneration Another aspect of the company that some shareholders are unhappy with is the directors remuneration packages. Directors basic salaries have increased significantly over the last few years, since the expansion. The directors are also paid a bonus of a maximum of 20% of salary, based largely on the sales and profits from products launched in the previous couple of years. The chief executive has argued that new products have the greatest strategic significance for Stoy Toys, since their success will justify the company seeking a stock market listing. The directors also receive very generous benefits in kind including expensive cars, health insurance and life assurance. The chief executive has expressed the view privately to other directors that they deserve generous rewards, as the expansion the company has enjoyed is due to their work, the founding family having failed to expand activities significantly when they managed the company. Currently also all the directors have three year service contracts. The chief executive has argued strongly for these, stating that the companys strategy and operations would be significantly disrupted if any of the current board left suddenly. The shareholders have previously accepted this, but some of them are now wondering if long contracts are a good idea. Internal audit The external auditors have suggested that an internal audit function could help improve the efficiency of operations and contribute to preventing any development and manufacturing problems inherent in such a business. However this suggestion has been dismissed by the chief executive who says that internal auditors are just tick and bash merchants who do work we pay the external auditors for. Required (a) Discuss the extent to which each of the following creates risks for the shareholders of Stoy Ltd: (i) (ii) (b) (c) Development of new toys Remuneration and service contracts of directors. (9 marks)

Demonstrate how the non-executive directors can make an effective contribution as members of the board. (8 marks) As a consultant employed by Stoy Toys, prepare a memorandum to Stoys board advising the directors of the benefits that a well-managed internal audit function could bring to Stoy, especially in anticipation of the listing. (6 marks) Professional marks for persuasiveness, content, style and layout of memo (2 marks) (Total = 25 marks)

SECTION B This ONE question is compulsory and MUST be attempted 2 ANG

ANG is a road haulage contractor. The company specialises in collection and delivery of vehicles and sensitive materials. The company owns 49 road vehicles of different sizes to enable transportation of the different goods. ANGs terms and conditions of carriage note that radioactive goods will not be transported under any circumstances. Explosives are carried, but only where the owners accept liability on their own insurance. ANG takes out standard employer and third party insurance. The Board of ANG is considering a new venture for the same day delivery of goods where the distance to travel is more than its existing fleet of road vehicles could travel in one day. This venture involves the purchase of surplus Hercules transport planes from the army. The Board has recently decided to make the purchase of the planes because they are being offered at a substantial discount. Marketing activities will commence next month. Contingency planning has been limited; the Board of ANG has believed that if any risks do occur, then ANG has sufficient vehicles to continue operations. ANG has an audit committee and a small internal audit function. Recently ANG has suffered a series of losses and disruptions to its operations: (1) The last summer in ANGs home country was very wet and one day recently very heavy storms caused widespread flooding, with serious disruption to the road network. Disruption as serious as this had not been considered as part of ANGs operational planning, with the result that several deliveries were very late. A major customer insisted on imposing penalties on ANG, which ANGs insurance policies did not cover. Another significant customer transferred its business to another haulage company. A major spill of chemicals recently took place from one of ANGs lorries that was involved in an accident. Investigations revealed that the chemicals had not been properly secured in accordance with legal requirements. This led to ANG suffering a substantial fine, which it had to pay itself; its insurance company refused to meet the cost on the grounds that ANG had not fulfilled the terms of the policies by implementing controls it said it would implement to prevent the spillage occurring. An internal investigation at ANGs depots revealed that the checks and safety procedures specified in ANGs compliance manual were often not carried out. The exception to this was when the internal audit was taking place; staff, realising they were being observed, always complied fully with the procedures then. Managers and staff interviewed stated that senior management seemed not to be interested in whether checks took place; instead senior managers were concerned with speed of turnaround and meeting tight delivery timetables. A significant part of depot staffs remuneration packages has been a bonus that has depended on meeting delivery targets. Required (a) (b) (c) Explain the significance of the concept of risk appetite in the decisions that ANGs board take about the companys strategy. (4 marks) Assess the risk management strategies of ANG and recommend any improvements that you consider are necessary. (9 marks) Describe the main stages of a risk management model that is appropriate to ANGs needs and advise the directors on the steps they need to take to ensure that the model is implemented. (12 marks) (Total = 25 marks)

(2)

Student self-assessment
Having completed this paper take a few minutes to consider what you did well and what you found difficult. Use this as a basis to focus your future study on effectively improving your performance.

Common problems
Timing and planning
Did you finish too early? Did you overrun? Y/N Y/N

Future emphasis if you answer Yes

Focus your planning time on generating more ideas. Use models to help develop breadth to your thinking. Focus on allocating your time better. Practise questions under strict timed conditions. If you get behind leave space and move on. Focus your planning time on developing a logical structure to your answer.

Did you waffle?

Y/N

Layout
Was your answer difficult to follow? Y/N Use headings and subheadings. Use numbering sequences when identifying points. Leave space between each point. Show why the point identified answers the question set. Give yourself time and space to make the markers job easy.

Did you fail to explain each point clearly? Did you fail to show any workings or were your workings unclear?

Y/N Y/N

Content
Did you struggle with: Interpreting the questions? Y/N Learn the meaning of common terminology (inside front cover). Learn subject jargon (key terms in study text). Read questions carefully noting all the parts. Practise as many questions as possible. Review your notes/text. Work through easier examples first. Classroom students please contact your tutor for further help. Home Study students please contact ACCA queries for further help (accaqueries@bpp.com). Quiz yourself constantly as you study. You need to develop your memory as well as your understanding of a subject.

Understanding the subject?

Y/N

Remembering the notes/text?

Y/N

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ACCA Fundamentals Level Paper P1 Professional Accountant Course Examination 1

Guidance, Marking scheme and Suggested solutions

ACP1CE10(J)

AC110 P1(1)

Guidance on improving your exam performance

To help improve your performance you should focus on these key areas.

Which questions to do first?

It is important for you to decide which order to attempt the questions. As each question on this paper carries equal marks you may prefer to attempt the questions that you are more confident about first. This means you will build up marks early on giving you a solid base to tackle the harder questions later. However do not spend too long on the questions you are confident about as you need to spend an equal amount of time on them all. An alternative strategy is to answer all questions in strict order. You could use the time saved choosing the order by starting to plan your answers. You may prefer to use this method if you find yourself spending too long on your favourite questions as it forces you to spend an equal time on each before moving on.

Strategy
The examiner lays stress on the key themes of professionalism, responsibility, accountability and ethics. Answers need to bring these themes out.

Time management
Use the reading and planning phase to make sure that you get as many of the marks as possible. Write a short plan for each question containing bullet points per mark and use it to write your answer when the writing time begins. Never overrun on any question and once the time is up move on to the next.

1 Stoy Toys
Marking scheme
(a) (b) Up to 1.5 marks per risk discussed. For 1.5 marks to be given, consequences of risk materialising should be explained. max Up to 2 marks per role discussed. Higgs categories (used in model answer) need not be used, but alternative categories used must be clearly distinct from each other. For high marks to be scored, role in strategy development, monitoring executive and manning board committees must be discussed. Contribution of internal audit. Up to 2 marks per point discussed To gain high marks, internal audits contribution to good corporate governance needs to be discussed. Max 4 marks if answer just covers risk and control work. Professional marks for persuasiveness, content, style and layout of memo max Marks 9

max

(d)

6 2 8 25

Suggested solution
Text references. Chapters 3, 6 and 8. Top tips. In (a) risks for shareholders include short-term risks to profits, as dividends are a constant proportion of earnings you need to concentrate on threats to sales. Shareholders will also be concerned with longer-term strategy, as this may influence how popular the shares are if Stoy is listed and hence the capital gains shareholders can achieve. Directors remuneration is not only a problem in terms of costs reducing profits; there are agency issues involved. Are the directors running the company in the best interests of the shareholders? The clue to this is in the first paragraph of the question, where the scenario highlights the fact that the majority shareholders are not involved in management. In (b) the UK Higgs report provides the framework of the four major aspects of the non-executive directors role. However your answer needs to demonstrate how NEDs can make an effective contribution to Stoy. Partly this involves being prepared to disagree with the chief executive! The NEDs must also tackle the issues of concern to shareholders, particularly the remuneration packages. The answer also shows how the committee structure helps NEDs by giving forums to discuss matters away from the executive directors. (c) represents a selling exercise; you are trying to sell to the board (in particular the chief executive) the benefits of internal audit. You need to get away from work on financial accounting controls and explore internal audits place in good corporate governance and its wider role in reviewing operations. Again a corporate governance report (here the Turnbull report) can be used to provide a useful framework for your answer. Easy marks. The roles of non-executive directors came up in the pilot paper and the December 2007 exam, so you need to be familiar with them. If you were, (b) should have been fairly straightforward. (a) (i) Decision to develop new products Diversification Ideally diversifying by producing different toys should be an effective way of managing risks. Producing a wide range of toys should mean that Stoy Toys can maintain returns even if

individual toys become less popular. Focus may be taken away from core parts of the business in order to develop the wider range. Development risk The main risk of development is that expenditure is wasted on projects that have little commercial appeal. There is also a risk that time will be spent on projects that are not in line with corporate strategy. Stoy has had limited success in developing new toys in recent years. Effective assessment of the research and development function can all to often be forgotten, with all the emphasis often being on meeting budget, and little assessment of how effective the department has been in producing popular new products. Branding and marketing risk Stoys current association with cuddly toys may undermine the appeal of its new range, which Stoy is marketing as a contemporary range. Stoys current marketing strategy may also need to be changed if it is to appeal to a mass market, as mainstream commercial channels are showing fewer childrens programmes. The alternative is advertising on specialist childrens channels with smaller audiences and competing against lots of other manufacturers. Competition risk Stoy is also at risk from competitors responding to its activities by taking action themselves. Stoy may be vulnerable to a counter-advertising campaign by its competitors. Its Attitude Girl package may be seen as too expensive by parents and children. It may be undercut by competitors selling similar items separately, thus appearing more affordable. Alternatively Stoy Toys may be vulnerable to pirate copies being made of Attitude Girl toys. (ii) Directors remuneration and service contracts Flaws in packages The fact that directors receive high basic salary increases that bear little relation to company success indicates that the packages are flawed. Directors can be rewarded well without any increase in company performance being required. The directors security is further enhanced by the long-term contracts that they have entered; if their employment is terminated early, perhaps for under-performance, Stoy may have to pay large amounts of compensation. Contract lengths are much longer than are allowed by most corporate governance codes. Short-termism The limited performance-related remuneration that is in place is not without flaws either. Although it is consistent with Stoys strategy of developing new products, it places excessive emphasis on toy development that will yield short-term results. There is no benefit gained from building a portfolio of more toys that will bring long-term returns to Stoy. There is also no downside risk from this element of the package. Directors can pour money into speculative new investments, in the knowledge that they wont be penalised if these are unsuccessful. Benefits The benefits in kind that are given to directors again do not appear to be linked with company performance. This could be an example of the agency problem, directors rewarding themselves, reducing company profits and not acting in a way that benefits shareholders. Employees may also be unhappy with these benefits as they not available to them. Reputation risk Excessive remuneration may also worsen the threat to sales if seen in conjunction with other reputation risks along with impacting on the share price achievable should the listing proceed, 4

(b)

Strategy As members of a single board, NEDs have responsibility along with executive directors for the strategic decisions that the board takes. NEDs should come from a variety of business backgrounds, but should have sufficient experience to contribute effectively. NEDs should not automatically support executive directors; instead they should evaluate, and if necessary challenge, the proposals made by executive directors, using their own experiences to reinforce their contribution. Performance scrutiny Once clear strategic objectives have been decided upon, NEDs should monitor whether the board and senior managers have met these objectives. This will be particularly important if a greater proportion of director remuneration is dependent on performance. They should represent shareholder interests and seek to ensure that agency problems do not arise between shareholders and executive directors and managers. Risk NEDs have certain specific tasks, to scrutinise the reporting of performance and the effectiveness of risk management and internal control systems in countering the risks that the company faces. Governance reports recommend that an audit committee staffed by independent NEDs is particularly important. NEDs should be able to conduct their reviews in this environment away from executive director pressures. Internal and external auditors can report to NEDs and raise concerns with them, and thus the auditors position will be enhanced as well. People Again the governance reports recommend that committees staffed by NEDs, the remuneration and nomination committees, are the best way for NEDs to exercise their influence. In this environment NEDs can effectively scrutinise and make recommendations about pay and contract issues. Since NEDs remuneration should ideally be fixed by the company in general meeting, and since they are elected for set terms, they can take an objective view of what rewards and contracts are desirable for executives. The nomination committee should review director appointments, also other issues affecting the board such as succession arrangements and the need for the board to have an appropriate mix of skills. This will be particularly important if the company expands and diversifies after its listing. Listing implications If Stoy Toys does obtain a listing, then it will be obliged to appoint non-executive directors under the corporate governance codes. If non-executive directors are appointed before Stoy is listed, they can have an important input into the strategic decision of whether a listing is appropriate.

(c)

To: From: Date: Subject:

Board Consultant 29 June 20X8 Establishment of internal audit function

The existence of an internal audit function is considered by many as a clear example of good corporate governance if set up properly with a degree of independence from the rest of the business. Its creation would also enhance Stoys attractiveness to potential shareholders if Stoy decide to proceed with the plans to list. On listing the company will in any case need to adhere to stock exchange requirements which will require the board to at least consider the need for internal audit annually. Turnbull report The UK Turnbull report lists a number of issues that should be considered when deciding whether to establish an internal audit department that are relevant to Stoy. Scale and complexity of operations This has clearly increased recently with rapid growth meaning more products and activities, and possibly more that can go wrong. Internal audit review can act as a check on the decision-making processes, that all the implications of the changes in business have been fully considered. Number of employees Recent increases in employee numbers are an indication of the need for development of human resource systems, which internal audit would wish to evaluate. Changes in organisational systems Overall control systems will have to develop, and internal audit will be an important part of this change. Internal audit may be particularly needed as a check on the development of other parts of the business systems; with rapid growth, there is a danger that information systems for example may not develop in a way that is best for the company. Changes in key risks Changes and expansions in products and activities will bring changes in risks. There are the risks associated with the production and sales of the new products such as the Attitude Girl range, including production stoppages and distribution difficulties. There may also be changes in the general risks that Stoy faces, with possibly the increased risk of inefficiencies and diseconomies of scale. Internal audit can review the adequacy of the overall risk management systems for coping with these changes and carry out work on specific areas of high areas. Problems with internal control systems Quality control is vital in a business producing toys for children and failures in quality control resulting in unsafe products quickly becomes high profile news with a damaging effect on a companys reputation. Quality control standards established in the past may now also be inadequate if there has been a significant investment in new machinery as a result of the expansion. Internal audit would be able to evaluate the current quality controls procedures in place, make recommendations for updating and continually monitor compliance with the standards set. Cost-benefit considerations Clearly cost-benefit considerations are significant. Fears that internal audit will interfere with operational departments may well be exaggerated, and well-directed internal audit work should bring benefits.

The benefits internal audit contributes may not just be finding mistakes. Internal audits presence may prevent problems by deterring potential wrongdoers from carrying out frauds, owing to the probability that internal audit will detect the frauds. Internal audit should also be able to stand back and report objectively on the organisation. This will significantly improve the overall environment in which the business carries on and controls operate.

2 ANG
Marking scheme
(a) (b) Definition and impact upon business decision-making. Maximum 2 marks if no application to ANG Answer should be grouped round the key elements of the risk management framework (avoidance, reduction, acceptance, transfer); up to 3 marks per element, only awarded for specific application to ANG Answers should follow the COSO or similar framework. Up to 2 marks per element, maximum 1 mark if no application to ANG Marks 4

max max

9 12 25

(c)

Suggested solution
Text references. Chapters 4, 5 and 7. Top tips. An illustration that although the company may be taking appropriate steps to manage the risks its identified, shortcomings in other areas may mean that its overall control and risk management systems are inadequate. The key points in (a) are that risk appetite means that the board must take decisions about how much risk the business bears and what returns it needs to take the risk. This will impact upon whether it takes on some activities at all (the risk may be too high, however high the return) and what return will be required to take on other risks. (b) involves the application of the different risk management strategies to a specific company. The requirement word to evaluate means to look for the good and bad elements in the strategy so dont assume that the company is doing everything wrong; in the real world this would be very unlikely anyway. Clearly state the elements of the risk management policy with reasoned comments as to whether they are appropriate. Where you think changes are needed, state these clearly in your answer with justification. As long as you say why the change is needed, your answer can be different from ours. In (c) you could have used an alternative risk model to the COSO model. However the allocation of marks means that you had to identify more stages than risk identification, risk management and controls. Students often forget the environment, communication and monitoring/feedback stages but these are all very important. Remember that the question specifies the role of the board, so that as well as defining each stage, you need to explain what the board needs to do to ensure that it is in place. The distinction between the overseeing role of the board and the responsibilities of line management is important at various stages of this answer. Easy marks. (b) is a straightforward discussion on methods of dealing with risk.

(a)

Significance of risk appetite The risk appetite of a business is the willingness of the board to take risks. All companies have to take risks in order to expand. However the boards risk appetite will determine what risks the business takes, the returns the business wishes to accept in return for bearing certain risks, and the extent to which certain risks have to be mitigated in order to be accepted. Risk appetite should be integrated with the businesss strategic activities. In the context of ANG the risk appetite impacts upon: What activities are carried out The directors do not wish ANG to transport radioactive material because the risks involved are too great. How risks are managed The board will only allow explosives to be transported if the customer accepts liability. How the business expands The board is willing to diversify into transporting goods by aircraft because it feels that the returns involved justify the risks in a new area (the scenario suggests the returns are considered acceptable because the aircraft are being offered at a substantial discount).

(b)

Avoidance The decision by ANG to avoid risk completely in the transfer of hazardous materials seems sensible. There has been some bad publicity about the transfer of radioactive goods by road. The potential for claims, particularly if an accident occurred in an area of high population density, could be excessive and the damage to ANGs reputation would be considerable. In the case of explosives, ANG would need to ensure that the contract for carriage clearly stated that the owner of the goods was responsible for insurance. ANG may also want to obtain a copy of the insurance contract to confirm this. Reduction It appears that ANG effectively self-insures against loss of vehicles by ensuring a replacement vehicle can be provided at short notice. This may be acceptable in the case of individual losses. However, it may be inappropriate in situations where, for example, a significant number of ANGs vehicles are destroyed in a fire or flood. Where haulage contracts are signed for time critical delivery of goods, then some reciprocal agreement with another haulage company may be appropriate. Acceptance There appears to be some risk in purchasing the transport planes prior to any market appraisal of the new venture. Normally the risk of a new venture would be reduced by carrying out market research prior to significant expenditure being incurred. The Board would normally be advised to check whether there was a demand for this service prior to expenditure being committed. Transfer The overall risk management strategy of ANG appears to be one of risk transfer. This is the policy adopted by most businesses and is wholly appropriate given the likelihood of many risks occurring is low, but if they do occur then significant expenditure would be involved. For example, damage caused from a load falling off a lorry could be considerable, not only to the load itself, but also to other vehicles, people and even the roads.

(c)

The model recommended is the COSO Enterprise risk management model. Internal environment The internal or control environment encompasses the attitude and actions of directors and managers regarding internal controls, also the corporate culture and values. Clearly ANGs board needs to reassess the messages it is sending out if staff believe that it is not concerned with safety. Part of this will involve taking active steps to promote a risk awareness and avoidance culture amongst staff, including obtaining evidence that all staff have been properly trained, establishing stricter disciplinary procedures and reviewing remuneration arrangements. Objective setting The board needs to ensure that it decides on key matters, including the objectives that the organisation will pursue. COSO stresses that a business needs to be clear it is setting different types of objectives, and that strategic objectives should align with other objectives. COSO highlights the following objectives: (i) (ii) (iii) (iv) Strategic high-level goals Operational (effective and efficient use of resources) Reliability of reporting Compliance with applicable laws and regulations

ANGs board seems to have paid insufficient attention to the last category and needs to reconsider its approach, with a named board member responsible for this area. Event identification Event identification means being able to recognise indications that risks arise. This involves not just knowing what events may cause loss, but also what conditions are likely to lead to these events and trends that indicate events may occur in the future. The board needs to find out why the logistical planning procedures that ANG has in place failed to identify the wet conditions as a potential problem that could disrupt operations. Risk assessment Risk assessment means assessing the consequences of risks materialising, financial and otherwise. It also means mapping risks so that they can be compared with each other according to the frequency they are likely to materialise and the severity of the consequences if they do. The board needs to review these procedures to see whether the consequences of transport disruption or legal penalties were underestimated. Risk response Risk response means taking action in relation to risk assessed that is consistent with the magnitude of those risks and the boards appetite for taking them. The board has evidently considered responses carefully and made for example different decisions about transporting radioactive materials and explosives. Risk response means that the board must take some action, even if it is a conscious decision to accept risks; ignoring risks is not an appropriate response. Control activities Control activities refer to the controls ANG implement to reduce risks. These would include for example checking the security of loads. The board needs to consider whether the controls in place are sufficient to reduce risks to the extent desired, as well as whether the controls in place are working satisfactorily. Information and communication This means that the board receives the information it needs to manage the companys activities effectively. It also means that employees are supplied with the information they need to fulfil their

responsibilities. The boards lack of knowledge about failures in safety procedures is clearly worrying. Possibly the board need to obtain more information themselves, maybe by visiting the depots on a surprise basis. They should also ensure that staff who have concerns about safety procedures not being followed can provide information to the board confidentially. Monitoring Monitoring consists of a combination of ongoing monitoring and separate evaluation. Ongoing monitoring should be carried out by operational management as part of its responsibilities. The board should obtain evidence that this has happened; in the light of recent failures, the board may need to obtain more formal assurance, such as requiring all monitoring to be documented. Separate evaluation includes the work carried out by internal audit, whose activities are supervised by the audit committee. The audit committee needs to reconsider the internal audit work programme to ensure the tests carried out are more effective in spotting weaknesses. The other key part of monitoring is that the board or audit committee communicate weaknesses found to managers and staff, and take subsequent steps to ensure that weaknesses have been corrected.

10

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