P3 BPP Exam Practice Kit

CIMA Exam Practice Kit
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Strategic Paper P3
Risk Management
This Exam Practice Kit is one of a suite of products, Targeted at CIMA’s 2015 exams, it provides:
for use independently or as part of a package, • Guidance on the objective test exams themselves
supporting Strategic Paper P3 Risk Management. • A large bank of practice questions covering the
This kit helps you focus your OTQ question practice whole syllabus
for the exam in a way that makes the best use of • Detailed feedback on each question so you can
your time. reinforce your learning as you go
CIMA
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December 2014
£18.00
Strategic Paper P3
Risk Management
Exam Practice Kit
for exams in 2015
CMP3RK15 (POL).indd 1-3 12/12/2014 09:59

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FOR EXAMS IN 2015

ii
First edition 2015

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Contents
Page
Using the Kit

Question and Answer index iv
Using your BPP Objective Test (OT) Kit v
The Objective Test (OT) exam vi
Learning Objectives vii
Passing P3
How to tackle Objective Test Questions (OTQs) ix
Demonstrating your understanding of P3 x
Questions and answers

Questions 3
Answers 51
Mathematical tables and exam formulae 87
Introduction iii
Question and Answer index
Page number
Question Answer
Objective test questions
1 Introduction to risk 3 51
2 Governance 5 52
3 Ethics and reputation 6 53
4 IS risks 8 55
5 Financial risk 11 57
6 Interest rate risk 12 58
7 International risk – Exchange rates 14 59
8 International risk – Financial instruments 17 61
9 Investment risk 19 62
10 Internal controls 21 64
11 Control failures 23 66
12 Internal audit 25 68
13 Monitoring 27 69
14 Control and direction 29 70
Mixed banks
15 Mixed Bank 1 31 73
iv Introduction
Using your BPP Objective Test (OT) Kit
One of the key criteria for achieving exam success is question practice. There is generally a direct correlation
between candidates who study all topics and practise exam questions and those who are successful in their real
exams. This Kit gives you ample opportunity for such practice throughout your preparations for your OT exam.
All questions in your exam are compulsory and all the component learning outcomes will be examined so you must
study the whole syllabus. Selective studying will limit the number of questions you can answer and hence reduce
your chances of passing. It is better to go into the exam knowing a reasonable amount about most of the syllabus
rather than concentrating on a few topics to the exclusion of the rest.
Practising as many exam-style questions as possible will be the key to passing this exam. You must do questions
under timed conditions.
Breadth of question coverage

Questions will cover the whole of the syllabus so you must study all the topics in the syllabus.
The weightings in the table below indicate the approximate proportion of study time you should spend on each topic,
and are related to the number of questions per syllabus area in the exam.
P3 Risk Management
Syllabus topics Weighting
A Identification, classification and evaluation of risk 20%
B Responses to strategic risk 20%
C Internal controls to manage risk 20%
D Managing risks associated with cash flows 20%
E Managing risks associated with capital investment decisions 20%
Introduction v
The Objective Test (OT) exam
The OT exam is a computer based assessment, which is available on demand at assessment centres all year round.
OT exams in each level can be taken in any order, but candidates must pass all the OT exams for a level before they
can sit the Integrated Case Study Exam for that level.
Each exam lasts for 90 minutes and the pass mark is 70%.
Results are available shortly after the test has been completed, and the results will include feedback.
The exam will be made up of different types of questions, including:
Question Type Explanation

Multiple choice Standard multiple choice items provide four options. 1 option is correct and the other 3
are incorrect. Incorrect options will be plausible, so you should expect to have to use
detailed, syllabus-specific knowledge to identify the correct answer rather than relying on
common sense.
Multiple response A multiple response item is the same as a multiple choice question, except more than one
response is required. You will normally (but not always) be told how many options you
need to select.
Drag and drop Drag and drop questions require you to drag a “token” onto a pre-defined area. These
tokens can be images or text. This type of question is effective at testing the order of
events, labelling a diagram or linking events to outcomes.
Gap fill Gap fill (or “fill in the blank”) questions require you to type a short numerical response.
You should carefully follow the instructions in the question in terms of how to type your
answer – eg the correct number of decimal places.
Hot spot These questions require you to identify an area or location on an image by clicking on it.
This is commonly used to identify a specific point on a graph or diagram.
Drop-down list Drop-down lists follow the same principle as multiple choice questions, in that you need to
select one option from a pre-defined list. This can be used in conjunction with a gap-fill
question: for example, you may be asked to key a numerical answer into a gap-fill box and
then select an explanation for the approach you’ve taken from a drop-down list.
vi Introduction
Learning Objectives
The table below has been prepared by CIMA to help you understand the abilities that CIMA is seeking to assess.
Example question
Learning objective Verbs used Definition types
1 Knowledge
What you are expected  List  Make a list of MCQ
to know  Express, fully or clearly, the
 State MCQ
details of/facts of
 Define  Give the exact meaning of MCQ
2 Comprehension
What you are expected  Describe  Communicate the key features of Multiple Response
to understand  Distinguish  Highlight the differences between Multiple Response
 Make clear or intelligible/state
 Explain Drop down list
the meaning or purpose of
 Recognise, establish or select
 Identify Hotspot
after consideration
 Use an example to describe or
 Illustrate Drop down list
explain something
3 Application
How you are expected  Apply  Put to practical use Multiple response
to apply your  Ascertain or reckon
knowledge  Calculate/ compute Number entry
mathematically
 Prove the certainty or
 Demonstrate Hotspot
exhibit by practical means
 Prepare  Make or get ready for use Drag and drop
 Make or prove consistent/
 Reconcile Drop down list
compatible
 Solve  Find an answer to Number entry
 Tabulate  Arrange in a table Drag and drop
Introduction vii
Example question
Learning objective Verbs used Definition types
4 Analysis
How you are expected  Analyse  Examine in detail the structure of Multiple response
to analyse the detail of  Place into a defined class or
what you have learned  Categorise Drag and drop
division
 Show the similarities and/or
 Compare & contrast Hotspot
differences between
 Construct  Build up or complete Drag and drop
 Discuss  Examine in detail by argument Multiple response
 Translate into intelligible or
 Interpret Multiple response
familiar terms
 Place in order of priority or
 Prioritise Drop down list
sequence for action
 Produce  Create or bring into existence Drag and drop
5 Evaluation
How you are expected  Advise  Counsel, inform or notify Multiple response
to use your learning to  Evaluate  Appraise or assess the value of Multiple response
evaluate, make
decisions or  Recommend  Propose a course of action Multiple response
recommendations
In your CBA, questions will be set which test up to the cognitive level of the verb in the component learning outcome
in each paper’s syllabus, so this means they will test up to level 5 verbs where the learning outcome permits this.
CIMA will limit the number of lower level questions in the exam – so that students will not be able to achieve the pass
mark solely based on correctly answering knowledge and comprehension questions. Higher level questions,
requiring candidates to demonstrate application, analysis and evaluation skills must be answered correctly for the
pass mark to be reached.
viii Introduction
Passing the P3 Objective Test exam
Tackling OTQs
 Read, and re-read the question to ensure you fully understand what is being asked
 When starting to read a question, especially one with a lengthy scenario, read the requirement first. You will
then find yourself considering the requirement as you read the data in the scenario, helping you to focus on
exactly what you have to do.
 Do not spend too much time on one question - remember you should spend 1½ minutes, on average, per
question
 If you cannot decide between two answers – look carefully and decide whether for one of the options you are
making an unnecessary assumption – do not be afraid of trusting your gut instinct
 Do not keep changing your mind – research has shown that the 1st answer that appeals to you is often the
correct one
 Remember that marks are awarded for correct answers, and marks will not be deducted for incorrect
answers. Therefore answer every single question, even ones you are unsure of.
 Always submit an answer for a given question even if you do not know the answer - never leave any answers
blank
 Pace yourself - you will need to work through the exam at the right speed. Too fast and your accuracy may
suffer, too slow and you may run out of time. Use this Kit to practice your time keeping and approach to
answering each question.
 If you are unsure about anything, remember to ask the test administrator before the test begins. Once the
clock begins ticking, interruptions will not be allowed.
 Remember to keep moving on! You may be presented with a question which you simply cannot answer due
to difficulty or if the wording is too vague. If you have only approximately 90 seconds per question, and you
find yourself spending five minutes determining the answer for a question then your time management skills
are poor and you are wasting valuable time.
 If you finish the exam with time to spare, use the rest of the time to review your answers and to make sure
that you answered every OTQ
Introduction ix
Demonstrating your understanding of P3
The P3 examiner will expect you to demonstrate the following:
Risk-based perspective You must be able to identify, classify and evaluate major risks in a
variety of scenarios.
A realistic, practical mind-set Controls and other measures must be appropriate. You need to be aware
of the strengths and weaknesses of a range of controls.
Show strategic awareness Remember this is a Strategic level paper, and the organisation's
strategies will determine not only the risks it faces, but also how it
responds to those risks.
All OTQs in all the exams are worth the same number of marks, both in this Kit and in the real exam. However this is
an approximate guide: some OTQs are very short and just require a factual selection, which you either know or you
don’t, while others are more complex, which will inevitably take more time. Note that the real exam will be balanced
such that the ‘difficulty’ of the exam will be fair for all students – the OTQs in this Kit have also been balanced in a
similar way.
Using the solutions and feedback
Avoid looking at the answer until you have finished a question. It can be very tempting to do so, but unless you give
the question a proper attempt under exam conditions you will not know how you would have coped with it in the real
exam scenario.
When you do look at the answer, compare it with your own and give some thought to why your answer was different,
if it was.
If you did not reach the correct answer make sure that you work through the explanation or workings provided, to
see where you went wrong. If you think that you do not understand the principle involved, work through and revise
the point again, to ensure that you will understand it if it occurs in the exam.
x Introduction
Objective test questions
1
2
1 Introduction to risk
1 Which of the following statements about risk are true?
1. A speculative risk is a risk from which either good or harm may result.
2. A fundamental risk is a risk beyond the control of any individual
A Statement 1 true; Statement 2 true

B Statement 1 true; Statement 2 false
C Statement 1 false; Statement 2 true
D Statement 1 false; Statement 2 false
2 Risk mapping is a technique for assessing the severity of a risk and the probability or frequency of its likely
occurrence.
For what type of risk would it probably be most appropriate to take out an insurance policy from an
insurance company?
A Severity low, frequency high.
B Severity high, frequency high.
C Severity high, frequency low.
D Severity low, frequency low.
3 Which of the following definitions best describes risk aversion?

A Trying to reduce or minimise risks through risk management.
B Investing in projects offering the highest expected value of net present value.
C Avoiding risks by refusing to invest in high-risk projects or investments.
D Avoiding investments where the risk is high if an investment offering the same return for less risk is
available.
4 Which ONE of the following statements is true?

A Risk is only concerned about things going wrong
B Risk only relates to new issues
C Big enterprises are the only ones who need to manage risks
D Risk can recognise positive events, including opportunities
5 Which TWO of the following are designated responsibilities of an organisation's risk manager?
A Establishing a common risk management language
B Setting the organisation's risk appetite
C Providing leadership, vision and direction for enterprise risk management
D Deciding the board's approach towards enterprise risk management
Questions 3
6 RLJ Ltd manufactures high-performance sports cars.
For the following risks, select the appropriate mitigation technique.
A customer or third party may be killed or injured by an accident caused by a manufacturing
flaw
Environmental legislation in Germany is likely to require cars sold there to comply with
stringent emissions and fuel economy standards that are impossible for cars of this type
A Transfer
B Accept
C Avoid
D Reduce
7 At which stage of the CIMA risk management cycle would the following activities take place?
Maintain a risk register
Risk mapping
A Identify risk areas

B Understand and assess the scale of risk
C Develop a risk response strategy
D Implement and monitor the suggested controls
8 Which of the following statements is true?

A Risk hedging is taking action to offset one risk by incurring a new risk in the opposite direction.
B Risk transfer means the management of a portfolio of different risks.
C High frequency, high severity risks are always strategic risks.
D Insuring risks means that businesses will not need to take any measures to reduce those risks.
9 Which of the following is not a technique for measuring risk?

A Standard deviation of expected returns.
B Sensitivity analysis.
C Risk mapping.
D Variance.
10 Risk appetite is the nature and strength of risk that an organisation is prepared to bear.
Which TWO of the following terms are examples of risk appetite?
A Risk attitude
B Risk seeking
C Risk aversion
D Risk capacity
4 Questions
2 Governance
1 Which THREE of the following represent examples of good, effective corporate governance?
A The recruitment of NEDs with experience outside the industry the organisation operates in
B Full disclosure of director remuneration
C Senior management focussing exclusively on objectives linked to bonus payments
D Low staff turnover
E A clear distinction between the roles of chairman and chief-executive officer
2 Which one of the following statements identifies the primary or main function of non-executive directors?
A To ensure adequate internal controls
B To prevent domination of the board by a single individual
C To consider and safeguard the interests of shareholders
D To consider and safeguard the interests of creditors
3 Many companies operate a series of board sub-committees responsible for supervising specific aspects of
governance using NEDs. The names of four board sub-committees are shown below.
Audit
Remuneration
Risk
Nominations
For each sub-committee, identify the corresponding description from the four options below.
A The Committee responsible for advising on executive director salary and other rewards for directors
B The Committee responsible for overseeing how prepared the organisation is to respond to possible
threats
C The Committee responsible for recommending the appointments of new directors to the board
D The Committee responsible for liaising with external audit, supervising internal audit and reviewing the
annual accounts and internal controls
4 In the context of corporate governance, ‘the agency problem’ refers to:

A The reliance of NEDs on executive directors to present all relevant information
B The reliance of shareholders on directors to run the company
C The lack of unity among shareholders
D The reliance of external auditors on the work of internal audit
5 Which THREE of the following statements are factors that would contribute to an effective board of
directors?
A A Nominations Committee that oversees the appointment of new directors.
B A wide range of backgrounds and experience across board members.
C Director remuneration packages with 80% of remuneration linked directly to the achievement of
current year financial targets.
D A well-respected, strong CEO.
Questions 5
6 Which of following statements represents poor corporate governance?
Select ALL that apply.
A A focus on short-term profitability rather than long-term profitability
B Senior managers being asked to provide explanations to external auditors
C A strong internal audit function
D A focus on long-term profitability rather than short-term profitability
E Domination of the board by a single individual
7 Mario recently retired from his position of Managing Director of TreeTops plc, 50 years after founding the
company. Mario has been succeeded as Managing Director by his eldest son. The board are keen to retain
access to Mario’s experience and expertise. To facilitate this, they have asked Mario to remain on the board,
as a non-executive director (NED).
Which TWO of the following issues are likely to reduce Mario’s effectiveness as a NED?
A Lack of true independence
B Insufficient knowledge of shareholder interests
C Lack of a wider perspective
D Unwilling to listen to other points of view
8 Which one of the following statements correctly states the main advantage of ensuring diversity at board
level of an organisation?
A Compliance with equal opportunity legislation.
B Enables the board to better understand the environment and market.
C Demonstrates that non-financial goals are important to the organisation.
D Presents an image of the organisation as a good corporate citizen.
9 Which of the following would not normally be one of the roles of the chairman of a company?
A Ensuring the board receives accurate and timely information
B Leading the induction programme for new directors
C Being responsible for developing new investment initiatives
D Facilitating board appraisal
E Helping to promote understanding of the views of directors
10 Which one of the following statements correctly states the main aim of external risk reporting ?
A To provide reassurance to stakeholders that risks are being appropriately identified and managed.
B To safeguard the company’s assets.
C To communicate the work of the Risk Committee.
D To comply with section 404 of The Sarbanes Oxley Act.
3 Ethics and reputation

1 CIMA's Code of Ethics is based upon:
A A framework of fundamental principles
B Principles devised by COSO
C A set of rules with penalties for non-compliance
D Sustainability principles and best practice
6 Questions
2 Which of the following represents an example of CIMA's fundamental principle of professional
competence and due care?
A Refusing to take on work where there is a conflict of interest
B Raising concerns when asked to perform a specialised task outside your expertise
C Maintaining confidentiality of sensitive information
D Accepting responsibility for errors made
3 Complete the following statement using one of the options below.

If a company’s board of directors and senior management believe they have a moral duty to act in the
interests of a wide range of stakeholders, their motivation is said to be
A instrumental
B normative
C charitable
4 The primary purpose of an integrated report is to explain:

A The organisation’s corporate strategy
B How the organisation creates value over time
C How the organisation integrates sustainability and ethics in its strategy
D The organisation’s five year plan
5 Martin Marr, a senior member of the accounts department of Bushgreen, carries out investment appraisal
calculations on the development of a major new product. Because his boss is away on holiday, Martin checks
the calculations himself and signs them off as satisfactory.
Martin's actions illustrate what kind of threat to his independence?
A Familiarity
B Advocacy
C Self-review
D Self-interest
6 Which of the following would be considered the behaviour of a ‘good corporate citizen’?
A Paying unskilled employees a minimum ‘living wage’ in excess of the minimum wage
B Sponsoring a local children’s sports team
C Encouraging a ‘work-hard play-hard’ culture for employees
D Relocating a customer service call centre to an area with high unemployment
7 Which issues from the following list represent environmental and / or social issues for a manufacturer of
fast -moving consumer goods?
A The materials used in manufacture
B The price charged in different markets
C The risk a competitor product will provide superior performance
D The employment conditions in supplier workplaces
E The packaging used
Questions 7
8 A CIMA member suspects fraudulent activity involving a significant sum, but does not have sufficient evidence
to be 100% sure a fraud has been committed.
What should the member do?
A Identify the key facts and ethical issues and consider alternative courses of action
B Spend time observing the suspect and the areas of the business involved to gather further evidence
C Take no action
D Confront the suspect immediately and request an explanation
9 Select the THREE concepts that underpin integrated reporting <IR> from the list below.
A The value creation process
B Corporate social responsibility
C Value creation over time
D Risk management
E The capitals
10 Which of the following is least likely to result in an accountant breaching the requirement to act with
professional competence and due care?
A Lack of a proper job description when the accountant was recruited
B Limited time to complete an assignment
C Lack of a superior to consult about problems with an assignment
D Lack of information about an assignment
4 IS risks
1 Which of the following are reasons why an organisation needs an IT strategy? Select ALL that apply.
A IT can provide the organisation with the competitive advantage needed for commercial success.
B IT is not a capital investment, but an expense.
C IT does not effect everyone in the organisation.
D IT is best left to the technical department.
E The success of business depends on the quality of the information in the organisation.
2 A very useful approach for a business to decide what information the Management Information System (MIS)
must report on is to specify the business's critical success factors (CSF). Performance indicators are then
specified for each CSF and the MIS must be able to report in terms of these indicators.
Which THREE of the following would you suggest are used to measure the achievement of a retailer's CSF
of offering excellent customer service?
A Queue lengths at tills.
B Customer satisfaction scores.
C Employee satisfaction scores.
D Number of returns.
E Number of customer complaints.
3 A doctor’s practice is designing a new IT system to allocate patient appointments. Under the new system, the
receptionist would ask patients seeking an appointment a series of questions and immediately input the
answers into the IT system. The computer would use this information to make a recommendation to the
receptionist. There are three possible recommendations: Make appointment with doctor; OR Make
appointment with nurse; OR No appointment required.
A steering committee has been established to help ensure control during the design and implementation
process.
8 Questions
Which of the following statements are true of a steering committee?
A The steering committee monitors the system implementation and the specific deliverables against the
project plan. It has overall responsibility to ensure the system is delivered to the required time, cost
and quality.
B The steering committee is responsible for creating the detailed budget for the new project.
C The steering committee brings together the sponsor of the project, the project manager who is
responsible for the day to day delivery of the project, specialist IT staff with responsibility for
delivering the project and user representatives with responsibility for accepting the system
D The steering committee should also consider the detailed needs of the internal auditors
E The steering committee should consider the ethical implications of the project
4 Are the following features characteristic of either Executive Information Systems (EIS) or Management
Information Systems (MIS)?
A MIS
B EIS
Imitates the layout of manual daybooks, so that the user has to scroll through lists of
individual transactions in order to find a period or category total.
Starts at the summary, and then permits, but does not force, the executive to drill down to
lower levels.
Designed to provide information that has been generated within the organisation.
Designed to allow internal and external information to be reported, although in practice the
less structured and predictable nature of much external information may make this difficult.
5 The term ‘Big Data’ refers to which of the following ?

1. Large volumes of structured data
2. Large volumes of unstructured data
3. The technology and techniques used to analyse that data
A 1 and 2
B 2 and 3
C 1 and 3
D 1, 2 and 3
6 Harry is Director of Information and Communications in a manufacturing company. The company has a
number of transaction based systems but lacks a Management Information System (MIS).
Which of the following statements regarding MIS are correct ?
A The MIS is a communication process wherein information is recorded, stored, processed and
retrieved for managerial decision-making
B The MIS is a communication process whereas data is converted into information
C The MIS gathers detailed external information
D The MIS incorporates complex mathematical models and statistical functions to offer management
advice on strategic decisions
Questions 9
7 Tough Steel Ltd manufactures steel which it supplies to a large number of car manufacturers. The company
have six furnaces, each of which operate 24 hours a day, 7 days a week, 365 days a year.
Tough Steel’s systems manager believes the company’s information systems are in need of an overhaul. At
present, the company computer network only extends to administrative offices.
Customer orders are scheduled by a production manager who plans production on a daily worksheet (hand
written). The worksheet photocopied, and a copy collected at the start of each shift by the six furnace
supervisors.
The systems manager has proposed a new system. This would expand the computer network to all Tough
Steel sites. Information would flow from the production manager to the furnace supervisors. Information
relating to workflow and the operation of the furnaces would be fed back to the production manager.
Which of the following best describes the systems manager’s proposal?
A The proposed upgrade does not support Tough Steel’s strategic requirements because the company
should be gathering external information concerning new types of steel and new markets
B The proposed upgrade does not support Tough Steel’s strategic requirements because the nature of
the product and its manufacturing does not require an elaborate system
C The proposed upgrade is an exciting opportunity for Tough Steel to modernise its systems and gather
valuable information
D The proposed new system will hugely reduce the company’s operating costs
8 Identify THREE consequences of not having an IT strategy.

A IT is exploited to gain competitive advantage.
B Poor quality information is produced.
C IT costs escalate.
D Systems may not be integrated.
E Business-led systems are developed.
9 Which THREE of the following issues would you expect to be addressed as part of the service level
agreement connected with an outsourcing contract?
A Contractual flexibility.
B Exit route.
C Standard of service level required.
D Other organisations for which services are supplied.
E Number of staff employed.
10 Which THREE of the following represent aspects of ‘Big Data’ that are significantly different to earlier
approaches to data collection and analysis?
A The volume of data
B The proportion of external data
C Data is more consistent in type and structure
D The proportion of unstructured data
E Data is in digital form
10 Questions
5 Financial risk
1 What is the purpose of hedging?
A To reduce or eliminate exposure to risk.
B To reduce costs.
C To protect a profit already made from having undertaken a risky position.
D To make a profit by accepting risk.
2 MF plc has a short position (ie where it has already sold) on 40 September long gilt contracts. Each contract
is for £500 and the tick size is 1/32. The contract price rose from 201.78125 to 202.15625.
What is the amount of profit or loss on the 40 futures contracts in total?
3 Buying and selling in different markets to make a guaranteed profit is referred to as what?
A Speculation
B Arbitrage
C Profit maximisation
D An efficient market
4 PS is a European company that owns 100% of the equity in a South American company H, where inflation
rates are high. H buys all its raw materials from PS and makes products for sale in neighbouring countries
where the economy is stronger and inflation lower. H pays PS using its own currency.
Which of the following statements are correct ?
A PS is exposed to transaction risks. The currency received from H is likely to decline over time because
of domestic inflationary pressures.
B PS is exposed to translation risks. The currency received from H is likely to decline over time because
of domestic inflationary pressures.
C H will be exposed to economic risk because it will almost certainly have to reflect the declining
exchange rates in selling prices. This could make it difficult for H to make a profit.
D H could create a natural hedge by exporting products to the country where PS is based in order to gain
access to currency used by PS.
5 A company based in the UK acquires 50% of its resources in the UK and the other 50% from suppliers in
Continental Europe (the eurozone countries). It sells nearly all its output to North America. It is strategically
exposed to the risk of a rise in the value of the euro, and to a fall in the value of the dollar against sterling.
What is the term for this type of currency exposure?
A Translation.
B Economic.
C Transaction.
D Strategic.
6 C Ltd grows barley to sell to breweries. The management are concerned that the yield from this year's crop
will be worse than last year and would like to purchase an option to reduce their risk.
Which ONE of the following would NOT reduce the barley grower's risk?
A Put Option to sell barley
B Weather Future to guarantee sunshine
C Call Option to buy barley
D Put Option to sell the company's biggest foreign competitor's currency
Questions 11
7 D plc is an electronics firm that has developed a new product which is highly innovative and likely to create a
new market. The board has decided that it must build a new manufacturing site as soon as possible to beat
any competitors to market and develop significant dominance therein.
The finance director recommends that a rights issue should be used to finance this investment and D
subsequently makes an announcement to the stock market about the rights issue.
From the following list of statements, select the TWO which are likely to be FALSE about the impact on
the company's share price:
A The directors cannot give full details of the new product to the market - the share price will FALL
B D has always developed innovative products in the past - the share price will RISE
C The company has already raised significant funds for another project in the last 12 months - the share
price will FALL
D The industry press is publishing stories about rumours that D is struggling to perfect its latest idea -
the share price will RISE
8 A UK company expects to receive settlement of an export invoice worth USD 12 million. The current exchange
rate between GBP and USD = US$1.50/£.
The daily volatility of this exchange rate = 0.5% and the standard normal value (Z) associated with a one-tail
99% confidence level is 2.33.
Calculate, to the nearest whole £, the 1 day 99% value at risk (VaR).
9 An investor buys a put option on XYZ shares, with an exercise price of 500p. The option was brought for a
premium of 20p.
If the price on expiry of the option is 440p, what is the gain or loss made by the investor just on the option
itself?
A 60p gain.
B 20p gain.
C 40p gain.
D 20p loss.
10 What term is used to describe an organisation's exposures to the effect of currency changes on the values
of assets and liabilities in its accounts?
A Structural exposure.
B Transaction exposure.
C Translation exposure.
D Economic exposure.
6 Interest rate risk

1 Which of the following is the best description of interest rate risk?
A The risk from borrowing funds
B The risk from not being able to meet interest payments on borrowings
C The risk to profits, cash-flows or even a company's valuation from any change in interest rates
D The risk that interest rates will rise
12 Questions
2 What is the purpose of hedging?
A To protect profits already made from having undertaken a risky position
B To reduce exposure to risk
C To reduce borrowing costs
D To make a profit by embracing risk
3 A company wishes to arrange a collar to fix a future interest rate on a variable rate five-year loan it has
obtained from Gross Bank.
By arranging the collar, the company will effectively be:
A Buying a cap and buying a floor.

B Buying a cap and selling a floor.
C Selling a cap and selling a floor.
D Selling a cap and buying a floor.
4 Companies use interest rate swaps as way of managing their exposure to interest rate risk, but they can
experience problems using them.
Which of the following is NOT a disadvantage of using interest rate swaps?
A Counterparty default
B The need for expensive legal advice when setting up swaps
C The cost of bank fees for identifying suitable counterparties
D Interest rate volatility
5 Which TWO of the following are disadvantages of using interest rate futures?
A Contracts are subject to basis risk
B Contracts are limited to a set amount of borrowing by fixed contract values
C Contracts are closed out on a specified date
D Contracts are only available for borrowing in a limited number of currencies
6 W Ltd has a 6 month revolving loan facility for £2 million with its bank. This is reset every 6 months, agreed 3
months in advance of it taking effect. The finance director of W believes that interest rates will rise in the next
6 months and has decided to use a forward rate agreement (FRA) to hedgethis borrowing.
Current base rates are 6% and W can access a 3-9 FRA at 6.1%.
Calculate the amount of interest paid (to the nearest £) for the next reset period if interest rates rise to
7%.
7 Which of the following is NOT a characteristic of the basic Black-Scholes model?

A It assumes a constant risk free rate over the option period.
B It applies to both US and European style options.
C It ignores the effects of transaction costs.
D It assumes that investors are risk-neutral.
8 Lucas Lodge Hotels plc wishes to borrow £20 million for four years at a fixed rate of interest and Hunsford plc
wishes to borrow £20 million for four years at a floating rate of interest. Each company can borrow the
required amount as follows:
Floating rate Fixed rate

%
Lucas Lodge Hotels plc LIBOR plus 60 basis points 6.8
Hunsford plc LIBOR plus 120 basis points 7.0
Questions 13
Assuming the companies agree to an interest rate swap and any benefits are shared equally, what will be
the annual net interest cost for Lucas Lodge Hotels plc?
A 6.7%.
B 6.5%.
C 6.4%.
D 6.6%.
9 The treasurer of BU Ltd needs to borrow cash (in sterling or GBP) in November and is worried that interest
rates will rise soon after.
Which of the following would be an appropriate hedging transaction for the treasurer to use?
A Sell December short sterling futures
B Buy September short sterling futures
C Buy December short sterling futures
D Sell September short sterling futures
10 A company has arranged a three-year variable rate loan at LIBOR plus 50 basis points. It has also arranged an
interest rate collar that fixes a maximum effective borrowing cost for the company of 8.50% and a minimum
effective borrowing cost of 7.50%.
What does the collar consist of?
A With the collar, the company has bought a series of consecutive interest rate put options at a strike
price of 8% and sold a matching series of call options at 7%.
B With the collar, the company has bought a series of consecutive interest rate put options at a strike
price of 8% and bought a matching series of call options at 7%.
C With the collar, the company has bought a series of consecutive interest rate put options at a strike
D With the collar, the company has bought a series of consecutive interest rate put options at a strike
price of 8% and bought a matching series of call options at 8%.
7 International risk – Exchange rates

1 Lanvert SA is a French company which trades frequently with Switzerland and the USA.
Transactions to be completed within the next six months are as follows:
Receipts Payments
3 months time $4.8m $7.6m
6 months time SF4.5m €2.8m
The company can do money market hedges, forward contracts and traded options.
What would be your first TWO recommendations to deal with the transactions above?
A Traded options.
B Forward contracts.
C Do nothing to some transactions.
D Money market hedges.
E Net off transactions.
14 Questions
2 Are the following statements correct or incorrect?
Statement 1 – A company is only exposed to currency risk if it exports or imports goods or services, or
borrows or invests in a foreign currency.
Statement 2 – When interest rates on the euro are lower than interest rates on sterling a UK company with no
other cash flows in euros will not save money by borrowing in euros.
A Both statements are correct.
B Statement 1 only is correct.
C Both statements are incorrect.
D Statement 2 only is correct.
3 Lytham plc trade in south-east Asia and remit profits to the UK.They are considering methods that they can
use to minimise their exposure to foreign exchange risk.
Which of the following will not protect them from exchange risks?
A Leading and lagging.
B Forward contracts.
C Matching.
D Invoicing in local currency.
4 The current spot rate for the Singapore dollar against sterling is £1 = Sing $2.45.
If Singapore experiences inflation at 2% each year over the next two years, and if the UK experiences
inflation at 5% each year over the same period, what movements in the exchange rate should we expect
in that time?
A Sterling will appreciate by about 6%.
B Sterling will appreciate by about 3%.
C Sterling will depreciate by about 6%.
D Sterling will depreciate by about 3%.
5 A British company is due to receive an amount of €10,000,000 from a French customer. The current spot rate
quoted is £1 = €1.2525 - 1.2550.
To the nearest £ how much will the UK company receive?
A £12,550,000
B £7,968,127
C £12,525,000
D £7,984,032
6 Chocshop distributes exotic chocolates from around the world. It buys chocolates from Ruritania which cost
Ruritanian $130,000 and the goods are resold in the UK for £42,500. At the time of importation, the exchange
rate is £1 = R$ 3.4050 - 3.6000.
What is the expected profit or loss on the resale of the chocolates in the UK?
A £6,389 profit.
B £4,321 profit.
C £5,384 loss.
D £6,898 loss.
Questions 15
7 Edted plc has to pay a Spanish supplier 100,000 euros in three months' time. The company's financial
director wishes to avoid exchange rate exposure, and is looking at four options.
1. Do nothing for three months and then buy euros at the spot rate.
2. Pay in full now, buying euros at today's spot rate
3. Buy euros now, put them on deposit for three months, and pay the debt with these euros plus
accumulated interest.
4. Arrange a forward exchange contract to buy the euros in three months' time.
Which of these options would provide cover against the exchange rate exposure that Edted would
otherwise suffer?
A Options 1,2,3 and 4.
B Option 4 only.
C Options 3 and 4 only.
D Options 2,3 and 4 only.
8 Consider the following statements concerning currency risk:

1. Leading and lagging is a method of hedging transaction exposure
2. Matching receipts and payments is a method of hedging translation exposure
Which of the above statements is/are true?
A Statement 1 False; Statement 2 False.
B Statement 1 True; Statement 2 False.
C Statement 1 False; Statement 2 True.
D Statement 1 True; Statement 2 True.
9 A UK company is about to enter two transactions receiving an amount of €9,112,500 from a Dutch company
and paying an amount of $7,600,000 to an American company.
Current exchange rates are: €1 = £0.8 and £1 = $1.9
What will the company receive and pay in £?
A Receives £11,390,625 Pays £4,000,000
B Receives £7,290,000 Pays £14,440,000
C Receives £7,290,000; Pays £4,000,000
D Receives £11,390,625 Pays £14,440,000
10 A group of companies controlled from the USA has subsidiaries in the UK, South Africa and Denmark. Below,
these subsidiaries are referred to as UK, SA and DE respectively. At 31 March 20X8, inter-company
indebtedness is as follows:
Debtor Creditor Amount
UK SA 3,500,000 South African rand (R)
UK DE 1,400,000 Danish kroner (Kr)
DE SA 2,300,000 South African rand
SA UK £240,000 sterling
SA DE 1,150,000 Danish kroner
It is the company's policy to net off inter-company balances to the greatest extent possible. The central
treasury department is to use the following exchange rates for this purpose.
US$1 equals R6 / £0.70 / Kr 5.8
16 Questions
Which of the following would be a possible arrangement for settling inter-subsidiary indebtedness?
A The UK subsidiary receives $56,322 from the Danish subsidiary and pays $425,533 to the South
African subsidiary.
B The UK subsidiary pays $56,322 to the Danish subsidiary and receives $425,533 from the South
African subsidiary.
C The UK subsidiary receives $425,533 from the South African subsidiary and receives $56,322 from the
Danish subsidiary.
D The UK subsidiary pays $425,533 to the South African subsidiary and pays $56,322 to the Danish
subsidiary.
8 International risk – Financial instruments

1 Lanvert SA is a French company which trades frequently with Switzerland and the USA. It has a net payment
in 3 months time of $2.8 million to make.
Current bank prime rates (per annum)
3 month 6 month
France 6% 6.25%
Switzerland 8% 8.30%
Lanvert can borrow at prime plus 1% in France, and prime plus 1.5% in Switzerland, and can invest at 1%
below prime in France and Switzerland.
Given the rates above, what is the amount of Euros that the company will pay using a money market
hedge, to the nearest €100,000?
A €2.9 million.
B €3.1 million.
C €3.0 million.
D Unable to calculate, not enough information.
2 Lanvert SA is a French company which trades frequently with Switzerland and the USA. It has a net payment
The relevant exchange rates are:
Exchange rates in Paris € per $1
Spot 1.0610 – 1.0661
3 months forward 1.0650 – 1.0715
6 months forward 1.0683 – 1.0740
Calculate, to the nearest € 000, the amount that can be guaranteed to be paid in 3 months time.
3 What is the maximum liability of the writer of a call option?

A Zero.
B Exercise price – Premium.
C Exercise price + Premium.
D Unlimited.
Questions 17
4 A US company has made a sale to a customer in France for €1 million, with payment due in two months.
How could the company hedge its exchange rate exposure during this period using currency futures or
options on currency futures?
A Buy euro futures or buy call options on euro futures.
B Buy euro futures or buy put options on euro futures.
C Sell euro futures or buy call options on euro futures.
D Sell euro futures or buy put options on euro futures.
5 Typha plc, a UK business, has recently sold goods to a US customer and expects to be paid $300,000 in three
months' time. Typha plc enters into a forward exchange contract to sell $300,000 in three months' time to
protect against foreign exchange risk. Exchange rates are:
$ spot 1 4505-1·4545
3-months forward $0·0025-0·0020 pm
What is the sterling amount that will be received by the company in three months' time (to the nearest £)?
A £207,182.
B £206,540.
C £206,612.
D £205,973.
6 In April, a company arranged a forward exchange contract to sell $650,000 that it expected to receive from a
US customer in three months, in July. During May, the company is notified that its US customer has filed for
Chapter 11 bankruptcy protection, and will not be able to pay the money due in June.
What should the company do to avoid any exposure to currency risk?
A Buy sterling/US dollar options for expiry in July.
B Arrange a forward contract to buy $650,000 in July.
C Notify the bank that it is cancelling the forward contract.
D Do nothing.
7 Easter Inc, an American company, buys some of its goods from Australia. The most recent invoice is for
A$1,300,000 which is due in 2 months time. The current exchange rate is A$2.80. It has been offered a
forward contract to buy Australian dollars at A$2.90 in two months time. The exchange rate is not expected to
go above A$3.00.
Calculate, to the nearest $100, the maximum risk that Easter would be exposed to if the company decided
to hedge this expense using the forward contract.
8 PLW Inc. has entered a transaction that will involve a yen payment exposure arising in six months time. The
company's treasurer decides to cover the exposure by means of foreign currency options, and buys a 6
month yen call/dollar put option.
Forward exchange rate 240 yen = $1
Option strike price 240 yen = $1
Option premium 1.2%
What is the worst case effective exchange rate that the company will have to pay, and what would it do in
6 months' time if the spot rate is 245 yen = $1?
A 237.1 Let option lapse
B 242.9 Let option lapse
C 242.9 Exercise the option
D 237.1 Exercise the option
18 Questions
9 An American company is due to receive an amount of £ 5,000,000 from a British customer in three months'
time. The company is looking to take out a forward contract. The current spot rate quoted is £1 = $1.9000 and
the forward rate is quoted at a 0.0035 premium.
To the nearest $ how much will the US company receive under the forward contract?
A $2,626,740
B $9,482,500
C $9,517,500
D $2,636,436
10 An engineering company has entered into a futures contract requiring it to deliver an agreed amount of KRW
(South Korean Won) to a counterparty in 3 months time.
Which of the following best describes the likely impact on the engineering company's margin if the value
of the KRW rises against the company's home currency?
A Some of the margin paid to date will be returned to the company
B The margin will remain unchanged
C Additional funds will need to be deposited by the engineering company
D The margin will have to be renegotiated between the two parties to this contract
9 Investment risk
1 Which of the following is NOT a constituent element of an organisation's cost of capital?
A A premium for business risk
B The risk free rate of return
C A premium for dividends payable
D A premium for financial risk
2 A new investment requires funds of $2 million but will deliver savings of $440,000 p.a. in perpetuity. The cost
of capital is 20%.
Debt is introduced to the value of $800,000 at a coupon rate of 14% but is allowable for tax relief of 30%, also
in perpetuity.
Calculate the Adjusted Present Value (APV) of this investment to the nearest $.
3 Capital rationing is a restriction on an organisation's ability to invest capital funds and can occur in one of two
ways.
For each of the following two definitions, identify the correct term from the three options that follow.
An internal budget ceiling imposed by management
An external limit on borrowing applied to a company
A Soft capital rationing

B Hard capital rationing
C Set capital rationing
4 An electric motor for a passenger ferry costs £20,000 and can be replaced either annually or after 2 years. If
the motor is replaced after 2 years, the scrap value drops from £16,000 to £13,000 and running costs rise
from £5,000 in year 1 to £5,500 in year 2.
Assuming the owner of the ferry uses a cost of capital of 10% and the 2 year cumulative discount factor is
1.736, calculate the equivalent annual cost (EAC) of the 2 year option in absolute terms.
Questions 19
5 Darwin Ltd is considering investing in a project with the following expected cash flows
Year Cash flow
£
0 (50,000)
1 40,000
2 30,000
3 20,000
Darwin uses the following certainty equivalents to adjust for risk.
Year Certainty
equivalent
1 90%
2 80%
3 70%
Darwin's cost of capital for cashflows which are certain is 12%.
Calculate, to the nearest hundred pounds, the net present value of the project.
6 Complete the following sentence with the correct word.

The cost of capital is the cost of funds that a company raises and uses, and is the return it
should make on its investments.
7 IG Ltd needs to borrow £18 million to acquire new machinery which will deliver additional cash-flows of £1.6
million each year indefinitely. Projects of this sort are appraised using a discount rate of 10%.
The capital structure of IG is 100% equity funded, but the finance director is considering using debt finance
available at a rate of 6%. Issue costs would be tax-deductible and have been quoted as £300,000.
The marginal tax rate for IG is 30%.
Calculate the Adjusted Present Value in £ million, to 2 decimal places.
If you wish to indicate a negative value use a minus sign.
8 QB Associates is a crowd-funding private equity business that has $50,000 to invest on behalf of its clients.
Currently, it has 4 possible investments that is inspecting, all of which are divisible (ie a proportion of the
project can be undertaken if there are insufficient funds to invest in it fully).
The investments are as follows:
Investment NPV Funds required
at time T0
A $100,000 ($50,000)
B ($50,000) ($10,000)
C $84,000 ($10,000)
D $45,000 ($15,000)
Rank the investments in order of preference, from 1 to 4, with 1 representing the best investment.
Project Rank
A
20 Questions
9 For each of the following explanations identify the appropriate investment real option:
A An investment will not be undertaken if it does not deliver a favourable outcome
B The decision to proceed will be deferred until a better time
C Initial losses may be acceptable if the investment delivers longer term profits
Option to abandon
Option to wait
Option to follow on
10 J Ltd is a food manufacturer and is considering an investment of £60 million in new packaging lines that are
expected to last 5 years. The company uses a weighted average cost of capital of 5% for all investments. It is
expected that at the end of its life, the lines will have a value of £6 million.
Volumes and margins for these proposed new lines have been difficult to predict with any certainty, so the
management accountant has prepared estimates based on past lines - there is a 20% chance that annual
cash-flows could be £10 million p.a., 40% likelihood of achieving £12 million p.a. and 40% chance that £15
million cash-flows could even be achieved.
Calculate, to the nearest £, the Expected Net Present Value for this investment.
NB: 5% 5 year discount factors are 0.784 and 4.329. If you wish to indicate a loss use a minus sign.
10 Internal controls
1 M Co is an exclusive supermarket chain with shops in several cities. Regular inventory counts are undertaken.
However, the directors are concerned that there are often significant differences between the physical
inventory on hand and the amounts shown in inventory records.
Which of the following controls would reduce the differences? Select ALL that apply.
A Store security staff to check employees’ bags at random when they are leaving the shop
B All purchases of goods for resale to be ordered by the buying department at head office
C All selling prices to be set by head office
D All goods should carry electronic tags that trigger alarms at store exits unless the goods have been
scanned through the EPOS terminals/tills
E Monthly independent inventory counts to be undertaken by staff from other shops or from head office,
with the results compared to inventory records
2 Which of the following controls is not designed to prevent goods being supplied to a poor credit risk?
A Obtaining references for new customers.
B Regular review of customer payment records.
C Sequential numbering of blank order forms.
D Checks on customer files before an order is accepted to ensure there are no credit problems.
3 Which of the following controls is not primarily designed to ensure proper recording of purchases?
A Comparison of supplier statements with purchase ledger balances.
B Review of allocation of expenditure.
C Comparison of goods received notes with purchase orders.
D Reconciliation of purchase ledger control account to purchase ledger balances.
Questions 21
4 Which of the following controls would best ensure that all monies received are banked?
A Daily bankings.
B Comparison of bank paying-in slips with initial receipt records.
C The amounts received being listed when the post is opened.
D Issuing receipts for amounts received.
5 For each of the three control activities below identify the correct type of control.
A member of staff checks invoices from suppliers against goods received
notes before they are paid
The credit controller chases customers who have exceeded their credit period
All customer services staff are given training and a procedures manual
A Prevent
B Detect
C Correct
D Direct
6 Toni has been appointed Branch Manager, managing a large branch of a national clothes retailer. Toni has
been informed by head office that each branch is treated as a separate profit centre.
Which TWO of the following will fall under Toni’s remit?
A Grow branch revenue
B Control branch costs
C Expand the branch network
D Investment responsibilities
7 J Co operates a factory that produces furniture. The factory has a number of controls in place.
Select the control procedure that would be most appropriate for each of the following control objectives.
Prevent staff from over claiming number of hours worked
Prevent overpaying of purchase ledger amounts
Prevent theft of portable plant and equipment
A Detailed asset registers

B CCTV coverage
C Time sheets signed by supervisors
D Confirmation of information by suppliers
E Separate buying department
F Separate departments for payroll and human resources
8 Bean Co has instituted some new controls over its procurement system. One such control is that the company
always invites tenders for goods and services.
Which TWO of the following control objectives does that control answer?
A The business does not pay too much for goods and services.
B The business does not purchase goods and services from connected parties.
C The business has goods and services when it needs them.
D The business has a central database of suppliers.
E The business researches potential suppliers before contracting with them.
22 Questions
9 Which of the following is not a control designed to ensure that assets are safeguarded?
A A register of non-current assets.
B Dispatch notes of goods sent out.
C Inventory counts.
D Review of accounting records to see if expenditure on non-current assets has been included as capital
expenditure.
10 The following statements relate to internal controls.

1. One of the objectives of an internal control system is to eliminate risk.
2. Internal controls should be designed to minimise risks and provide reasonable assurance that
organisations will fulfil their objectives.
Which of the statements are true?
A Both statements are true
B Both statements are false
C Statement 1 is true and statement 2 is false
D Statement 2 is true and statement 1 is false
11 Control failures
1 Organisations exercise control over the individuals they employ.
Which one of the following statements regarding controls over employees is FALSE?
A HR controls are more likely to be weak in a smaller business
B Employment contracts are a form of HR control
C The main reason control is exercised over employees is to prevent fraud
D The main reason control is exercised over employees is to ensure that their work contributes to
achievement of the organisation’s goals
2 Which THREE of the following represent conditions necessary for fraud?

A Collusion
B Dishonesty
C Opportunity
D Motive
E Complacency
3 An information system contingency plan or disaster recovery plan should provide for standby procedures,
recovery procedures and personnel management.
For each of the three descriptions below identify the associated aspect of a disaster recovery plan.
Procedures implemented after the cause of the breakdown has been discovered or corrected
Procedures that ensure that some operations can be performed during the period that normal
services are disrupted
Policies to ensure that the recovery plan is implemented and operates as intended
A Personnel
B Recovery
C Standby
Questions 23
4 Which TWO of the following are the main benefits of an effective internal control system?
A Reduced time required for the external audit
B Safeguard the shareholders’ investment
C Manage and control business risk
D Maximise profitability
5 Which THREE of the following controls is designed to guard against ghost employees, imaginary
employees being paid wages or salaries?
A Review of the number of employees required to achieve a certain amount of work.
B Requiring employees being paid cash wages to collect them in person.
C Recording of hours worked by timesheets.
D Comparison of payroll with employee personnel records.
6 A computer repair business keeps a store of computer parts. The parts store is locked and only Jaitinder has a
key. Jaitinder only issues parts when she receives a signed parts requisition from Joanne. If a repairs
engineer requires a part, they ask Joanne to sign a parts requisition. All parts requisitions are charged to
specific repair jobs. An inventory count is carried out every two weeks by Pippa.
Are the following statements true or false?
1. Pippa exercises some supervision over the work of Jaitinder
2. Any fraud involving parts theft would have to involve Pippa
B Both statements are false
C Statement 1 is true and statement 2 is false
D Statement 2 is true and statement 1 is false
7 F Co is a company which produces very expensive parts for ships and ferries. The parts are delivered all over
the world. F Co has an excellent IT system which controls the ordering and delivery. The parts usually cost
around $1 million to make and take about 10 days to build. F Co has a disaster recovery site around 250 miles
from head office, which is tested annually. It takes two days to activate but incurs minimal cost to maintain. F
Co is now ready to refresh its entire IT infrastructure at a cost of $3 million. It does this every 4 years. Four
options for the refresh of the disaster recovery plan are shown below.
Which one represents the best course of action for F Co?
A Continue with its existing disaster recovery site and infrastructure, no additional cost
B Re-use the infrastructure that will be replaced at the current disaster recovery location at a cost of
$0.25 million
C Install a new disaster recovery site more locally at a cost of $2.1 million
D A second system should be installed at head office in case the first one fails
8 Teeming and lading is a fraud risk. It involves the misallocation of receipts to cover-up missing funds that
have been fraudulently removed from the business.
Poor segregation between which of the following areas would increase the risk of this type of fraud
occurring?
A Stores department and goods outwards
B Wages department and cash department
C Receivables ledger and cash receipts
D Payables ledger and goods inwards
24 Questions
9 M Co employs consultants who are based in remote locations around the world. Sam, a Senior Consultant
based in a remote location, requested a team of four junior staff and recommended four suitable candidates.
The four candidates were immediately employed by M Co, with the Human Resources department at head
office taking care of the administration and paperwork. Because of Sam’s recommendation, none of the usual
background checks were performed. Since starting work, the four staff have submitted significant overtime
and expense claims to Sam, who has authorised and passed to payroll for payment.
Based on the scenario, which of the following are probable flaws in M Co’s system?
A Insufficient checks on the need for additional staff
B Insufficient checks on employee identification, qualifications and background
C Lack of segregation of duties between overtime authorisation and payment
D Lack of staff training
E Insufficient control over the overtime approval process
10 HM Co manufacture automotive components. Orders for materials are made by department heads and signed
by the production director. Only preferred suppliers are used. HM operate JiT production. Goods delivered are
received and used immediately without being checked. Invoices are paid on time by direct debit without
reference to the original orders.
Which TWO of the following are likely consequences of the HM Co system?
A False invoices could be paid
B Materials received could be stolen goods
C Inferior quality goods could be accepted
D The accounting value of materials in inventory stores could be incorrect
12 Internal audit
1 Planning is essential to help ensure an effective audit.
Which of the below represent objectives of the audit planning process? Select ALL that apply.
A To set out the audit objectives and the other priorities that apply
B To define how the audit evidence necessary to achieve the objectives will be achieved
C To perform data analysis to identify major weaknesses
D To identify the resources that will be needed and actually employed in audits
E To perform compliance tests
2 Benchmarking is sometimes used as an audit tool, for example during analytical review.
Which one of the following statements correctly identifies the use of benchmarking as part of an
analytical review?
A Implementing quality management to match competitior standards
B The use of business process reengineering to implement best practice
C Seeking external accreditation for quality processes
D Comparing financial and non-financial performance with other organisations
Questions 25
3 Which of the following statements concerning internal audit's role in risk management are true?
1. Internal audit's primary role in a company is identifying risks.

2. Internal audit has a key role in determining company strategy to minimise risks.
3. Internal audit monitors risk strategies to ensure that they operate effectively.
A (1) only.
B (1) and (2) only.
C (3) only.
D (1), (2) and (3).
4 Which of the following is the best description of a management audit?

A It assesses the financial performance of the departments for which managers are responsible.
B It is an audit by managers of their own departments.
C It assesses whether adequate resources are being devoted to management and control.
D It aims to reveal weaknesses in the performance of individual managers and in the overall management
structure.
5 Which of the following are primary objectives of tests of controls for internal auditors? Select ALL that
apply.
A Identify those persons within the organisation whose performance is not acceptable.
B Establish whether the controls are operating as they are expected to be.
C Establish whether the documentation relating to controls fairly reflects the operation of the system.
D Establish whether improvements need to be made to controls.
E Form an opinion as to the adequacy of the system as a whole for managing the risks identified.
6 Plant plc are concerned about the independence of its internal audit function.
Which of the following would help ensure independence?
A Outsource the internal audit function
B Ensure the Head of Internal Audit has access to the Chairman of the Board of Directors and is
accountable to the Audit Committee
C Ensure the internal auditors are physically separate from the rest of the workforce
D Ensuring internal auditors work closely with the executive directors
E Ensure all internal auditors have previously worked in another area of Plant Plc to enable them to
provide insight and understanding
7 Which of the following audit tests would not be relevant in testing procurement?
A Reviewing a sample of contracts to confirm supplier was selected after thorough research and tender
procedure.
B Reviewing suppliers to confirm that none appear to be connected with employees.
C Checking movements of inventory from one of the organisation's locations to another.
D Comparing invoices with original purchase requisitions.
26 Questions
8 Which of the following will make the least impact on successfully performing analytical procedures?
A The detail of the available information.
B The reliability of the available information.
C The complexity of relationships.
D The comparability of the available information.
9 Which of the following audit procedures is a test of controls?

A Checking that the total shown on the aged list of receivables has been correctly analysed.
B Checking that approved sales orders indicate that reference was made to the aged listing.
C Enquiring whether the aged listing is used as a basis for credit control decisions.
D Checking that the total of the nominal ledger receivables control account agrees to the total shown by
the aged listing.
10 What is the main advantage in using statistical sampling in auditing?

A To reduce the need for audit judgement.
B To ensure that a representative sample is selected.
C To reduce the number of items to be tested.
D To provide an objective estimate of the probability of error in the population.
13 Monitoring
1 The Project Support Office (PSO) is a government agency that provides a service desk and project support
service to other government departments. Generally, service desk queries are relatively simple and project
support queries are more complex.
Senior management have decided to introduce the balanced scorecard to monitor PSO performance.
Identify THREE areas that the PSO balanced scorecard should address.
A A target measure stating the minimum number of incidents to be handled by each member of staff per
month
B Customer satisfaction measures
C Group target measures rather than individual measures
D Target call resolution time
E Differentiate between simple and complex queries and measure these separately
2 Exception reporting within a business is:

A The reporting of exceptional events, outside the normal course of events.
B The scrutiny of all data as a matter of course, save in exceptional circumstances.
C Where reports on routine matters are prepared on an 'ad hoc' basis.
D The analysis of those items where performance differs significantly from standard or budget.
3 All businesses need to record income and expenditure and keep financial records. Budgets have a number of
control functions.
Which one of the following is not a control function?
A To evaluate performance.
B To motivate.
C To communicate and co-ordinate activities through the allocation of resources.
D To limit expenditure.
Questions 27
4 Which of the following is an example of a qualitative non-financial control?
A Standard costing system
B Strategic plan
C Activity-based management
D Balanced scorecard
5 What type of cost can be defined as: 'The costs of failure to deliver the required standard of quality'?
A The cost of appraisal.
B The cost of non-conformance.
C The cost of quality.
D The cost of conformance.
6 Bazda Motor Company manufacture motor vehicles. One business unit within Bazda produces alloy wheels.
These wheels are supplied to Bazda and to other motor vehicle manufacturers. The gross margin on sales to
other vehicle manufacturers averages 35%. Transfer prices for ‘internal sales’ are set annually by the Bazda
finance department. The transfer price for the upcoming year has been set at cost price, as this makes it
easier to establish a realistic figure of the full cost of a Bazda vehicle supplied with alloy wheels.
Are the following three statements TRUE or FALSE?
A True
B False
Unless the alloy wheel business unit is obligated to supply Bazda they are likely to prioritise
external sales
Unless appropriate adjustments are made, the planned approach will distort the financial
performance of the alloy wheel business unit
It is not possible to set realistic financial performance targets to the alloy wheel business
unit under these circumstances
7 A government-run budgetary advisory service uses the balanced scorecard to monitor performance.
Which one of the following criteria is most closely linked to the ‘customer’ perspective for this
organisation?
A Whether the advice provided enabled customers to better manage their finances
B Staff turnover
C Identifying the processes which service staff must carry out efficiently and effectively in order to
deliver meaningful, timely advice
D The percentage of staff in the service that possess a recognised financial qualification
8 According to Fitzgerald, performance measurement in the service sector is based on six dimensions.
Select these SIX dimensions from the list below.
A Efficiency
B Flexibility
C Innovation
D Resource utilisation
E Financial performance
F Excellence (of service quality)
G ROI
H Competitiveness
28 Questions
9 Which THREE of the following organisations would be most suited to application of the management
accounting technique EVA?
A A management consultancy
B A motor vehicle manufacturer
C A software development company
D A mobile phone manufacturer
E An accounting partnership
F A commercial printing company
10 What can be defined as the process for calculating and charging costs when a product is sold, or when it
is transferred to a finished good store?
A Target costing
B Life cycle costing
C Backflush costing
D Transaction costing
14 Control and direction

1 One important aim of a post-completion audit is to:
A Obtain sign-off on all documentation by the project sponsor
B Appraise the performance of the project manager
C Capture organisational learning and document it to ensure lessons are learnt
D Close the budget codes to prevent future expenditure
2 Projects involve risk and risk management.

The taking out an insurance policy is an example of risk:
A Reduction
B Transfer
C Acceptance
D Avoidance
3 A project objective should:

A Describe how the project fits the organisation’s overall strategy
B Describe the overall aim of the project
C Describe how the overall aim of the project will be achieved
D Describe a specific, required project outcome
4 Quality management, in the context of project management, should focus on:

A Ensuring the fitness for purpose of deliverables
B Inspection and testing of deliverables
C Ensuring professionally presented project reports
D The post completion audit
5 Identify the main benefits of post completion auditing from the list below.
A Improved decision making

B Better researched projects
C Improved internal controls
D Highlight reasons for successful projects
E The process is quick and inexpensive
Questions 29
6 Hamza works as a store manager for a large coffee shop chain. Over half of Hamza’s remuneration is
dependent upon the store achieving monthly sales targets.
Hamza is under pressure, which has resulted in dysfunctional behaviour.
Classify the following examples of Hamza’s dysfunctional behaviour.
Opening 24 hours a day, 7 days a week, with Hamza working many 12 hour
shifts himself. As a consequence, customer service levels have suffered.
Including the first day of the following month’s trading in the previous month.
Offering unsustainable ‘bargain prices’ to entice customers away from

competitor shops.
A Myopia
B Tunnel vision
C Misrepresentation
7 Budgets and budgetary control systems are often used to monitor and appraise the performance of business
units or responsibility centres. In this context, the management writer Hopwood identified three types of
manager.
Select the correct manger type for each of the descriptions.
Assessed through a comparison against short-term financial targets
Assessed through non-budgetary performance measures
Focus on the organisation continuing to achieve its overall financial goals
A Non-accounting focussed
B Profit conscious
C Budget constrained
8 FPR Company has three divisions.

The Fruit Division (F) grows fruit (apples and oranges) for use in the production of fruit juice. F sells 75% of
its fruit FPR’s Production Division (P) and sells the other 25% on the open market.
The P Division receives fruit from the F division, inspects for quality and sends ‘passed’ fruit to the production
line. The output of the line is juice packed in cartons.
P sells 100% of their production to FPR’s Retail division (R). The R Division sells the cartons of juice direct to
the general public. All of the juice sold by R is sourced from P.
The three divisions are profit centres, and FPR uses Return on Investment (ROI) to assess divisional
performance. Each division uses cost plus pricing for external sales and for internal transfers between
divisions.
Three behavioural consequences that might arise as a result of the policy for the structure and performance
evaluation of the divisions are shown below.
30 Questions
Select the correct Division, F, P or R for each of the consequences. Note: A single Division may be
represented more than once.
Consequences Division [F, P or R]
Transfer costs may mean that profit and ROI is low and frustration will arise as
they do not have a wide enough product range.
The main emphasis should be on technical efficiency and quality. ROI may
conflict with these aims and the division may not replace machinery as it could
worsen ROI.
This division must work closely with the other two divisions and being a profit
centre may not be the best option.
9 Z Ltd have invested over $2million in 20 projects over the past eight years. The directors of Z Ltd are unsure
whether Z Ltd has always received value for money from their investment in capital projects. They are
considering introducing a system of post completion audit.
Which of the following are true with regard to a post completion audit?
A Post completion audits could produce valuable insights
B Post completion audits will not prevent dysfunctional behaviour by project sponsors
C Project sponsors should be held liable for all negative findings from post-completion audits
D It may be difficult to introduce post completion audits
E Only those projects starting after the audit system was introduced should be audited
10 Which THREE of the following are aims of the post implementation review of a new information system?
A To ensure the system is secure
B To ensure the system meets the needs of managers
C To ensure the system produces accurate information
D To establish the time taken for the project
E To establish the costs incurred on the project
15 Mixed Bank 1
1.1 Select a word from the list below to complete the statement.
A result
B likelihood
C chance
D opportunity
Risk analysis is about ranking the impact and of a risk occurring.
1.2 Non-executive directors and executive directors each bring different viewpoints and skills to the board of
directors. The views of non-executive directors are independent. Executive directors run the company day-to-
day so have a deeper understanding of the company than non-executive directors.
Are each of the following statements concerning executive directors and non-executive directors TRUE or
FALSE?
A True
B False
Questions 31
The view of an individual non-executive director should always carry more weight than the view
of an individual executive director.
The view of an individual executive director should always carry more weight than the view of
an individual non-executive director.
When considering the make-up and balance of the board, the number and status of non-
executive directors should be sufficient to ensure their views carry significant weight.
1.3 DomApp Limited manufacture domestic appliances. Through their distribution network, they supply several
retailers in a number of countries. The board of DomApp feel they are not receiving value for money from their
IT department. Two significant problems are inadequate information and frequent service interruption. As a
result, the board has decided to outsource all IT services.
Which TWO of the following actions should DomApp now take?
A DomApp should issue an RFI (request for information) to prospective suppliers
B DomApp should look to fix all its problems in house before looking for an outsource supplier
C DomApp should look for a relatively new IT service provider as they will be keen to offer a
competitive price
D DomApp should consider outsourcing parts of its IT needs only
E DomApp should consider carrying out an internal review of all its IT services and needs
F DomApp should encourage the managers in charge of the IT system to set up their own IT
consultancy and to tender for DomApp’s business
1.4 RS plc is an international mining company that has operations across several continents. The company is
currently investigating the viability of a new mine in a West African country where the same government has
been in power for two decades with no realistic political challenge in this time.
What TWO measures should RS take to manage the long-term political risks (especially that of
expropriation) for this mine?
A Consultation with local industrial and government representatives
B Joint venture with the government as an investment on a profit share basis
C Identify local sponsors who are prepared to buy-in after 5-10 years
D Research the likely political stability and economic viability of the country concerned
E Invest profits earned from the mine in local infrastucture (such as schools and hospitals)
1.5 Complete the following sentence with the correct word.

A is an option which sets a lower limit to interest rates.
1.6 X Ltd is a motor manufacturer and has several large supply contracts, one of which includes selling to a
company in Zedland. The currency in Zedland is the Z$ which is experiencing problems due to rising levels of
inflation that are not expected to improve for the foreseeable future. X is concerned about the impact on
exchange rates between its own currency and the Z$.
What type of risk is this scenario describing?
A Environmental risk
B Financial risk
C Business risk
D Reputation risk
32 Questions
1.7 A company is considering a new project that would earn cash profits before tax of £5,000,000 per annum for
three years. Tax, 30% of cash profits, will be payable one year in arrears of the profits. The cost of the project
would be £7,500,000 and the finance would be obtained by obtaining a five year loan at 10% interest, for
which annual repayments would be as follows:
End of Capital Total
year repayment Interest payment
£'000 £'000 £'000
1 2,500 750 3,250
2 2,500 500 3,000
3 2,500 250 2,750
Loan issue costs would be £100,000. The loan would significantly alter the company's gearing. Its current
weighted average cost of capital is 12%, but if the company were all -equity financed, its cost of capital would
be 13%.
What is the adjusted present value of the project, to the nearest £100,000?
A £1,600,000
B £1,500,000
C £1,400,000
D £1,300,000
1.8 CT Co manufactures and sells several types of tyre. The tyres are stored in a secure warehouse. An inventory
count is carried out every quarter by warehouse staff and checked by the warehouse supervisor. Inventory
sheets are filled in using pencil. Tyres are counted twice by two separate teams.
Which of the following risks arise as a result of CT Co’s procedure?
A Collusion and misappropriation of inventory
B Error in the count
C Failure to make a permanent record of inventory
D Deterioriation of inventory
1.9 The internal audit team of the Bestco supermarket chain are auditing head office, focussing on staff recruitment.
Bestco’s recruitment procedures require all degree qualifications to be verified by Bestco human resources staff
before the new employee starts. An internal auditor has established that one employee, who started working in the
marketing department three months ago, has not had their degree verified. The internal auditor has checked all head
office employees and this employee is the only one with a degree that has not been verified.
How should the internal auditor proceed?
A Consider the failure in light of the findings from investigation as a whole before deciding whether
to report an adverse finding
B Flag this as a compliance error because part of the purpose of an internal audit is to encourage
the application of procedures
C Report the compliance error to demonstrate a thorough audit has been performed
D Review the quality of the employees work with a view to overlooking the failure on the grounds
that the employee must be qualified if the work is satisfactory
1.10 What type of structure is typically characterized by subordinates reporting to two or more superiors?
A Divisionalised structure.
B Matrix structure.
C Network structure.
D Functionalised structure.
Questions 33
16 Mixed Bank 2
2.1 CVJ Ltd manufactures home-cinema equipment which it sells via a network of distributors and other retail
outlets. The company has always enjoyed high margins in an industry driven by high-end technology (DVD
players and surround sound systems) but more recent developments from digital competitors have
revolutionised its market place.
What should CVJ do immediately?
A Outsource all its production to a high-volume low-margin manufacturing facility
B Sell cheaper products under its own brand label
C Complete a review of the marketplace
D Invest in niche segments of the market (eg vinyl records only)
2.2 Which of the following is least likely to be carried out by an audit committee?
A Review of the adequacy of financial systems.
B Review of risk management.
C Review of succession planning within the organisation.
D One-off investigations.
2.3 A Knowledge Work System (KWS) is a system which:

A Performs and records routine transactions.
B Aids structured decision making.
C Is designed to increase the productivity of data and information workers.
D Facilitates the creation and integration of new knowledge into an organisation.
2.4 A project has an internal rate of return (IRR) of 12% and delivers a positive net present value (NPV) at 10%.
The project will be funded by loan stock at 8% for which the contract has already been signed. If the company
does not proceed with the project, it will use the funds to invest in a financial instrument carrying a rate of
6%.
What is the opportunity cost of investing in the project?
A 4%
B 6%
C 8%
D 10%
2.5 Swaps could be used for a number of different purposes.

Which of the following would not be a reason for entering a swap transaction?
A To switch net interest obligations out of one currency and into another currency.
B To alter the mix of fixed and floating rate debt obligations in the organisation's debt structure.
C To reduce net borrowing costs through credit arbitrage.
D To benefit from favourable interest changes during the term of the swap.
2.6 The US dollar/sterling spot rate is £1 =$1.52

One year US interest rates = 8%
One year UK interest rates = 14%
The one year forward exchange rate between the dollar and sterling should be:
A $1.4288 to £1
B $1.6112 to £1
C $1.6044 to £1
D $1.4400 to £1
34 Questions
2.7 Which of the following statements about investment appraisal techniques are true?
A Either NPV or IRR should be used to select projects
B As a minimum, in order to be acceptable, a project should have IRR greater than the discount rate and
a positive NPV
C NPV and IRR are equally useful in choosing between competing projects
D Payback is often a useful alternative to IRR or NPV
2.8 Which of the following controls would be least effective in ensuring money is available to the business
when required?
A Cash flow forecasts.
B Arrangements with the bank if cash shortages arise.
C Contingency funds.
D Hedging policy statement.
2.9 Joe works as an internal auditor for a company that uses standard costs for budgeting and to produce
monthly variance reports. The system operates as follows:
I. Variances are reported to the managers responsible within three working days of the end of each
month
II. Managers are required to investigate variances in excess of 10% of standard cost
III. Managers are required to report to their superior, in writing, on the reasons for variances and the
control measures implemented to reduce future variances, within one week of receiving the report
Joe is carrying out an audit of the budgetary control system in one of the company’s operating centres.
Which of the following are compliance tests?
A Establish the details of the standard costing and budgetary system. Find out how costs are recorded
and how variances are produced and distributed at month end
B Check whether variances are reported within three working days of month end
C Check whether the 10% figure for exceptional variances is reasonable
D Suggest improvements to the system
E Check whether managers report reasons for variances and control action taken within one week
F Perform detailed tests to establish how staff report variances to managers
2.10 Which of the following is not a method that can be used to hide budgetary slack?
A Treating fixed costs as variable.
B Budgeting in excess of requirements for certain items, and transferring the surplus to another
category.
C Focusing on positive aspects of performance rather than negative ones.
D Unnecessarily increasing current period spending to ensure that budgeted spending is higher in the
next period.
Questions 35
17 Mixed Bank 3
3.1 D plc is a manufacturer that is experiencing some problems with defects in one of the main products it
produces. The product, which has been made by the company for many years and is very profitable, has had
over 2000 customer complaints in the last month (around 10% of products sold) which are a reputation risk
for D.
Which of the following risk mitigation strategies should D follow?
A Accept this risk: the company makes other products which are just as profitable
B Reduce the risk by increasing the frequency of maintenance on the production line manufacturing the
affected product
C Transfer the risk by outsourcing the manfacture of the product to another company
D Avoid the risk by ceasing production while the cause of the defects is identified
3.2 Which ONE of the following would not be regarded as good practice for the nomination committee?
A The nomination committee should consider the need to attract board members from a diversity of
backgrounds.
B The nomination committee should consist entirely of executive directors.
C The nomination committee should regularly review the structure, size and composition of the board.
D The nomination committee should consider whether non-executive directors are spending enough time
on their duties.
E The nomination committee should use an external search consultancy and open advertising when
recruiting a chairman.
3.3 Which of the following types of business is LEAST likely to use Big Data analytics?
A Supermarkets
B An independent bicycle shop
C An internet book retailer
D A multinational bank
3.4 O Ltd sells electronic equipment worldwide, trading across Europe, USA and Asia, sourcing products from
different countries before selling to end clients. Transfer prices set at source are denominated in GBP, EUR
and USD and are revised each month. The sales cycle lasts between 3 and 4 months.
How should O manage the risks presented by this scenario?
Select all that apply:
A Do nothing - everyone else is in the same position
B Set up unilateral netting to be performed by a central treasury function before any net sums are settled
C Establish accurate sales forecasting to avoid over-stocking
D Establish a "just in time" supply process for all major items exceeding a certain value
E Factor stage payments on delivery based on foreign currency translation at that date
3.5 A company has a floating rate loan of £4 million with four years remaining to maturity, on which it pays
interest of LIBOR plus 50 basis points, but it would prefer to pay a fixed rate of interest on this loan amount. It
therefore arranges a 'plain vanilla' four-year interest rate swap. The bank's rates for a four-year swap are
5.50% – 5.55%.
What is the effective net interest rate that the company will pay, as a result of arranging the swap?
A 5.0%
B 6.0%
C 5.05%
D 6.05%
36 Questions
3.6 Which TWO of the following risks would normally be classified as strategic risks for a company trading
overseas, which has contracted its manufacturing operations to a foreign manufacturer?
A failure by the overseas manufacturer to supply finished goods in time for the peak sales season
A A failure by the overseas manufacturer to supply finished goods in time for the peak sales season
B The exhaustion of oil supplies in the country that has been supplying the company with all its oil
C A temporary fall in the value of the company's home country currency
D A change in a foreign government leading to nationalisation of the company's interests in that country
3.7 A company is considering four capital projects in which to invest. All of the projects are divisible, which
means that if the company invests in a fraction of a project, it will earn that fraction of the expected returns.
Information about the projects is as follows:
Cash flows Project W Project X Project Y Project Z
£ £ £ £
Year 0 (10,000) (8,000) (18,000) (17,000)
Year 1 3,000 7,000 0 0
Year 2 6,000 5,000 18,000 27,000
Year 3 8,000 3,000 15,000 –
Year 4 8,000 2,000 1,000 –
PV of annual cash profits 17,340 13,200 24,500 25,860
If there is capital rationing in Year 0, and none of the project start times can be delayed beyond year 0,
how would the four projects be ranked in order of priority, starting with the most desirable project first?
A W, X, Z then Y
B Z, Y, W then X
C X, W, Z then Y
D W, X, Y then Z
3.8 Which of the following should a disaster recovery plan provide for?
A The use of firewalls.
B Standby procedures.
C Physical access control.
D Recovery procedures.
E Personnel management.
3.9 Select the correct option to complete the sentence below.
To be effective, internal audit should work other areas of the organisation.
A collaboratively with
B independent of
C integrated with
D subordinately to
Questions 37
3.10 RN Anthony identified three levels of decision making in an organisation: strategic planning, management
control and operational control, although the boundaries between the three levels are not precise.
Which of the following statements is the most appropriate description of what "management control"
means in this context?
Management control is the process by which management:
A Decides on the policies that are to govern the acquisition, use and disposition of the resources of the
organisation.
B Ensures that specific tasks are carried out effectively and efficiently, focussing on individual tasks
within strictly defined guidelines.
C Decides on objectives, on changes in objectives, on resources used to obtain these objectives.
D Ensures that resources are obtained and used effectively and efficiently in the accomplishment of an
organisation's objectives.
18 Mixed Bank 4
4.1 Identify the correct activities to complete CIMA’s risk management cycle.
Activities
1 Identify risk areas
2 Implement strategy and allocate responsibilities
3 Refine the process and do it again
4 Develop risk response strategy
A
38 Questions
4.2 Which of the following is NOT true when considering the independence of non-executive directors?
A They should have no shareholdings in the company.
B They should be appointed for specific terms.
C Their service should not be pensionable.
D They should not have been employees of the company over the last few years.
4.3 Two statements relevant to Big Data follow. Are the statements TRUE or FALSE?
1. Big Data analytics cannot be performed on complex, unstructured data
2. Big Data analytics are now possible because of the amount of data storage that is available
B Statement 1 is true but statement 2 is false
C Statement 1 is false but statement 2 is true
D Both statements are false
4.4 The following cash flows have been estimated for a capital expenditure project.
Cost of equipment (year 0) £200,000
Revenues (years 1 - 5) £200,000 each year
Running costs (years 1 - 5) £120,000 each year
Project duration 5 years
Cost of capital 12%
Which of the following variables is least sensitive with regard to the overall financial viability of the project?
A Running costs.
B Project duration.
C Revenues.
D Cost of equipment.
4.5 In three months time you will have £6 million to put on deposit for four months. You are concerned that interest
rates will fall and wish to arrange an FRA to hedge the risk and fix an effective interest rate for the future deposit.
What will you do to hedge the exposure?
A Buy a 3 v 7 FRA.
B Buy a 3 v 4 FRA.
C Sell a 3 v 4 FRA.
D Sell a 3 v 7 FRA.
4.6 What keeps unquoted foreign exchange rates from two different countries in line with each other?
A Cross rates
B Forward rates
C Futures rates
D Spot rates
4.7 TOTC Co has appraised three capital investment projects. The following results were found:
Capital PV of NPV of Profitability
Project outlay cash flows project Index
($) ($)
AA 120,000 250,000 $130,000 2.08
BB 150,000 300,000 $150,000 2.00
CC 200,000 410,000 $210,000 2.05
Capital is restricted to $280,000.
Calculate the maximum NPV that can be achieved assuming that all three projects are indivisible.
Questions 39
4.8 Which of the following controls should contribute to assurance that depreciation is not charged on fully
depreciated assets?
A Regular physical inspections to note the condition and usage of assets.
B Prior authorisation of sales or scrappings of assets.
C A register of tangible non-current assets maintained and reconciled to results of physical inspections.
D A tangible non-current assets register containing cost and accumulated depreciation of each asset.
4.9 Analytical procedures are a powerful tool for both internal and external auditors.
Which ONE of the following statements is not true in respect of analytical procedures used by internal
auditors?
A Analytical procedures may be used as substantive procedures.
B Analytical procedures are often used as tests of controls.
C Analytical procedures can be used in certain circumstances as an alternative to detailed testing of
transactions and balances.
D Analytical procedures can be used as part of risk assessment to highlight areas in which further work
may be required.
E Analytical procedures are often used as a final review procedure.
4.10 Which of the following is not an advantage of basing budget centres at a low level in the management
hierarchy?
A Motivation and encouragement of junior managers.
B Greater awareness of management's responsibility.
C More informed budgeting because of greater knowledge of detail.
D Less opportunity to introduce budgetary slack.
19 Mixed Bank 5
5.1 B Ltd produces financial information to monitor its position and performance. Each indicator is plotted on a
quarterly basis to show a profile that the Finance Director can use to assess the company's risks. The
following data have been extracted from the most recent set of management accounts:
Quarter 1 Quarter 2 Quarter 3 Quarter 4

Receivables days 30 days 31 days 38 days 41 days
Gearing ratio 51% 57% 62% 69%
Interest cover 4.1 4.0 3.9 2.7
For each of the indicators below, suggest an appropriate risk response for the Finance Director to take.
Each response should be different.
Receivables days
Gearing ratio
A Transfer
B Avoid
C Reduce
D Accept
40 Questions
5.2 Which ONE of the following statements relating to the board of directors and shareholders of a listed
company is TRUE?
A The shareholders act as an agent of the board and have access to more information than the board
B The shareholders act as an agent of the board and have access to less information than the board
C The board act as an agent of shareholders and have access to less information than shareholders
D The board act as an agent of shareholders and have access to more information than shareholders
5.3 A situation where data is run on both old and new systems for a specified time is an example of:
A Restricted data running.
B Parallel running.
C Indirect changeover.
D Pilot operation.

risk is the risk of loss due to an adverse move in the value of an asset – a stock, a bond, a loan,
foreign exchange or a commodity – or a derivative contract linked to these assets.
5.5 Three-month sterling June futures are quoted on LIFFE at 93.50. Call options on three-month sterling June
futures at 93.00 are quoted at 0.66.
This premium of 0.66 represents:
A 0.66 intrinsic value.
B 0.66 time value.
C 0.50 intrinsic value and 0.16 time value.
D 0.16 intrinsic value and 0.50 time value.
5.6 Lanvert SA is a French company which trades frequently with Switzerland and the USA. It has a net payment
Euro market traded option prices (62,500 euro contract size) in the USA. (The options relate to the purchase
or sale of euros.)
June contracts September contract
Exercise price ($/€1) Calls Puts Calls Puts
0.936 1.65 0.41 2.38 0.71
0.938 0.56 1.20 1.01 1.57
0.940 0.17 2.65 0.48 3.45
Option premia are in cents per euro and are payable up front. The options are American style. Assume that it
is now 1 June and that option contracts mature on the 15th of the month.
How many options contracts should Lanvert enter into to hedge the transaction given, assuming a rate of
$0.938/euro?
A 50
B 52
C 46
D 48
5.7 JS Ltd has many subsidiary companies whose directors are paid an annual bonus based upon their reported
profit. The directors at one of the subsidiaries are considering the purchase of new delivery vehicles using the
following data:
Vehicle 1 Vehicle 2
Purchase price £100,000 £90,000
Equivalent Annual Cost (and lifetime) £30,000 (5 years) £25,000 (3 years)
Vehicle 1 is chosen by the directors.
Questions 41
Which of the following reasons is most likely to explain this decision?
A Vehicle 1 has a better combination of initial investment amount and running costs
B Vehicle 1 is likely to show a higher reported profit
C Vehicle 1 is the less risky investment
D Vehicle 1 will lead to a higher share price
5.8 Which TWO of the following tasks could internal audit appropriately carry out when reviewing the work of
the treasury function?
A Approving the size and nature of transactions.
B Reviewing forecasts of future activities.
C Checking operations on a day-to-day basis.
D Checking the adequacy of contingency arrangements.
5.9 Which of the following audit tests would provide evidence that sales had been completely recorded?
A Testing the sequence of dispatch notes and enquiring into any missing items.
B Reviewing sales ledger accounts of individual customers.
C Checking that statements are sent out regularly to customers.
D Checking items in the sales ledger to the sales day book.
5.10 What can be defined as the process of applying a zero defect philosophy to the management of resources
and relationships within an organisation as a means of developing and sustaining a culture of continuous
improvement focusing on meeting a customer's expectations?
A Target management.
B Total quality management.
C Throughput.
D Isomorphism.
20 Mixed Bank 6
6.1 Which THREE of the following risks would normally be classified as operational risks?
A A merger between the business's sole supplier of one component and the business's main competitor
B The insolvency of one of the business's fifteen suppliers of a particular component
C One of the business's most significant customers seeking to extend its credit period from 30 to 60
days
D One of the business's most significant suppliers transferring its manufacturing operations overseas
6.2 Instead of a single or unitary board structure, some countries use multi-tier board structures. A multi-tier
structure has some disadvantages.
Which of the following describe valid disadvantages of a multi-tier structure?
A Narrower stakeholder representation
B More bureaucratic
C Less accountability
D Reduced independence from operational pressures
E Less opportunity for domination by a single individual
42 Questions
6.3 Which THREE of the following would usually be done at the systems implementation stage?
A Testing.
B Data flow diagrams.
C Prototyping.
D Conversion.
E Training.

The financial risk associated with the possibility of default by a counterparty is called risk.
6.5 Which of the following statements is correct?

A If interest rates rise, the market price of interest rate futures will fall
B If interest rates rise, the market price of interest rate futures will rise
C If interest rates rise, the coupon rate on a bond will fall
D If interest rates rise, the coupon rate on a bond will rise
6.6 If you were to buy a call option priced at 100 for a premium of 12, what would your maximum possible
profit be on the whole position?
A Unlimited
B 100
C 88
D 12
6.7 Big plc has decided to invest in a new project at a cost of $3,000,000. The break-even discount rate of the
project’s operating cash-flows is 22% and the PV of the tax shield is $40,000.
What is the IRR of the entire project?
A 22%
B 22.29%
C 21.71%
D 19.14%
6.8 'Teeming and lading' is an irregularity involving extraction of assets by unauthorised persons; the opportunity
to perpetrate this class of fraud is enhanced where there is unsatisfactory segregation of duties.
Poor segregation between which of the following areas can provide the opportunity for this type of
irregularity to occur?
A Receivables ledger and cash receipts.
B Payables ledger and goods inward.
C Wages department and cash department.
D Stores department and goods outward.
6.9 A review of the revenues and expenses in the detailed statement of profit or loss and other comprehensive
income of a company, involving investigation of significant variations in comparison with the equivalent
figures for the previous year, is most likely to detect which of the following significant problems?
A The fact that a line of inventory has become obsolete during the year and should be written off.
B A misallocation of distribution costs as advertising expenses.
C The fact that the costs of some exceptional repairs to the company's premises have not been included
in the statement of profit or loss.
D Failure to make a provision for volume discounts which have been introduced this year for major
customers.
Questions 43
6.10 Which of the following is not a financial control?
A Budget
B Variance analysis
C Investment appraisal methodology
D Total quality management
21 Mixed Bank 7
7.1 "A modelling and risk assessment procedure in which changes are made to significant variables in order to
determine the effect of these changes on the planned outcome."
What is this describing?
A Value at risk
B Sensitivity Analysis
C Expected value
D Certainty Equivalent
7.2 Which one of the following statements describes a difference between corporate governance practice for
a global charity organisation and corporate governance practice for a commercial listed company?
A A charity will place less emphasis on internal control
B The board of a charity is not concerned with financial objectives
C The board of a charity is not concerned with decisions relating to strategy
D A charity will have different reporting responsibilities and committee structure
7.3 P Ltd is a wholesale and distribution company which currently services its customers from a central
warehouse. The company has decided to computerise its stock control, order processing and sales
accounting procedures, which have previously been executed manually. At the same time the company wishes
to close its central warehouse as soon as possible and establish four regional distribution centres, linked to a
central mainframe computer in a multi-user system.
The most risky, but in a situation like this also probably the only realistic option for system changeover, is:
A Direct changeover.
B Phased implementation.
C Pilot operation.
D Parallel running.
7.4 Helen Ltd has budgeted the following results for the year:
Sales Units Probability
20,000 0.2
30,000 0.5
40,000 0.3
Sales price per unit is £20. Variable costs per unit are budgeted as follows.
Costs Probability
£
12 0.1
14 0.6
16 0.3
Fixed costs will be £175,000.
Calculate the probability that Helen will make a loss.
44 Questions
7.5 Which of the following instruments is most similar to a forward rate agreement (FRA)?
A An interest rate guarantee (IRG)
B An interest rate swap
C An interest rate option
D An interest rate future
7.6 The sterling/US dollar spot rate is £1 = $1.7770 – 1.7860 and the forward rate is quoted as 0.35 – 0.36
discount.
At what forward rate will the bank sell US dollars?
A 1.7724.
B 1.7896.
C 1.7735.
D 1.7805.
7.7 David's manager is explaining to him how he will rate his project's success. As this is the first project that
David will be responsible for, it is very important that he understands what is expected of him.
Which THREE of the following would be used as measurements of the success of a project?
A Quality.
B Use as few resources as possible.
C Timescale.
D Budget.
E Conflict-free implementation.
7.8 Jess is the management accountant for an independent tile retailer. The retailer has ten outlets, each of which
is treated as an investment centre. Jess, who is based at head office, has been asked to implement a scheme
that rewards the store manager and staff of the best performing store each financial year.
Which of the performance measures below is most appropriate for this purpose?
A Customer satisfaction rating
B Gross profit margin
C Net profit earned
D ROCE
7.9 As new auditor of Lowie Co you note that the company's gross profit percentage as per the draft financial
statements has fallen from 30% in the previous year to 20% in the current year.
Which of the following explanations do you consider to be the most plausible?
A Errors in computation have caused opening inventory to be undervalued and this has been
compounded by the inclusion for the first time (so as to comply with IAS 2 Inventories) of indirect
overheads in the closing inventory valuation.
B Errors in computation led to opening inventory being overvalued and the company has also increased
sales as a result of a marketing drive based on undercutting competitors.
C Errors in computation led to the opening inventory being overvalued and this has been compounded
by the inclusion for the first time (so as to comply with IAS 2 Inventories)of indirect overheads in the
closing inventory valuation.
D Errors in computation led to opening inventory being undervalued and margins have fallen as a result
of the entry into the market of a major new competitor.
Questions 45
7.10 Kids Tables Limited produce tables and chairs for use by children. The furniture is produced in the Kids
Tables factory, which runs three manufacturing production lines. Senior management are concerned about
levels of wastage in the factory, and as a result is looking to improve the control environment.
Which of the following actions demonstrate a good control environment ?
A Monthly inspection of production lines by senior management
B The performance of production line managers is based on the volume of production
C Staff are trained on new equipment
D Daily production logs and failure rates are noted
E Senior management require weekly calibration of equipment
F The maintenance staff who conduct the weekly calibrations need not complete records but should
report any serious problems
22 Mixed Bank 8
8.1 Which of the following is not part of the control environment?
A The operating style of managers and directors.
B Access restrictions on assets.
C The directors' methods of imposing control.
D The integrity, ethical values and competence of directors and staff.
8.2 Which of the following is not defined by CIMA as being a threat to compliance with its Ethical Code?
A Self-review
B Advocacy
C Familiarity
D Confidentiality
8.3 You have been employed by an organisation to introduce controls over systems development and acquisition.
Such controls were previously non-existent. You decide to take the following steps to remedy the situation.
Steps:
1. Draw up a strategy for future systems development.
2. Do a survey to estimate the size of the problem (eg incompatibility of different makes of computer).
3. Lay down organisation-wide standards, with the active support of senior management, for equipment
and software acquisition.
4. Develop procedures to ensure that capital expenditure on information technology is authorised
centrally.
Which of the following is the logical order in which you should proceed?
A Steps 1, 2, 3, 4.
B Steps 2, 3, 1, 4.
C Steps 4, 2, 3, 1.
D Steps 4, 3, 2, 1.
46 Questions
8.4 Which of the following is least likely to be an advantage of using expatriate staff to run overseas
operations compared with using local staff?
A Possession of technical skills not available overseas.
B Greater awareness of the organisation's culture and requirements.
C Easier control.
D Lower costs.
8.5 The spot rate of exchange is £1 = $1.4400. Annual interest rates are 4% in the UK and 10% in the USA.
Assume three months to be exactly one quarter of a year.
The three month forward rate of exchange should be?
A £1 = $1.4614
B £1 = $1.5231
C £1 = $1.4616
D £1 = $1.5264
8.6 The current spot rate for US dollar/South African rand is $1 = R6.7580 – 6.7600. The three-month forward
rate is quoted as 0.0100 – 0.0090 premium. You wish to convert R2 million into US dollars in three months'
time, and you intend to hedge the currency exposure with a forward exchange contract.
How many US dollars will you receive in three months' time?
A $296,252.
B $295,464.
C $296,384.
D $295,508.
8.7 As a consultant for a Capital Project and Facilities Consulting Company, you are advising clients on strategies
to deal with the risk involved in their current project.
Which THREE of the following strategies would you include in your advice?
A Avoidance.
B Removal.
C Absorption.
D Transference.
8.8 Juliet started an exercise class business called Jump Ltd 10 years’ ago with her two friends. They started with
just a few clients but now the business has grown and they employ 150 people to teach classes around the
area. Clients pay by monthly direct debit. Juliet is thinking of introducing a control system.
Which of the following statements apply to the above scenario?
A A control system will assist in compliance with laws and regulations
B There is little point in having a control system because the business is fulfilling its objectives
C The introduction of a control system is overdue
D A control system will be inappropriate because the employees are creative individuals
E The introduction of a control system will change the way the business operates
Questions 47
8.9 The receivable days figure in a manufacturing company has increased from 30 days to 60 days.
Which of the following explanations may have caused this rise?
A Customers are paying more promptly than they used to.
B Customers are taking longer to pay than they used to.
C Credit terms to receivables have changed.
D The accounting records on which the calculation has been based may be inaccurate.
E Cash received from customers may have been misappropriated.
8.10 In which project report or document would you expect to find a cost-benefit review?
A Budget report
B Completion report
C Project status report
D Post -completion audit report
48 Questions
Answers to
objective test questions
49
50
1 Introduction to risk
1 A Statement 1 true; Statement 2 true.
2 C Severity high, frequency low.
Insurance might be the most appropriate risk hedging strategy when the potential cost is high, but the
likelihood of the adverse outcome happening is fairly low. When the frequency is high, internal
measures to manage the risk would probably be more appropriate.
3 D Avoiding investments where the risk is high if an investment offering the same return for less risk is
available.
Risk aversion is not the same as risk avoidance. Risk aversion means not undertaking an investment
when an alternative is available offering the same return for less risk, or a higher return for the same
risk.
4 D Risk can recognise positive events, including opportunities.
Risk can include things that occur more favourably than expected.
5 The correct answers are:
A Establishing a common risk management language
C Providing leadership, vision and direction for enterprise risk management
Providing leadership, vision and direction of enterprise risk management and establishing a common risk
management language are both recognised elements of a risk manager's role.
Risk appetite may be quantified by a risk manager, but it is set by the board in consultation with investors.
Similarly, the risk manager may advise the board about enterprise risk management but will not set decide its
approach.
6 A customer or third party may be killed or injured by an accident caused by a manufacturing A
flaw
Environmental legislation in Germany is likely to require cars sold there to comply with C
stringent emissions and fuel economy standards that are impossible for cars of this type
The damages caused by such an event are best addressed by transferring this risk via insurance. Such risks
could not be accepted or avoided, and while reduction may reduce the likelihood, the impact remains the
same.
It appears impossible to comply with this legislation, so it cannot be accepted, reduced or transferred,
meaning that avoidance is the only option.
7 Maintain a risk register A
Risk mapping B
Risk registers are used to record all risks, including the addition of new risks, changes to existing risks and
the removal of risks as they cease to be relevant, in order to identify all risks that require managing by an
entity.
Risk maps are drawn, usually on axes covering impact and likelihood, to plot individual risks so an
organisation can understand and assess the scale of risks prior to developing a risk response strategy.
8 A Risk hedging is taking action to offset one risk by incurring a new risk in the opposite direction.
Some operational risks will be high frequency, high severity risks. The management of a portfolio of
different risks is risk pooling or risk diversification. Insurance companies will insist that businesses
take some action to reduce many risks as a condition of insuring those risks.
Answers 51
9 C Risk mapping.
Risk mapping is a technique for assessing risks, in terms of frequency and severity. It leads on to risk
measurement, but is not itself a technique for measuring risk. Risks can be measured as (severity x
frequency) or (impact x probability), for which techniques such as statistical analysis (for example
standard deviation and variance) and sensitivity analysis can be used.
B Risk seeking
C Risk aversion
Risk aversion and risk seeking are two extremes of an organisation's risk appetite - risk averse organisations
do not seek higher risk investments unless compensated by higher returns, while risk seekers focus on
maximising their returns, regardless of the risk.
Risk attitude refers to the directors' views on the levels of risk that they consider desirable, while risk capacity
describes the nature and strength of risks that the organisation is able to bear. Crucially though, these do not
take into account the views of investors who ultimately decide on an acceptable balance between risk and
reward.
2 Governance
A The recruitment of NEDs with experience outside the industry the organisation operates in
B Full disclosure of director remuneration
E A clear distinction between the roles of chairman and chief-executive officer
2 C To consider and safeguard the interests of shareholders.
This is part of Agency Theory.
3 Audit D
Remuneration A
Risk B
Nominations C
4 B The reliance of shareholders on directors to run the company

Agency theory assumes that agent and principal act in their own self-interest. The separation of
ownership from management results in shareholders relying upon agents (directors) to run the
company for them.
A A Nominations Committee that oversees the appointment of new directors.
B A wide range of backgrounds and experience across board members.
D A well-respected, strong CEO.
An effective Nominations Committee is an important element of a board of directors, ensuring appropriate
procedures are followed for board member appointment and rotation. A diverse board ensures a wider range
of views are considered. A strong CEO is generally a positive, as effective leadership requires a strong,
decisive mind. If this option had included the word ‘dominant’ or the phrase ‘unwilling to listen’ it would then
be correct to exclude this when identifying desirable factors.
Linking 80% of director remuneration to the achievement of current year financial targets would encourage
the board to favour actions that produce shortterm results over investments that may be more beneficial
overall, but would deliver results later.
52 Answers
A A focus on short-term profitability rather than long-term profitability
E Domination of the board by a single individual
A Lack of true independence
C Lack of a wider perspective
8 B Enables the board to better understand the environment and market.
Ensuring diversity across an organisation, including at board level, enables the organisation to more
readily understand the environment and market.
The other options imply diversity is something that is done for the sake of appearance or to appease
others. This should not be the case - diversity should make commercial sense.
9 C Being responsible for developing new investment initiatives
This would normally be the responsibility of the chief executive officer.
10 A To provide reassurance to stakeholders that risks are being appropriately identified and managed.
The main aim of external risk reporting is to provide reassurance to stakeholders that risks are being
appropriately identified and managed.
The information provided will help communicate the risk appetite of the organisation and the work of
the Risk Committee, but neither of these are the main aim.
For organisations based in the USA, appropriate external risk reporting will demonstrate how the
organisation has complied with section 404 of The Sarbanes Oxley Act, but this is not the main aim.
3 Ethics and reputation

1 A A framework of fundamental principles.
CIMA's Code of Ethics is based upon a framework of fundamental principles. They are: Professional
behaviour; Integrity; Professional competence and due care; Confidentiality; Objectivity (PIPCO).
2 B Raising concerns when asked to perform a specialised task outside your expertise.
The fundamental principle of professional competence and due care requires an individual to only
undertake tasks that they are confident they have the skills to perform. This may mean undergoing
training before undertaking a task, or working with a more experienced colleague to gain the skills and
expertise required.
3 B If a company’s board of directors and senior management believe they have a moral duty to act in the
interests of a wide range of stakeholders, their motivation is said to be normative.
The normative view is based on the idea that the company has moral obligations towards stakeholders.
The instrumental view justifies considering stakeholders because of the economic benefits to the
company.
Charitable does not fit the statement as acting in the interests of a wide range of stakeholders would
include stakeholders with financial and commercial interests.
4 B How the organisation creates value over time
The primary purpose of an integrated report is to explain how the organisation creates value over time.
Integrated reporting or <IR> differs from other forms of reporting is that it focuses on the process not
the product, using a series of capitals to illustrate how an organisation creates value for all
stakeholders. The report is concerned with the organisation’s ability to continue to draw on these
capitals over time.
Answers 53
5 C Self-review.
A Paying unskilled employees a minimum ‘living wage’ in excess of the minimum wage
B Sponsoring a local children’s sports team
Paying a ‘living wage’ in excess of the minimum wage would cost the organisation money and would be
perceived as ‘doing the right thing’. Sponsoring a local children’s football team would also be perceived as
socially responsible.
Encouraging a ‘work-hard play-hard’ culture is likely to be perceived as irresponsible.
Relocating a customer service call centre to an area with high unemployment is likely to be perceived as a
commercial decision (for example to take advantage of a relatively cheap source of labour) rather than as a
decision taken in the wider interest of society.
A The materials used in manufacture
D The employment conditions in supplier workplaces
E The packaging used
Consumers increasingly expect products to be produced and packaged using materials, components and
packaging that have been sourced and / or produced ethically. Sustainability and recyclability are key
concerns.
Price may have social impacts but is more likely to be outside of the manufacturer’s control while the relative
merits of competitor products are issues of a purely commercial nature.
8 A Identify the key facts and ethical issues and consider alternative courses of action
Use the following approach to ethical dilemmas:
1. Identify the key facts (briefly)
2. Identify the relevant ethical issues and fundamental principles
3. Consider alternatives and their consequences
4. Make a recommendation
5. Justify the recommendation
A The value creation process
C Value creation over time
E The capitals
The three fundamental concepts underpinning are:
The ‘capitals’ are the resources and the relationships used and affected by the organisation. They are:
financial, manufactured, human, intellectual, natural and social. An organisation’s integrated report is not
required to cover all capitals, it should focus on the capitals relevant to the entity.
The ‘value creation process’ is in effect an entity’s business model. This explains how capitals and inputs are
transformed by the entity’s activities to create outputs and outcomes.
‘Value creation over time’ relates to the organisation’s ability to continue to draw on these capitals in a
continuous cycle.
10 A Lack of a proper job description when the accountant was recruited
This may have an impact on an assignment, but the accountant may be able to complete an
assignment without it. The other options have more direct impact on an assignment.
54 Answers
4 IS risks
A IT can provide the organisation with the competitive advantage needed for commercial success.
E The success of business depends on the quality of the information in the organisation.
An organisation needs an IT strategy because IT can provide the competitive advantage needed for
commercial success. Unless the organisation has a strategy it may miss these opportunities.
The success of business depends on the quality of the information for it is on this basis that decisions are
made. The IT systems provide this information.
If IT is left to the technical department, the decisions made may not be business-led and so may not be
appropriate. IT permeates the whole organisation and will often affect everyone and so it is important that
senior management time is spent on it. The total expenditure on IT can be great and so strategic direction is
needed.
A Queue lengths at tills.
B Customer satisfaction scores.
E Number of customer complaints.
Number of returns is likely to be a performance indicator for the CSF of offering the correct quality and range
of products. Employee satisfaction scores will be a performance indicator for the CSF of having a happy and
motivated workforce.
A The steering committee monitors the system implementation and the specific deliverables against the
project plan. It has overall responsibility to ensure the system is delivered to the required time, cost
and quality.
C The steering committee brings together the sponsor of the project, the project manager who is
responsible for the day to day delivery of the project, specialist IT staff with responsibility for delivering
the project and user representatives with responsibility for accepting the system
The role and responsibilities of the steering committee are as explained in the two correct options. These are
relatively high-level, rather than hands-on, operational tasks.
Setting the detailed budget is a more operational task that would likely be performed by the project manager.
Ethical implications should be considered before a project is given the go-ahead, before a steering committee
is established.
Control implications may be considered at a high level by the steering committee, but the detailed needs of
internal auditors would not be.
4
Imitates the layout of manual daybooks, so that the user has to scroll through lists of A
individual transactions in order to find a period or category total.
Starts at the summary, and then permits, but does not force, the executive to drill down to
B
lower levels.
Designed to provide information that has been generated within the organisation. A
Designed to allow internal and external information to be reported, although in practice the
B
less structured and predictable nature of much external information may make this difficult.
Answers 55
5 D 1, 2 and 3.
The term ‘Big Data’ describes the storage and analysis of large and / or complex data sets using a
range of techniques.
Big Data includes structured and unstructured data, and the technology and techniques used to
analyse it.
A The MIS is a communication process wherein information is recorded, stored, processed and retrieved
for managerial decision-making
B The MIS is a communication process whereas data is converted into information
The MIS converts data from mainly internal sources (transaction processing systems) into information, often
in a standard format - for example summary reports. This information enables managers to make timely and
effective decisions for planning, directing and controlling the activities for which they are responsible.
As explained above, the MIS does not include detailed external information or include complex mathematical
models and statistical functions. As explained above, the MIS does not include detailed external information
or include complex mathematical models and statistical functions.
7 B The proposed upgrade does not support Tough Steel’s strategic requirements because the nature of
the product and its manufacturing does not require an elaborate system
This question is based on a question that appeared in CIMA’s Specimen Exam.
One option can be discounted relatively easily as the new system would not hugely reduce operating
costs.
The other options are not as clear cut. CIMA’s correct answer could be perceived as the best answer
as the existing system was working fine, and a more elaborate system is not a necessity.
However, there may be some merit in expanding the computer network and collecting production data,
and of an information system that gathers external information relating to developments in steel and in
uses of steel.
These type of questions are therefore a judgement call. Consider the relevant factors and make your
choice.
B Poor quality information is produced.
C IT costs escalate.
D Systems may not be integrated.
If there is no IT strategy, piecemeal investment in IT may take place and the costs can escalate. Systems will
be developed on an ad hoc basis and so may not be easily integrated. The quality of the information produced
is likely to be inferior.
By having an IT strategy in place, the systems that are developed are likely to be business-led and IT can be
exploited to gain competitive advantage.
A Contractual flexibility.
B Exit route.
C Standard of service level required.
The SLA needs to address what happens if the agreement needs renegotiating or the circumstances change,
therefore flexibility is important to address. Similarly the exit route needs to be agreed so that the organisation
is not left without any support at all should the agreement lapse or be broken for any reason. Standard of
service level required is the obvious option to be included as this it vital to any outsourcing agreement.
56 Answers
The number of staff is not highly significant as long as the required level of service is met, and is a decision of
the outsourcing company, rather than part of the agreement. Also, whilst it is of concern whether the
outsourcing company provides services to a company where there might be a conflict of interest it does not
traditionally form part of the agreement. This aspect is usually covered by a confidentiality of information
clause. Many outsourcing companies specialise within a business sector so it is likely that a competitor
organisation may be using the same outsourcer.
A The volume of data
B The proportion of external data
D The proportion of unstructured data
Big Data differs from earlier approaches in three fundamental ways:
 A higher volume of data
 A higher proportion of external data
 A higher proportion of unstructured data (not fitting neatly into the columns and rows of a database)
Big Data is in digital form, but this is not a change as computerised data was previously in digital form. Big
Data is less consistent in type and structure, for example it includes Tweets, images, emails, videos etc.
5 Financial risk
1 A To reduce or eliminate exposure to risk.
2 £ –7500
The short position means that the company needs to buy the security in order to close out each contract,
resulting in a loss.
The value of the loss is the movement in each contract in ticks (12/32 or 0.37500) × £500 per contract ×
40 contracts = –7500
3 B Arbitrage.
This is the definition of arbitrage - spotting temporary imbalances in different markets which lead to
opportunities. Once exploited, the market reacts and "catches up" and the opportunity is gone. Timing
is key to successful arbitrage.
A PS is exposed to transaction risks. The currency received from H is likely to decline over time because
of domestic inflationary pressures
C H will be exposed to economic risk because it will almost certainly have to reflect the declining
exchange rates in selling prices. This could make it difficult for H to make a profit.
PS is exposed to currency fluctuations from trading the currency used by H but this is limited to transactions
only – owning both assets and liabilities in H mean that a natural hedge in H's own currency removes any
translation risk.
The inflationary pressures faced by H will affect its competitiveness in the long term, leading to economic risk.
However, exporting to the country where PS s based will not create a hedge as H pays PS in its own currency.
5 B Economic.
Economic exposures are strategic exposures to currency risk. An economic exposure gives rise to transaction
exposures. In this example, transaction exposures will arise whenever the company buys supplies in the euro
zone for payment in euros and whenever it sells to customers in the US for payment in dollars.
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6 C Call Option to buy barley
This would not be of interest to an organisation wishing to sell barley: a put option would be of use to
C however. Weather futures could be used to offset the risk of a poor harvest due to the weather.
A put option to sell a competitor’s currency could offset poor yield if the competitor outperforms C in
the market (while this is not guaranteed, call options represent a worse option so should be selected
here).
C The company has already raised significant funds for another project in the last 12 months - the share
price will FALL
D The industry press is publishing stories about rumours that D is struggling to perfect its latest idea -
the share price will RISE
The absence of information on new products is likely to unsettle investors, meaning the share price will FALL.
A history of innovation is likely to make investors confident in future success so the share price is likely to
RISE.
Having already raised funds suggests the market was keen on D and so will be keen to invest again, meaning
the share price will RISE.
The rumours could lead to requests for more funding being met unfavourably, so the share price will FALL.
8 £93,200
The daily volatility is required in GBP so USD 12 million is translated at the current rate of $1.50/£ to equal
GBP 8 million. Applying the 0.5% daily volatility value means that the 1 day standard deviation = £40,000.
The VaR formula requires:
Mean + (standard deviation × Z score)
As the mean is not mentioned, we assume it is zero.
VaR = £40,000 × 2.33 = £93,200
9 C 40p gain.
The put option will be exercised, giving a profit of (500 - 440)p = 60p, but after deducting the cost of
the premium, the net gain for the investor is 40p.
10 C Translation exposure.
6 Interest rate risk

1 C The risk to profits, cash-flows or even a company's valuation from any change in interest rates.
Interest rate risk arises for investors and lenders, as well as for borrowers, and risk can arise from a
fall as well as a rise in interest rates, or from a change in the structure of interest rates.
2 B To reduce exposure to risk.
3 B Buying a cap and selling a floor.
Buying a cap sets the maximum rate for borrowing. Selling a floor reduces the cost of the collar, but
also sets a minimum effective rate.
4 D Interest rate volatility
This is not a disadvantage as swaps require one party who wants to fix their interest costs and the
other who wants rates to change (usually fall) so volatility is actually a goal not a disadvantage.
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5 The answers are:
A Contracts are subject to basis risk
D Contracts are only available for borrowing in a limited number of currencies
Basis risk and limited availability are recognised disadvantages of using interest rate futures.
Futures are available in set amounts of borrowing (eg £100,000 contracts) but these can be combined to
hedge significant sums, so this is not a disadvantage.
Futures contracts can be closed out at any time before settlement date, so this option is untrue.
6 £61,000
W will borrow £2 million and pay interest at 7%, but receive the difference between the FRA rate of 6.1% and
the base rate of 7% back from the bank.
In practice, this will mean paying 6.1% per annum interest on £2 million for 6 months only.
£2 million @ 6.1% = £122,000 × 6/12 months = £61,000
7 B It applies to both US and European style options.
The Black-Scholes model only applies to European style options.
8 D 6.6%.
Without swapping, both parties borrow at a total of (6.8%) + (L+1.2%) = L+8.0% Swapping, they borrow
instead at (L+0.6%) + (7.0%) = L+7.6% which is a saving of 0.4% Split 50:50 between both parties, Lucas
Lodge saves 0.2% on its fixed rate of 6.8% = 6.6%
If you calculated 6.4%, you added the differences of 0.6% and 0.2% to find the arbitrage benefits.
If you calculated 6.5%, you used the fixed rate of 6.8% less half the difference between the floating rates.
If you calculated 6.7%, you used the fixed rate of 6.8% less half the difference between the fixed rates.
9 A Sell December short sterling futures
To hedge an exposure to a rise in short-term interest rates with futures, it is necessary to sell futures.
December futures are more appropriate than September futures, since the December futures relate to a
three-month interest period from December, whereas the September futures have expired and would
therefore relate to a three-month period starting next September.
10 A With the collar, the company has bought a series of consecutive interest rate put options at a strike
A collar in effect is a series of matching put and call options. The company buys a series of put
options, each with a strike rate of 8%, which fixes its maximum net borrowing cost at 8.50% (since
the company borrows at LIBOR plus 0.50%). For each put option, the company sells a call option,
which reduces the net premium payable. The call options set a floor of7%to LIBOR, so that the net
borrowing cost for the company will not fall below7.50%.
7 International risk – Exchange rates

C Do nothing to some transactions.
E Net off transactions.
You will do nothing, when a transaction is in the company's home currency, in this case euros, and net off
transactions, in this case the $ amounts in 3 months time.
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2 D Statement 2 only is correct.
Even when a company does not export or import, it might be exposed to the threat of foreign
competition in its domestic markets.
A strong domestic currency makes foreign imports relatively cheap. Borrowing in a foreign currency at
a lower rate of interest is not a cheap option, because the foreign currency will be quoted forward at a
premium, and its spot rate value could also strengthen over time.
Since the foreign currency loan has to be repaid at some time, and since interest payments will be
made in the currency, the effective cost could be about the same as borrowing in domestic currency.
3 D Invoicing in local currency.
Leading and lagging means advancing or delaying payments to a time when the exchange rate is
favourable. Matching receipts and payments in the same currency reduces the need to convert
currencies. Forward contracts hedge against changes in exchange rate and provide certainty in
conversion. Invoicing in local currency means that profits are held in local currency. Remitting these
profits to the UK will then be open to exchange risk.
4 C Sterling will depreciate by about 6%.
Applying purchasing power parity, the future spot rate (probably the forward rate set by banks) in 12
months would be:
2.45  (1 + 2% / 1 + 5%) = 2.45  (1.02/1.05) = $2.38 per £
The annual change = (2.45 – 2.38) / 2.45 = 2.86
Over 2 years = 5.71% which is approximately 6%
If you stated that Sterling would appreciate, you misunderstood the erosion of inflation on Sterling –
higher rates in the UK would mean that over time, its purchasing power would depreciate.
Of the remaining two options, 6% is closer than 3% so should have been selected.
5 B £7,968,127
10,000,000/1.2550 = £7,968,127
As it's a British company receiving euros and the rate quoted is
£1 = €X, divide by the rate quoted:
As the rate is quoted £1 = €X, the bank will buy € from the company at the higher rate, so that the
company receives fewer £ for each € sold.
6 B £4,321 profit.
The Ruritanian $ buy rate is 3.4050
Sterling cost of imports = $130,000/3.4050 = £38,179
Profit = £42,500 - £38,179 = £4,321
7 D Options 2,3 and 4 only.
Leading with the payment eliminates the foreign currency exposure by removing the liability.
Borrowing short-term in euros to meet the payment obligation in three months time matches assets
and liabilities and provides cover against the exposure. A forward exchange contract is a popular
method of hedging against exposure.
8 B Statement 1 True; Statement 2 False.
Matching receipts and payments is another method of hedging transaction exposure, not translation
exposure.
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9 C Receives £7,290,000; Pays £4,000,000
As we're looking from a UK perspective:
For the receipt as currency is quoted at €1 = £X we multiply by rate quoted, so receives 9,112,500 ×
0.8 = £7,290,000
For the payment, as currency is quoted at £1 = $X we divide by rate quoted, so pays 7,600,000/1.9 =
£4,000,000
10 D The UK subsidiary pays $425,533 to the South African subsidiary and pays $56,322 to the Danish
subsidiary.
The first step is to convert the balances into US dollars as a common currency.
Debtor Creditor Amount in US dollars
UK SA R3,500,000/6 = $583,333
UK DE Kr1,400,000/5.8 = $241,379
DE SA R2,300,000/6 = $383,333
SA UK £240,000/0.7 = $342,857
SA DE Kr1,150,000/5.8 = $198,276
Paying subsidiaries
Receiving subsidiaries UK SA DE Total
$ $ $ $
UK – 342,857 – 342,857
SA 583,333 – 383,333 966,666
DE 241,379 198,276 – 439,655
Total payments (824,712) (541,133) (383,333) 1,749,178
Total receipts 342,857 966,666 439,655
Net receipt/(payment) (481,855) 425,533 56,322
8 International risk – Financial instruments

1 D Unable to calculate, not enough information.
In order to do a money market hedge when we are making a payment we need to be able to invest
money now, in order to have enough available in 3 months time to make the payment. We don't have
the information about US investing rates to be able to do this.
2 The amount to be paid in three months time is €
3,000,000.
The payment will be $2.8 million multiplied by 1.0715, which is €3.0 million. The worst rate is always taken.
For a payment this will be the higher amount of Euros per dollar.
3 D Unlimited.
The worst possible scenario for a writer of a call is that the price of the underlying security increases to
an infinitely large amount.
4 D Sell euro futures or buy put options on euro futures.
The US company will want to sell 1 million euros in two months, and could use futures or options on
currency futures to hedge against the risk of a fall in the value of the euro against the dollar between
now and then. It can do this by selling euro futures, which are contracts for the sale of euros in
exchange for dollars, or it can buy put options on euro futures. (Each future is for 125,000 euros,
which means that 8 contracts or options would be needed to hedge the position.)
5 B £206,540.
Sterling amount = $300,000/(1.4545 – 0.0020) = £206,540
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6 B Arrange a forward contract to buy $650,000 in July.
The new contract offsets the original contract. Unless this is done, the original forward contract
creates a currency exposure, since the $650,000 will not be received in July but the company has
contracted to sell $650,000. The forward contract is a binding contract, not an option, and cannot be
cancelled unilaterally by one party.
7 $14,900
Cost of forward contract = A$1,300,000/A$2.90
= $448,276
Minimum cost of currency if don't hedge = A$1,300,000/A$3.00
= $433,333
Maximum cost of hedging = $448, 276 - $433,333
= $14,943
which to the nearest $100 is = $14,900
8 A 237.1 and let the option lapse
The option premium makes foreign currency options quite expensive, and could therefore be unsuitable for
any company trading on narrow profit margins. Options are often used by companies faced with:
1. a currency exposure that might not arise at all, or
2. where the amount of the total receipt or payment is uncertain.
Option premium = 240 × 1.2%
= 2.88 yen
Worst case = 240 – 2.88
= 237.12 yen
If the spot rate in 6 months time is 245, the company will allow the option to lapse, and buy yen at the spot
rate; its all -in cost would be 245–2.88 option premium = 242.12 yen to $1.
9 B $9,482,500
5,000,000 × (1.9000 - 0.0035) = $9,482,500
As it's an American company receiving £ and the rate quoted is £1 = $X, multiply by the rate quoted.
As the forward rate is quoted at a premium, this means $ will become more expensive, so the premium has to
be subtracted from the spot rate. This indicates that the company will obtain fewer $ when it sells the £ it's
received.
10 C Additional funds will need to be deposited by the engineering company
This is incorrect - as the KRW has appreciated in value, the engineering company will need to find
more of its own currency to settle this liability, meaning the initial margin paid up front (usually as a
percentage of the sum due) will need to rise. It is not subject to negotiation!
9 Investment risk
1 C A premium for dividends payable.
The cost of capital can be estimated by an "opportunity cost" approach where investors in a business
are rewarded for the following:
 at least as much as risk-free investments would deliver (eg the yield on Government securities)
 a premium for the risk inherent in whatever industry a company operates in
 a further premium for the risks arising from gearing levels in an organisation
Dividends are not quantified in the cost of capital, only the risks to shareholders of not getting any!
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2 $ 440.000 .
Base case NPV = $440,000 / 20% = $2.2 million less $2 million investment = $200,000 +ve
Tax shield = $800,000 @ 14%  30% = $33,600 p.a. in perpetuity over 14% = $240,000 +ve
APV = $440,000 +ve
3 An internal budget ceiling imposed by management A
An external limit on borrowing applied to a company B
Soft capital rationing is internally set (eg like a budget)

Hard capital rationing is externally set (eg by a market or a regulator)
Set capital rationing is not a recognised term, so is incorrect
4 £10,569 .
NPV = –£20,000 – ($5,000 / 1.1) – ($5,500 / [1.1 × 1.1]) + ($13,000 / [1.1 × 1.1]) = –$18,347
EAC in absolute terms (ie no +ve or –ve signs) = $18,347 / 1.736 = $10,569
£11,200
5 .
Certainty Adjusted cash Disc cash

Year Cash flow equivalent flow Disc factor flow
£ £ 12% £
0 (50,000) 1.0 (50,000) 1.000 (50,000)
1 40,000 0.9 36,000 0.893 32,148
2 30,000 0.8 24,000 0.797 19,128
3 20,000 0.7 14,000 0.712 9,968
11,244
6 The cost of capital is the cost of funds that a company raises and uses, and is the minimum return it
should make on its investments.
7 £ 3.19 million
Base case NPV = £1.6 million /10% = £16 million – £18 million = £2 million -ve
Tax shield (including the issue costs) = £18.3 million  6%  30% = £0.3294 million in perpetuity @ 6% =
£5.49 million [NB this is the same as multiplying the debt and issue costs by the tax rate]
Including the issues costs, the Adjusted Present Value = 5.49 – 2 – 0.3 = £3.19 million +ve
8 A 3
B 4
C 1
D 2
Calculate the profitability index for each project (NPV per $ outlay):
Project A = 100/50 = 2
Project B = last because the NPV is –ve
Project C = 84/10 = 8.4
Project D = 45/15 = 3
So, the preferred order is C, D, A, B
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In this example, 100% of projects C and D would be undertaken (costing $25,000) and the remaining $25,000
would be invested in 50% of project A.
Option to abandon C
Option to wait B
Option to follow on A
Abandonment options allow unprofitable projects to be exited

Waiting options allow for an advantageous pause
Follow-on (sometimes known as strategic) options take longer term outcomes into account as well as those
initially assessed
10 £115,200
Expected cash-flows = (10 × 20%) + (12 × 40%) + (15 × 40%) = £12.8 million
Over 5 years @ 5% = 12.8 × 4.329 = £55.4112 million
Residual value @ year 5 = 0.874 × 6 = £4.704 million
Expected NPV = (55.4112 + 4.704) - 60 = £115,200 +ve
10 Internal controls
A Store security staff to check employees’ bags at random when they are leaving the shop
D All goods should carry electronic tags that trigger alarms at store exits unless the goods have been
scanned through the EPOS terminals/tills
E Monthly independent inventory counts to be undertaken by staff from other shops or from head office,
with the results compared to inventory records
Random employee bag checks would discourage staff from stealing inventory.
Ensuring goods are purchased by the head office buying department, and that prices are set by head office
would not reduce the opportunity for inventory fraud.
Having all goods carry electronic tags that trigger alarms at store exits unless scanned would both discourage
and detect theft.
Independent inventory counts would reduce the chance of collusion.
2 C Sequential numbering of blank order forms.
Sequential numbering is a control over the completeness of recording of orders.
3 C Comparison of goods received notes with purchase orders.
This comparison is a check that goods and services received have been authorised.
4 B Comparison of bank paying-in slips with initial receipt records.
Daily bankings will help reduce the risk of monies received not being banked but do not ensure that
monies don't go astray during the day. Listing the amounts received and issuing receipts are important
recording controls, but the most important check is a comparison of what has actually been banked
with what has been received.
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5
A member of staff checks invoices from suppliers against goods received A
notes before they are paid
The credit controller chases customers who have exceeded their credit period D
All customer services staff are given training and a procedures manual D
Checking invoices against goods received notes before payment prevents incorrect payment. It is therefore a
prevent control.
Direct controls are controls that direct activities or staff towards a desired outcome. Chasing customers for
payment is an attempt to ‘direct payment’.
Providing training and information relating to procedures is ‘directing staff behaviour’.
A Grow branch revenue
B Control branch costs
Profit centre managers are responsible for revenues and costs. They have no investment responsibilities.
Expanding the branch network would require investment.
7 Prevent staff from over claiming number of hours worked C
Prevent overpaying of purchase ledger amounts D
Prevent theft of portable plant and equipment B
Ensuring time sheets are signed by supervisors would act as an authorisation control and would reduce the
chance of staff claiming for more hours than they worked. You may have hesitated over the option of having a
separate department for payroll and human resources, but this control is more useful for preventing the
creation of ghost employees.
Confirming information with suppliers (for example by checking the amount showing as owing on J Co's
system matches the amount showing as due from J Co on the supplier's system) would help prevent
overpayment. The separate buying department control is more applicable to the prevention of goods being
ordered for personal use.
Theft of portable equipment would be discouraged by CCTV coverage. However, the benefits must outweigh
the cost. Detailed asset registers are unlikely to prevent theft although they would help to detect theft after the
event.
A The business does not pay too much for goods and services.
E The business researches potential suppliers before contracting with them.
Both of these objectives are answered by the control of putting contracts out to tender.
'The business has a central database of suppliers' is not a control objective, it is a control, to ensure that
goods and services are purchased from approved suppliers. 'The business has goods and services when it
needs them' is a control objective, but it is not directly answered by the control set out in the question. A
tender process does not ensure that receipt of goods will be timely. Similarly, 'the business does not
purchase goods and services from connected parties' is a control objective, but it is not answered by the
control of receiving tenders. A tendering process might help prevent a company dealing with related parties
while being unaware that they are connected, but does not completely prevent it. For example, if the
connected party is a large concern, there might be nothing or no one attached to the tender that would appear
to be connected to the purchasing company.
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9 D Review of accounting records to see if expenditure on non-current assets has been included as capital
expenditure.
How assets are treated in the financial accounts should not impact upon how the organisation takes
steps to ensure their safe custody.
10 D Statement 2 is true and statement 1 is false
It is not possible to eliminate risk (without ceasing operations). In commercial organisations, profit is
part of the reward for successful risk taking. The purpose of an internal control system is to manage
and control risk rather than to eliminate it. So statement 1 is false.
Statement 2 is true. COSO states ‘Internal control is a process affected by an entity’s board of
directors, management and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives’.
11 Control failures
1 C The main reason control is exercised over employees is to prevent fraud.
Although one reason control is exercised over employees is to prevent fraud, it is incorrect to say this
is the main reason.
The main reason control is exercised over employees is to ensure that their work contributes to
achievement of the organisation’s goals.
Employment contracts include terms related to unacceptable conduct and notice periods - so they are
one way of exercising control over employees.
HR controls are more likely to be weak in smaller organisations, as these organisations tend to be
more informal. There is also a chance that the business may be dominated by a single individual who
may not recognise the need for formal controls.
B Dishonesty
C Opportunity
D Motive
Dishonesty, opportunity and motive are necessary for fraud.
Collusion is sometimes involved in fraud, but fraud is possible without collusion. For example, many frauds
are committed by individuals acting alone, taking advantage of weaknesses in control systems.
Complacency helps make fraud easier, but fraud is possible without complacency. For example, if collusion is
involved even well designed control systems can be contravened.
3
Procedures implemented after the cause of the breakdown has been discovered or corrected B
Procedures that ensure that some operations can be performed during the period that normal C
services are disrupted
Policies to ensure that the recovery plan is implemented and operates as intended A
This is another question that it is possible to answer correctly without specialist knowledge.
‘After the cause of the breakdown’ implies recovery.
‘During the period that normal services are disrupted’ implies standby.
‘To ensure the recovery plan is implemented’ implies personnel.
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B Safeguard the shareholders’ investment
C Manage and control business risk
According to the Turnbull report, the objectives of internal controls are to manage and control risk and to
safeguard the shareholders’ investment.
Reduced time needed for an external audit and maximising profitability may be by-products of an effective
internal control system, but they are not the main benefits of an effective system.
A Review of the number of employees required to achieve a certain amount of work.
B Requiring employees being paid cash wages to collect them in person.
D Comparison of payroll with employee personnel records.
6 Statement 1 is true and statement 2 is false
Statement 1 is true because by counting the inventory Pippa is checking that the number of parts which
Jaitinder has issued is consistent with the number of parts that should have been issued according to the
parts requisitions.
Statement 2 is false. If a fraudulent parts requisition was issued the parts in stock could still match the
requisitions, in which case Pippa wold be unaware of the fraud.
7 B Re-use the infrastructure that will be replaced at the current disaster recovery location at a cost of
$0.25 million.
Although continuing with the existing recovery facility is the cheapest option, it seems inefficient to
dispose of the old system when is can be used as a disaster recovery system at relatively low cost. The
benefit would be that the disaster recovery system has been updated.
Having a disaster recovery site more locally is not necessarily beneficial. Disasters may happen locally,
for example, natural disasters. F Co does not want to find that both sites have been subject to the same
disaster. This is also a very expensive option.
Installing a second system at head office increases the risk of a single disaster impacting both
systems.
8 C Receivables ledger and cash receipts.
Teeming and lading involves diverting cash intended for one receivable to the account of another. This
requires that the individual has access to cash receipts and the receivables ledger.
The other three options do not provide access to cash receipts.
A Insufficient checks on the need for additional staff
B Insufficient checks on employee identification, qualifications and background
D Lack of staff training
E Insufficient control over the overtime approval process
Four additional staff have been employed on the strength of a request from one person. Additional
authorisation should be required to ensure the need for additional staff is genuine.
People should not be employed without proper checks on their identity, background, qualifications and
employment history. Without these checks, the organisation could employ individuals who hide their past or
exaggerate their credentials - or who don’t exist (a’ ghost employee’).
Staff training is an important control. If M Co HR staff had been trained in the possible risks of not following a
proper employment process, they might not have employed the four recruits without checks.
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Sam is able to approve overtime without referring to any other manager or senior person. The control issue is
with the approval process rather than a lack of segregation between approval (Sam) and payment (payroll
staff).
A False invoices could be paid
C Inferior quality goods could be accepted
Checking invoices to orders would reduce the risk of accepting invoices for goods which were not ordered.
Without this check, false invoices may be paid.
It is unlikely that goods will be stolen if they have come from a preferred supplier.
As no check is made on goods received, it is possible that inferior goods will be accepted. For example, goods
may have been damaged in transit.
As materials are used straight away, there is no inventory store.
12 Internal audit
A To set out the audit objectives and the other priorities that apply
B To define how the audit evidence necessary to achieve the objectives will be achieved
D To identify the resources that will be needed and actually employed in audits
2 D Comparing financial and non-financial performance with other organisations.
3 C (3) only.
Internal audit monitors risk strategies to ensure that they operate effectively. Internal audit does not
have a part in determining policy or identifying risks.
Instead, it monitors what others have put into place and looks at issues of efficiency and effectiveness.
4 D It aims to reveal weaknesses in the performance of individual managers and in the overall management
structure.
Financial performance would be considered but the audit should cover non-financial issues as well.
Assessment of resources is part of the assessment of the adequacy of management structure.
B Establish whether the controls are operating as they are expected to be.
C Establish whether the documentation relating to controls fairly reflects the operation of the system.
D Establish whether improvements need to be made to controls.
E Form an opinion as to the adequacy of the system as a whole for managing the risks identified.
The objectives of tests of controls are similar for internal and external auditors. The purposes for internal
auditors include determining whether the controls are operating as they are expected to be, whether the
documentation is adequate, whether improvements need to be made, and to form an opinion as to the
adequacy of the system as a whole. The identification of persons whose performance is not acceptable may
be a by-product of this process, but it is not normally a primary objective.
A Outsource the internal audit function
B Ensure the Head of Internal Audit has access to the Chairman of the Board of Directors and is
accountable to the Audit Committee
C Ensure the internal auditors are physically separate from the rest of the workforce
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7 C Checking movements of inventory from one location to another.
Audit of procurement is audit of the purchasing process. Internal movements of inventory are not
connected with purchasing, they are to do with the logistics of operations.
8 C The complexity of relationships.
Some complex relationships will be worth testing by regression for example, because of the insight
they offer into long-term trends. Conversely some simple relationships, for example salaries against
staff numbers, will also be important.
All the other factors are likely to have major impacts on the analytical procedures.
9 B Checking that approved sales orders indicate that reference was made to the aged listing.
Reference should be evidenced by signature - checking for that signature is the controls test.
10 D To provide an objective estimate of the probability of error in the population.
Using statistical sampling cannot reduce the need for judgement in auditing as it is still required to be
exercised by the auditor.
Statistical sampling does not reduce the number of items to be tested.
Ensuring that a representative sample is selected is achieved through statistical sampling but is not the
main advantage of statistical sampling.
13 Monitoring
B Customer satisfaction measures
C Group target measures rather than individual measures
E Differentiate between simple and complex queries and measure these separately
Introducing a target call resolution time would likely adversely impact the quality of service provided and
make staff reluctant to take on more complex calls. The same problem, the prioritisation of speed over the
quality of service, would also apply if a target minimum number of calls was introduced.
The scorecard should be used to monitor group and organisational performance, rather than the performance
of specific individuals.
2 D The analysis of those items where performance differs significantly from standard or budget.
3 D To limit expenditure.
As a control mechanism, the budget helps to plan expenditure and to authorise expenditure but does
not act as a limiting factor. Where budgets are used to motivate performance, targets should be
challenging but realistic and goals should be clear and simple so that performance against them can be
evaluated. The main function of budgets is to communicate and co-ordinate activities. Decisions taken
and plans made at higher levels in the organization are communicated down through the hierarchy as
resources are allocated to fulfill the objectives.
4 B Strategic plan.
5 B The cost of non-conformance.
6 Unless the alloy wheel business unit is obligated to supply Bazda they are likely to prioritise TRUE
external sales
Unless appropriate adjustments are made, the planned approach will distort the financial TRUE
performance of the alloy wheel business unit
It is not possible to set realistic financial performance targets to the alloy wheel business unit FALSE
under these circumstances
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7 A Whether the advice provided enabled customers to better manage their finances.
The customer perspective is concerned with the quality of the service provided. For a budgetary
advisory service, the main indicator of service quality is whether the advice provided enabled
customers to better manage their finances.
The other options would be classified as internal business (processes) or innovation and learning (staff
turnover, number of qualified staff) in the balanced scorecard.
B Flexibility
C Innovation
D Resource utilisation
E Financial performance
F Excellence (of service quality)
H Competitiveness
The six dimensions identified in 1991 by Fitzgerald et al in their published CIMA-funded research are:
Flexibility, Innovation, Resource utilisation, Excellence, Financial performance, Competitiveness.
Efficiency and ROI would comprise part of the resource utilisation dimension.
B A motor vehicle manufacturer
D A mobile phone manufacturer
F A commercial printing company
Economic value added (EVA) is based on the premise that businesses should create returns at a rate above
their cost of capital. The EVA calculation depends heavily on invested capital. It is most suited to companies
with relatively high levels or values of assets. The three organisations selected would all have significant
investment in tangible physical assets including plant and machinery.
10 C Backflush costing.
14 Control and direction

1 C Capture organisational learning and document it to ensure lessons are learnt
CIMA define a post completion audit as ‘an objective, independent assessment of the success of a
project in relation to plan. It covers the whole life of the project and provides feedback to managers to
aid the implementation and control of future projects.’ The audit is not intended as a means of directly
appraising the performance of the project manager, or of obtaining sign-off on project documentation,
or of closing budgetary codes.
2 B Transfer.
An insurance policy may be used to transfer a risk to another party (the insurer). Not all risks are
insurable, for example the risk that a product will become obsolete or out-of-date due to advances in
technology.
Risk reduction involves taking action to control or reduce risk.
Risk acceptance involves not taking any action.
Risk avoidance would require abandoning the project.
3 D Describe a specific, required project outcome
Project objectives need to be SMART (Specific, Measurable, Achievable, Relevant, Time-bound).
Objectives that meet this criteria are then able to be used in project monitoring and control.
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The other options refer to some useful information that should be considered and documented, but
they relate to issues that are wider than individual project objectives.
4 A Ensuring the fitness for purpose of deliverables
Quality is concerned with fitness for purpose. In a project management content the focus should
ultimately be on ensuring the project deliverables are produced to specification - which means to the
required level of quality.
The aim should be to ensure quality during the project, rather than a reliance on the inspection and
testing of output.
Lessons relevant to quality may be leaned during the post-completion audit, but the main focus should
be on ensuring the fitness for purpose of project deliverables.
In this context, the presentation of project reports is a relatively minor issue.
A Improved decision making
B Better researched projects
C Improved internal controls
D Highlight reasons for successful projects
CIMA define a post completion audit as ‘an objective, independent assessment of the success of a project in
relation to plan. It covers the whole life of the project and provides feedback to managers to aid the
implementation and control of future projects.’
Over time, by highlighting things that worked well and things that didn’t, these audits will facilitate improved
decision-making, improved internal controls and better researched projects.
The process is not necessarily quick and inexpensive. The time and cost will depend to a large extent on the
complexity of the project.
6 Opening 24 hours a day, 7 days a week, with Hamza working many 12 hour shifts himself. As B
a consequence, customer service levels have suffered.
Including the first day of the following month’s trading in the previous month. C
Offering unsustainable ‘bargain prices’ to entice customers away from competitor shops. A
Tunnel vision involves focussing on performance measures to the detriment of other areas.
Misrepresentation involves creative reporting to suggest that a result is acceptable.
Myopia refers to short-sightedness. In a business context it involves prioritising short-term goals at the
expense of longer term objectives.
7 Assessed through a comparison against short-term financial targets C
Assessed through non-budgetary performance measures A
Focus on the organisation continuing to achieve its overall financial goal B
The correct answers reflect the correct definitions of the manager-types.

Even if unfamiliar with this theory, there are clues in the question. In the context of the information provided:
‘Overall financial goals‘ implies ‘profit’
‘Non-accounting’ implies ‘non-budgetary’
‘Constrained’ implies ‘short-term targets’
Answers 71
8 Transfer costs may mean that profit and ROI is low and frustration will arise as they do not R
have a wide enough product range.
The main emphasis should be on technical efficiency and quality. ROI may conflict with these P
aims and the division may not replace machinery as it could worsen ROI. P
This division must work closely with the other two divisions and being a profit centre may P
not be the best option.
Careful reading of the scenario and of the options in this type of question often reveals the answer. For
example, the only division that works with both of the other two divisions is the Production division. The only
mention of machinery is P, the production line. The retail division will have to absorb the cost-plus transfer
prices applied by both the F and P divisions, which will reduce profit and ROI.
A Post completion audits could produce valuable insights
B Post completion audits will not prevent dysfunctional behaviour by project sponsors
D It may be difficult to introduce post completion audits
CIMA define a post completion audit as ‘an objective, independent assessment of the success of a project in
relation to plan. It covers the whole life of the project and provides feedback to managers to aid the
implementation and control of future projects.’
It would not be reasonable or appropriate to find the project sponsor liable for all negative findings from post-
completion audits. Project shortcomings should be investigated and those responsible held accountable,
although in many situations a combination of factors and stakeholders contribute to the failing.
Judging the performance of production line managers based on the volume of production would encourage
managers to push lines to the limit, sacrificing quality for quantity.
A post completion audit can be completed retrospectively. This would be worthwhile for some past projects at
Z Ltd, to enable lessons to be learned.
A To ensure the system is secure
B To ensure the system meets the needs of managers
C To ensure the system produces accurate information
A post-implementation review establishes whether the objectives and targeted performance criteria for the
new system have been met.
Examples of relevant measures include:
• Ensuring the system is secure
• Ensuring the system meets the needs of users
• Ensuring the system produces accurate information
• Measuring throughput speeds on new systems and comparing them with prior performance
• The volume and nature of errors and queries (both quantitative and qualitative)
• Comparison of the new system costs compared with the amount budgeted
Although a comparison of cost versus budget may form part of the post-implementation review, the review
would not establish the costs incurred on the project, as this would have already been done. The time taken
on the project would also be established before the post implementation review.
72 Answers
15 Mixed Bank 1
1.1 B Risk analysis is about ranking the impact and likelihood of a risk occurring.
Risk analysis is about understanding the impact or severity of a risk or risks, as well as their
probability or likelihood.
1.2 The view of an individual non executive director should always carry more weight than the FALSE
view of an individual executive director.
The view of an individual executive director should always carry more weight than the view of FALSE
an individual non-executive director.
When considering the make-up and balance of the board, the number and status of non- TRUE
executive directors should be sufficient to ensure their views carry significant weight.
The views of individual directors should always be judged on their merits. When considering the ‘inside out
mix’ of executive directors and nonexecutive directors. It is important that the number and status of non-
executive directors is sufficient to ensure their views carry significant weight.
1.3 The correct answers are:
A DomApp should issue an RFI (request for information) to prospective suppliers
E DomApp should consider carrying out an internal review of all its IT services and needs
This question is based on a question that appeared in CIMA’s Specimen Exam.
The two correct options are the most appropriate actions to take at this relatively early stage in the (possible)
outsourcing process.
A request for information from prospective suppliers will enable DomApp to collate information about the
capabilities of various suppliers. This does not commit the company to outsourcing, but if the decision to
outsource is taken then this information can be used to invite appropriate suppliers to tender.
An internal review of all DomApp’s IT services and needs will enable DomApp to establish and document their
needs in full. A decision on the best course of action can then follow, based on this.
Whether outsourcing should be rejected, partial outsourcing considered and issues relating to outsource
partner selection are all issues to be considered later – after the formal internal review and RFI.
A Consultation with local industrial and government representatives
D Research the likely political stability and economic viability of the country concerned
Expropriation is the risk that the assets owned by RS are acquired (possibly against the company's wishes) by
the government in the country concerned so an understanding of the likelihood of such political volatility is
essential to manage this risk.
Joint ventures, local sponsors and some philanthropy may be viewed favourably in the short term, but the
best way to manage any long term risks should focus on the risk itself, not how to mitigate the effects.
1.5 A floor is an option which sets a lower limit to interest rates.
1.6 B Financial risk.

The scenario is explaining the issue of financial risk, where exchange rates are affected by long term
economic issues.
Environmental risk relates to risk from an environmental event or condition (usually physical) that may
have some financial risk but not currency-related.
Business risk relates to a risk from a company’s industry, not necessarily currency-related.
Reputation risk is a broad risk describing the way a company is perceived by its stakeholders and the
resultant impact, again not necessarily currency-related.
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1.7 C £1,400,000.
Step 1 Calculate NPV as if the company were all-equity financed. Here the cost of capital will be 13%.
Loan issue costs will be considered later.
Year Cash flow Discount factor at 13% PV
£'000 £'000
0 (7,500) 1.00 (7,500.0)
1–3 5,000 2.361 11,805.0
2–4 (1,500) 2.089 (3,133.5)
(2.9740–0.885) 1,171.5
Step 2 Calculate the PV of the tax shield provided by the loan interest, discounting the tax reliefs at the
pre-tax cost of interest (Assumption: tax shields are just as risky as the interest payments that
generate them.)
Year Interest Tax shield Discount factor PV
at 10%
£'000 £'000
2 750 225 0.826 185.9
3 500 150 0.751 112.7
4 250 75 0.683 51.2
349.8
Step 3
£'000
NPV of project if all equity financed 1,171.5
PV of tax shield due to loan interest 349.8
Loan issue costs (100.0)
APV 1,421.3
A Collusion and misappropriation of inventory
C Failure to make a permanent record of inventory
Errors in counting are unlikely due to the controls used by CT Co. Inventory should not deteriorate in the time
between inspections, so any faulty products are likely to be identified before they present a risk.
1.9 B Flag this as a compliance error because part of the purpose of an internal audit is to encourage the
application of procedures.
1.10 B Matrix structure.
In a matrix structure, subordinates report to a functional and project/product/service group manager.
16 Mixed Bank 2
2.1 C Complete a review of the marketplace
This will not address changes to the digital landscape (eg streaming to portable devices).
2.2 C Review of succession planning within the organisation.
Succession planning is a matter of strategy that the board as a whole would normally consider.
2.3 D A system that facilitates the creation and integration of new knowledge into an organisation.
KWS include systems such as CAD and CAM and are used by knowledge workers such as research
and development staff in an organisation to help the business develop new products. Office
automation systems are designed to increase the productivity of all workers throughout an
organisation.
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2.4 B 6%
You have calculated the difference between the NPV of the project and the alternative investment in the
financial instrument, which is correct.
2.5 D To benefit from favourable interest changes during the term of the swap.
Moving payment obligations from one currency to another can be achieved using a cross-currency
swap. The main purpose of interest rate swaps for nonfinancial companies is probably to manage the
balance between fixed and floating rate debt. Occasionally, a credit arbitrage opportunity might exist to
lower borrowing costs by arranging a swap.
2.6 D $1.4400 to £1
$1.52  1.08/1.14 = $1.4400
A Either NPV or IRR should be used to select projects.
B As a minimum, in order to be acceptable, a project should have IRR greater than the discount rate and
positive NPV.
One of NPV or IRR is acceptable for project selection, with IRR greater than the discount rate and NPV being
positive.
NPV and IRR are not equal as IRR can deliver false responses (multiple IRRs) and payback is not
sophisticated enough to replace either IRR or NPV as it ignores the time value of money.
2.8 D A hedging policy statement.
Hedging is designed to combat excessive risks. Whilst the organisation may face a serious shortage of
cash if it takes excessive risks, a hedging policy will not have any impact on temporary cash trading
shortages or funds being tied in long-term investment.
B Check whether variances are reported within three working days of month end
C Check whether the 10% figure for exceptional variances is reasonable
E Check whether managers report reasons for variances and control action taken within one week
2.10 C Focusing on positive aspects of performance rather than negative ones.
Although this is a method of manipulating data, it does not strictly involve including excess estimates
of expenditure in the budget.
17 Mixed Bank 3
3.1 D Avoid the risk by ceasing production while the cause of the defects is identified.
This is dangerous as the reputation risk from one product could adversely affect sales of others.
3.2 B The nomination committee should consist entirely of executive directors.
Corporate governance practice varies, but the UK Corporate Governance Code recommends that the
majority of nomination committee members should be independent non-executive directors.
3.3 B An independent bicycle shop.
Big Data analytics tend to be used on large data sets, including those generated by supermarkets, large
multinational organisations and internet retailers.
Of the four organisations listed, Big Data analytics is least likely to be of use to an independent bicycle retailer.
Answers 75
B Set up unilateral netting to be performed by a central treasury function before any net sums are settled
C Establish accurate sales forecasting to avoid over-stocking
The overall risks to O Ltd are that foreign currency rates fluctuate across the business, eroding profits; also,
the process of managing cash-flow across the business is complex.
Doing nothing is not an option: O is not likely to be large enough to diversify all its trading and currency risks.
Unilateral netting will help manage unnecessary transfers of funds, simplifying the process and minimising
the costs of translating funds.
Accurate forecasting will allow efficiencies in purchasing and stockholding.
"Just in time" purchasing should apply to high volume not high value items.
Factoring will not necessarily address the translation and transaction risks presented by contracts over this
cyle, meaning that any factoring arrangement
will not necessarily assist O Ltd.
3.5 D 6.05%.
In the swap, the bank will receive the fixed rate and pay the floating rate. The higher fixed rate will
therefore apply, 5.55%.
The company will receive LIBOR in the swap, and pay 5.55% fixed. It will also pay LIBOR + 0.5% on its
loan. Its effective net payment is therefore 5.55% + 0.5% = 6.05%.
B The exhaustion of oil supplies in the country that has been supplying the company with all its oil.
D A change in a foreign government leading to nationalisation of the company's interests in that country
A temporary fall in the value of the company's home country currency and a failure by the overseas
manufacturer to supply finished goods in time for the peak sales season are examples of operational risks.
3.7 A W, X, Z then Y.
Divide the PV of annual cash profits by the year 0 outlay to find the profitability index.
Project W Project X Project Y Project Z
PV of annual cash profits £17,340 £13,200 £24,500 £25,860
Year 0 outlay £10,000 £8,000 £18,000 £17,000
Profitability index 1.734 1.65 1.361 1.521
1st 2nd 3rd 4th
B Standby procedures.
D Personnel management.
E Recovery procedures.
It should include definitions of responsibilities, priorities, backup and standby arrangements, communications
with staff, measures to deal with public relations, and a risk assessment. The other two options are relevant to
security; firewalls are used to protect computer systems from viruses and hacking and physical access
control aims to control human access.
3.9 B To be effective, internal audit should work independent of other areas of the organisation.
Part of the roles of internal audit is to ensure other areas of the organisation adhere to the system of internal
controls. This is best achieved through remaining independent. Working relationships should be professional
and civil, but not close.
Working collaboratively and or being closely integrated in to other areas of the business would hinder
independence.
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Internal audit also requires a ‘strong voice’ and the authority to ensure recommendations are taken seriously.
This would not be possible if internal audit was subordinate to other areas of the organisation.
3.10 D Ensures that resources are obtained and used effectively and efficiently in the accomplishment of an
organisation's objectives.
18 Mixed Bank 4
4.1 A 3 Refine the process and do it again
B 1 Identify risk areas
C 4 Develop risk response strategy
D 2 Implement strategy and allocate responsibilities
4.2 A They should have no shareholdings in the company.

While owning shares can present a conflict of interest, most governance codes (eg UK Corporate
Governance Code) specify that independence can be compromised only if such shareholdings are
significant. The remaining answers (pensions, length of service and previous employment) are far
more likely to compromise independence.
4.3 D Both statements are true
Big Data enables organisations to leverage complex, unstructured data that was previously ignored
because there was no reasonable way to process and analyse it.
To enable this data to be available for analysis, requires it to be stored. In the past, computer storage
space was relatively constrained. The ability to store vast amounts of data means there are ‘big’ sets of
data available for analysis.
4.4 D Cost of equipment.
The sensitivity measurement is the percentage change in the value of the item that would be necessary
to reduce the project's NPV to 0.
PV of revenues = £200,000  3.605 = £721,000
PV of running costs = 3.605  £120,000 = £432,600
NPV = (721,000 – 432,600 – 200,000) £88,400
Variable Sensitivity
Equipment cost 88,400/200,000 44.2%
Revenues 88,400/721,000 12.3%
Running costs 88,400/432,600 20.4%
Annual cash flow £80,000
PV of annual cash flows need to be
£200,000 for an NPV of 0.
PV of annual cash flows are:
Years 1 – 5 (  3.605) = £288,400
Project duration Years 1 – 4 (  3.037) = £242,960 37.0%
Years 1 – 3 (  2.402) = £192,160
Approx discounted breakeven
= 3 years + 200,000 –192,160
242,960 – 192,160
= 3.15 years. (5.0 – 3.15)/5 years
Answers 77
4.5 D Sell a 3 v 7 FRA.
To fix a rate for interest income, you should sell an FRA. An FRA for a four-month interest period
starting at the end of month 3 is a 3 v 7 FRA.
4.6 A Cross rates.
These represent how much of one currency can be bought or sold for another in the future and are
quoted automatically.
Cross rates use a common currency to create an exchange rate that otherwise is not offered by the
market.
For example, USD can be used to create cross rates: the exchange rate between Thai Baht and Swedish
KR may not be quoted, but Baht to USD and USD to KR are, thus allowing a cross rate to be calculated
and quoted.
Forward rates show how much of one currency can be bought or sold in the future for another.
Futures rates are the price of a derivative quoted on a futures market.
Spot rates are the rates of any commodity or currency quoted today.
4.7 Maximum NPV assuming all three projects are indivisible is $280,000.
The projects are indivisible therefore you need to consider all the possible options
CAPITAL NPV OF
OUTLAY PROJECT(S)
$ $
AA + BB 270,000 280,000
AA + CC 320,000 TOO LARGE
BB + CC 350,000 TOO LARGE
CC 200,000 210,000
Capital will therefore be spent on AA ($120,000) and BB ($150,000). Unused capital allocation is $10,000.
4.8 D A tangible non-current assets register containing cost and accumulated depreciation of each asset.
Where a tangible non-current asset register is maintained, that contains cost and progressively records
accumulated depreciation in respect of each asset, this should ensure that further depreciation cannot
be charged once the asset has been fully written off, provided that the annual depreciation is calculated
from this information.
4.9 B Analytical procedures are often used as tests of controls.
Analytical procedures can be used in certain circumstances as an alternative to detailed testing of
transactions and balances, where the overall balance examined is immaterial, for example. Analytical
procedures can be used as part of risk assessment and at the final review stage – external auditors
must use them at these stages as it is required by ISA 315 Identifying and assessing the risks of
material misstatement through understanding the entity and its environment and ISA 520 Analytical
procedures.
4.10 D Less opportunity to introduce budgetary slack.
78 Answers
19 Mixed Bank 5
5.1 Receivables days A
Gearing ratio C
Receivables days are rising suggesting that the company is unable to collect its debts on time, which is
evidently leading to liquidity issues and increased interest-bearing debt. As interest cover is an output factor,
it should be accepted, as improving cash-flow will reduce short term interest charges. Both receivables days
and gearing need to be reduced, but as each response needs to be different, the risk associated with debt
collection could be transferred to a third party factoring agency, allowing the company to reduce its debt
levels (this is an active choice as an increase in liquid cash could be paid out to shareholders, but the desire to
manage debt levels is favoured here).
5.2 D The board act as an agent of shareholders and have access to more information than shareholders
The board act on behalf of shareholders. Shareholders have relatively restricted access to information,
for example shareholders do not usually have the right to inspect ‘the books’. Shareholders usually
base their judgment of future prospects on the annual report and accounts, stockbrokers’ reports and
media sources. This situation, where the agent has more information that the principal, is referred to
as an ‘information asymmetry’.
5.3 B Parallel running.
This method provides a degree of safety should there be problems with the new system.
Pilot operation involves selecting part or parts of an organisation to operate a new system in parallel
with the existing system.
5.4 This is the definition of market risk. Market risk is the risk of loss due to an adverse move in the value of an
asset – a stock, a bond, a loan, foreign exchange or a commodity – or a derivative contract linked to these
assets.
5.5 C 0.50 intrinsic value and 0.16 time value.
The option is in-the-money, because an investor could exercise the call to buy a future at 93.00 and
sell the future at 93.50, a gain of 0.50. The intrinsic value of an option is the amount by which it is in-
the-money. The intrinsic value is therefore 0.50, and the rest of the premium must be its time value.
5.6 D 48.
The calculation is $2,800,000/0.938 (to get a euro figure) divided by 62,500 euro contracts. This gives
47.8 contracts. As you can't do part of a contract round to the nearest contract, so enter into
48 contracts.
5.7 B Vehicle 1 is likely to show a higher reported profit
Over the life of the asset, vehicle 1 will require £20,000 depreciation and £30,000 costs = £50,000 p.a.
Vehicle 2 will require £30,000 depreciation and £25,000 costs = £55,000 p.a.
This decision is dysfunctional as the equivalent annual cost of Vehicle 2 is lower but the decision is
swayed by the impact on the directors' bonuses and ignores factors such as risk or shareholder
wealth.
B Reviewing forecasts of future activities.
D Checking the adequacy of contingency arrangements.
Checking operations on a day-to-day basis and approving the size and nature of transactions are tasks that
should be part of the regular control systems and carried out by management. Internal audit should be
independent of treasury control systems, observing and not participating.
Answers 79
5.9 A Testing the sequence of dispatch notes and enquiring into any missing items.
Reviewing sales ledger accounts of individual customers can give assurance that credit limits are not
being exceeded but will not demonstrate whether sales to that customer have been completely
recorded. Checking that statements are sent out regularly to customers is a check on credit control
procedures. Checking items in the sales ledger will confirm that they reflect the original records of
sales (the sales day book) but won't confirm that all sales recorded in the sales day book have been
recorded in the sales ledger.
5.10 B Total quality management.
20 Mixed Bank 6
B The insolvency of one of the business's fifteen suppliers of a particular component
C One of the business's most significant customers seeking to extend its credit period from
30 to 60 days
D One of the business's most significant suppliers transferring its manufacturing operations overseas.
A merger between the business's sole supplier of one component and the business's main competitor is an
example of a strategic risk.
B More bureaucratic
C Less accountability
Disadvantages of multi-tier boards include that they are more bureaucratic and can lead to confusion over
authority and accountability.
Advantages of multi-tier boards include greater independence from operational pressures and broader
representation from the inclusion of a wider range of stakeholders.
A Testing.
D Conversion
E Training.
Data flow diagrams and prototyping are techniques used in the system analysis and design stages, not the
systems implementation stage.
6.4 The financial risk associated with the possibility of default by a counterparty is called credit risk.
6.5 A If interest rates rise, the market price of interest rate futures will fall.
If interest rates rise, the market price of bonds will fall, and so the price of interest rate futures based
on these bonds will also fall. Call options on interest rate futures will increase in value and put options
on interest rate futures will fall in value. The coupon rate of a bond is unaffected by rises or falls in
general interest rates.
6.6 A Unlimited.
The option would only be exercised if the price went above 100, which would mean you could sell for
whatever the price was, making potentially unlimited profit less the premium of 12. If the price fell
below 100, the option would lapse and you would lose the premium of 12.
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6.7 C 21.71%.
The IRR is the discount rate that makes the net present value of the sum of all cash flows from a
particular project equal to zero.
This example provides limited information. The calculation requires adjustment to remove the tax
shield, as under the IRR rate the project will break-even.
3,000,000 - 40,000 = 2,960,000
2,960,000 / 3,000,000 = 0.9867
0.9867 × 22% = 21.71%
6.8 A Receivables ledger and cash receipts.
'Teeming and lading' is said to occur when cash is extracted by manipulation of cash receipts and the
receivables ledger accounts of individual receivables. The irregularity is operated by diverting cash
intended for one receivable to the account of another. Therefore to be able to perpetrate this fraud then
the individual must have access to cash receipts and the maintenance of receivable accounts.
6.9 B A misallocation of distribution costs as advertising expenses.
A misallocation of distribution costs as advertising expenses would be picked up by reviewing the
statement of profit or loss and other comprehensive incomefrom one year to the next. The other
options would not be picked up as there is no corresponding figure in last year's statement of profit or
loss to compare against this year's.
610 D Total quality management
Total quality management is an example of quantitative non-financial control.
21 Mixed Bank 7
7.1 B Sensitivity Analysis.
7.2 D A charity will have different reporting responsibilities and committee structure
A charity will have different reporting responsibilities (for example, for charities based in England and
Wales to the Charity Commission) and committee structure. Strategy, internal controls and financial
objectives are important to charities. Charites set goals and are responsible for the funds they receive
and spend.
7.3 A Direct changeover.
The key issue here is that the organisation of the business is changing so drastically that the continued
operation of the old system is practically impossible, especially since the central warehouse is to be
closed as soon as possible. A direct changeover is therefore appropriate.
7.4 0.44.
Prob No. of units Varble costs Cost per Cost Fixed costs Profit/ (loss)
sold unit
£ £ £ £ £
0.2×0.1=0.02 20,000 12 8 160,000 175,000 (15,000)
0.2×0.6 =0.12 20,000 14 6 120,000 175,000 (55,000)
0.2×0.3 =0.06 20,000 16 4 80,000 175,000 (95,000)
0.5×0.1 =0.05 30,000 12 8 240,000 175,000 65,000
0.5×0.6 =0.3 30,000 14 6 180,000 175,000 5,000
0.5×0.3 =0.15 30,000 16 4 120,000 175,000 (55,000)
0.3×0.1=0.03 40,000 12 8 320,000 175,000 145,000
0.3×0.6 =0.18 40,000 14 6 240,000 175,000 65,000
0.3×0.3 =0.09 40,000 16 4 160,000 175,000 (15,000)
Answers 81
Probability of making a loss = 0.02 + 0.12 + 0.06 + 0.15 + 0.09
= 0.44
7.5 D An interest rate future.
FRAs and futures are both fixing instruments, while options and IRGs are insurance arrangements. A
swap can fix cash-flows but is more concerned with changing the nature of borrowing between fixed
and variable.
7.6 D 1.7805.
Dollars are quoted forward at a discount which means that the forward bid and ask rates are
1.7805 – 1.7896.
The bank is selling dollars, and will want the more favourable rate, which is 1.7805. (At this rate, it will
receive more in sterling for the dollars it sells than at the higher rate of 1.7896).
A Quality
C Timescale
D Budget
A project will be rated successful if it is completed at the specified level of quality, on time and within budget.
Projects are seldom conflict-free or efficient in their use of all resources.
7.8 D ROCE.
Each store is an investment centre, therefore the measure used needs to take into account the capital
invested in each store. Return on Capital Employed (ROCE) is the only measure of the four suggested
that does this. However, Jess would have to be careful that the use of ROCE did not encourage
‘shorttermism’, particularly a reluctance to invest in the stores.
7.9 B Errors in computation led to opening inventory being overvalued and the company has also increased
sales as a result of a marketing drive based on undercutting competitors.
Undervaluing opening inventory and increasing closing inventory value through indirect overheads
would both reduce costs of sales and so increase the gross margin.
Overvaluing the opening inventory would decrease the gross margin - the effect of this would then be
cancelled out by the increase in closing inventory value through indirect overheads.
The entry into the market of a major new competitor would reduce sales volumes, but this does not
directly translate into a change in the company's gross margin.
Overvaluing the opening inventory, combined with a marketing drive to undercut competitors is the
correct answer. Both would have the effect of reducing gross margin.
C Staff are trained on new equipment
D Daily production logs and failure rates are noted
A good or effective control environment, that would either help identify the causes of waste or reduce the
likelihood for waste, would include staff receiving adequate training on new equipment and records being kept
that recorded production levels and failures.
Judging the performance of production line managers based on the volume of production would encourage
managers to push lines to the limit, sacrificing quality for quantity.
Involving senior management in operational inspections is not practical. Line inspections and the checking of
calibrations should be performed daily or more, at least until the level of wastage is reduced.
82 Answers
22 Mixed Bank 8
8.1 B Access restrictions on assets.
Access restrictions are control procedures, which are normally distinguished from the control
environment.
8.2 D Confidentiality
8.3 B Steps 2, 3, 1, 4.
You would need to see the problem first, as it may not be particularly serious, or worthy of a great deal
of management time. Then you would wish to ensure that some order was brought into current and
future purchasing, and you would lay down organisation-wide standards and so forth. This ensures
that the problem is contained and then you can start to plan for the future. Centralisation of capital
expenditure authorisation would ensure that the standards are complied with. This is likely to be the
most contentious of all. User departments would not wish to see their budgets cut.
8.4 D Lower costs.
Costs of using expatriates may well be higher including higher salaries, accommodation costs, benefits
for expatriates' families (travel, school fees) and costs of training them about the country to which they
are sent.
8.5 A £1 = $1.4614
Using Interest Rate Parity, the exchange rate in 3 months time will be calculated as follows:
1.44  [1 + (10% / 4)] / [1 + (4% / 4)]
1.44  (1.025 / 1.01) = $1.4614 per £
8.6 A $296,252.
Forward premiums are deducted from the spot rate, which means that the forward rates are
6.7480 – 6.7510. The bank will be buying rands in exchange for dollars, and will apply the rate more
favourable to itself, which is the rate that will cost it the lower amount of dollars. This is the 'ask' or
'offer' rate of 6.7510.
Your company will receive R2,000,000/6.7510 = $296,252.
A Avoidance
C Absorption
D Transference
Avoidance is where the factors that give rise to the risk are removed, transference means the risk is passed on
to someone else, such as an insurer, and absorption is where the risk is accepted and the consequences dealt
with as necessary. There is a fourth strategy, known as reduction or mitigation. The potential for the risk
cannot be removed but analysing the risk may identify ways to reduce the incidence and/or the consequences.
8.8 The correct answer is:
A A control system will assist in compliance with laws and regulations
C The introduction of a control system is overdue
E The introduction of a control system will change the way the business operates
A control system will help ensure financial results are timely and accurate, taxation compliance and other
regulatory compliance.
The point of a control system is to manage risks that may hinder the fulfilment of objectives. Just because the
objectives are being fulfilled, does not mean that potential risks should be ignored.
The introduction of a control system is overdue because the business has grown and employs large number
of staff.
Answers 83
The fact that the employees are creative individuals will not mean that a control system is unnecessary.
Creative people may be able to think of ways of defrauding the business!
The introduction of a control system will change the way the business operates. For example through more
formal processes and checks.
B Customers are taking longer to pay than they used to.
C Credit terms to receivables have changed.
D The accounting records on which the calculation has been based may be inaccurate.
E Cash received from customers may have been misappropriated.
If customers are taking longer to pay than they used to, receivable days may rise. If credit terms have
changed, receivables may be paying more slowly. If the accounting records on which the calculation has been
based are inaccurate, receivable days may appear to rise. If cash has been misappropriated, it may appear that
receivable days have risen.
If customers are paying more promptly than they used to, receivable days will fall.
8.10 D Post-completion audit report.
A cost-benefit review cannot be carried out until after the project has been completed and implemented
operationally. This is a task for the post completion audit. The purpose of a completion report is to document
the completion of the project, with the client or project user signing off.
84 Answers
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Mathematical tables 87
88 Mathematical tables
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Question Type Explanation

A Statement 1 true; Statement 2 true

3 Which of the following definitions best describes risk aversion?

4 Which ONE of the following statements is true?

A Identify risk areas

8 Which of the following statements is true?

9 Which of the following is not a technique for measuring risk?

4 In the context of corporate governance, ‘the agency problem’ refers to:

3 Ethics and reputation

3 Complete the following statement using one of the options below.

4 The primary purpose of an integrated report is to explain:

5 The term ‘Big Data’ refers to which of the following ?

8 Identify THREE consequences of not having an IT strategy.

6 Interest rate risk

A Buying a cap and buying a floor.

7 Which of the following is NOT a characteristic of the basic Black-Scholes model?

Floating rate Fixed rate

7 International risk – Exchange rates

8 Consider the following statements concerning currency risk:

8 International risk – Financial instruments

3 What is the maximum liability of the writer of a call option?

An external limit on borrowing applied to a company

A Soft capital rationing

6 Complete the following sentence with the correct word.

Prevent overpaying of purchase ledger amounts

Prevent theft of portable plant and equipment

A Detailed asset registers

10 The following statements relate to internal controls.

2 Which THREE of the following represent conditions necessary for fraud?

1. Internal audit's primary role in a company is identifying risks.

4 Which of the following is the best description of a management audit?

9 Which of the following audit procedures is a test of controls?

10 What is the main advantage in using statistical sampling in auditing?

2 Exception reporting within a business is:

14 Control and direction

2 Projects involve risk and risk management.

3 A project objective should:

4 Quality management, in the context of project management, should focus on:

A Improved decision making

Offering unsustainable ‘bargain prices’ to entice customers away from

Assessed through non-budgetary performance measures

Focus on the organisation continuing to achieve its overall financial goals

8 FPR Company has three divisions.

1.5 Complete the following sentence with the correct word.

2.3 A Knowledge Work System (KWS) is a system which:

2.5 Swaps could be used for a number of different purposes.

2.6 The US dollar/sterling spot rate is £1 =$1.52

3.9 Select the correct option to complete the sentence below.

To be effective, internal audit should work other areas of the organisation.

Quarter 1 Quarter 2 Quarter 3 Quarter 4

5.4 Complete the following sentence with the correct word.