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CIMA P3 Sample Question Answers

Question # 1

Accpro is a leading tuition provider for professional accountancy qualifications. It has decided to replace its old accountancy software (tuition fee records only) and with a new one. The new system will maintain student records, tuition providers’ fees, exam fee payments, and analysis of information. The new system was purchased from the market and has only been live for just over a week. It was not run in parallel with the old system because Accpro’s finance director deemed that a parallel run would have been too expensive and disruptive to its operations. The head of Accpro’s internal audit department offered to conduct a post-implementation review of the system to confirm that user needs are being satisfied, but Accpro’s finance director declined this offer. He argued that any problems with the new system will quickly become apparent after it goes live. Classify which of the following are limitations of conducting a post-completion audit. Select ALL that apply:

A. Sufficient resources may not be allocated to the task of completing PCA.
B. PCA can be time-consuming and costly to complete.
C. If undertaken by the managers of the project, they may claim credit for all that went well and blame external factors for everything that didn’t.
D. It can be used to blame the directors rather than learn from past mistakes.

Question # 2

Accpro is a leading tuition provider for professional accountancy qualifications. It has decided to replace its old accountancy software (tuition fee records only) with a new one. The new system will maintain student records, tuition providers’ fee, exam fee payments and analysis of information. The new system was purchased from the market and has only been live for just over a week. It was not run in parallel with the old system because Accpro’s finance director deemed that a parallel run would have been too expensive and disruptive to its operations. The head of Accpro’s internal audit department offered to conduct a post-implementation review of the system to confirm that user needs are being satisfied, but Accpro’s finance director declined this offer. He argued that any problems with the new system will quickly become apparent after it goes live. Evaluate the argument put forward by Accpro’s finance director for refusing to have a post-implementation review and identify the statements that support his point of view. Select ALL that apply:

A. This system is too important to the efficient running of Accpro to dispense with a postimplementation review.
B. It is possible that many of the results that would have been obtained from a formal review will come to light if users are dissatisfied.
C. The system is extremely important to Accpro’s operations and its control over cash.
D. The system is a standard package, which reduces the risks of not conducting a review.

Question # 3

Identify which of the following are ADVANTAGES of Post-Completion Audit (PCA). Select ALL that apply:

A. It decreases the frequency of project termination for ‘bad projects’.
B. It improves the quality of decision-making.
C. It abandons all under-performing projects by identifying the reasons for the under-performance.
D. It highlights the reasons for successful projects.
E. It provides a means of improving control mechanisms.

Question # 4

Primed is a private medical college that is constructing a new block to offer additional admission seats for the MBBS qualification. ConstructAll has the contract for constructing the new block in 10 months’ time. Normally such projects take 14 months but ConstructAll has committed to put in extra workforce and finish the work in 10 months. Classes are going to commence by the last week of month 11. The project has no contingency plan. ConstructAll has not given any raises to its employees for two years, so some of them are considering going on strike. Which of the following is/are potential risks to the successful completion of the project? Select ALL that apply:

A. The commencement of classes might be cancelled due to low admissions.
B. The administration of the college may not remain interested in offering increased admissions.
C. 10 months might prove to be an unrealistic deadline commitment.
D. The project may be suspended due to any unforeseen labour strike problem

Question # 5

Eduexc is a public sector university that is constructing a new block for offering additional postgraduate qualifications. The board of directors of the university want to have strict control on the capital expenditure on this large project and have asked the accountant to submit periodic reports on the progress and cost. Which ONE of the following will NOT be data included in a capital expenditure progress and cost report for the new building?

A. Estimated cost to complete and estimated final over- or under-expenditure.
B. Budgeted cost of the project, date started and scheduled completion date.
C. Estimated depreciation method and useful life.
D. Cost and over- or under-expenditure to date.
E. Estimated completion date and details of penalties, if any.

Question # 6

TelNet Co is a leading telecommunications company in country C. It is planning to offer internet services to its customers via a small portable USB device. The management of TelNet commissioned some market research to assess the key design features of the device that customers require. Then, the product design was created and a trial product produced. This trial product has gone into testing for consumer feedback. This activity would take place within which stage of implementation of the new project and its control processes?

A. The conceptual stage
B. The development stage
C. The control stage
D. The operating stage

Question # 7

BDD is a leading tuition provider for professional accountancy qualifications. One of the critical success factors (CSFs) for BDD is to improve student satisfaction. Mr. Ben, the management accountant and a former student of BDD, is looking to measure its performance in a quantifiable way. Which of the following indicators would BEST suit the CSF identity? Select ALL that apply:

A. Maximization of BDD’s owner’s wealth.
B. A decrease in the monthly number of complaints from students.
C. An increase in positive student feedback.
D. An increase in market share.
E. The number of students.
F. BDD’s gross profit percentage.

Question # 8

What is the meaning of having a satisficing strategy in an organisation?

A. Maximization of shareholders’ wealth
B. Maximization of performance indicators satisfied
C. Maximization of shareholders satisfied
D. Maximization of stakeholders satisfied

Question # 9

Which of the following features can distinguish a not-for-profit organization from profit-maximizing organizations? Select ALL that apply:

A. They do not have external shareholders providing risk capital for the business.
B. They do not distribute dividends, so any profit or surplus that is generated is retained by the business as a further source of capital.
C. Their objectives usually include some social, cultural, philanthropic, welfare or environmental dimension.
D. They offer a product that no other major organisation offers.

Question # 10

Steel Co, a construction company, has won a contract with the government of Country C to build a new train line for within-city commuting. Their aim is to provide high-class travelling facilities to lowincome people. Currently, these people only have the option of using a bus for travelling within the city. However, the opposition party in Country C has protested that the plan is a favour given by the government to Steel Co rather than actually being beneficial to low-income people. Some people will suffer because their land and houses will be damaged or taken over on the construction route. As a result, the government has specified a range of conditions on the contract. Which of the following is the MOST likely to address the needs of less wealthy people if the project is successful?

A. The government will pay the fair value of the property to people whose houses are on the specified train route and will, therefore, be taken over.
B. The train will be fuel-efficient and will have less than half of the carbon emissions of buses accommodating the same number of people.
C. The ticket price charged will be half of the on-going rate for traveling via bus on the same routes.
D. Steel Co will develop the road infrastructure of some prescribed areas of the city at a subsidized price.

Question # 11

What sort of performance measure might be set if a company wishes to measure the quality of its product? Select ONE correct statement:

A. The number of defective products produced.
B. The number of staff leaves.
C. The rate of staff turnover.
D. The profit per unit of product.

Question # 12

Care is public sector hospital. Its directors are working on evaluating its performance and are considering different indicators for this purpose. Which of the following statements is/are TRUE for performance indicators for public sector organisations? Select ALL that apply:

A. The concept of profitability is most important in public sector organizations.
B. Market share can be used as a performance indicator for public sector organizations.
C. Return on assets may not be an appropriate indicator as there may be a difficulty in measuring its value.
D. Public sector entities tend to be risk-averse because of the political repercussions of failure.

Question # 13

Cap Co manufactures and sells sports goods. Its products are distributed through a multi-channel network comprising of its own stores and online business, franchises and retail partners. The directors of Cap Co use profitability as their main performance indicator. Identify the DISADVANTAGES of using profitability as a performance indicator by Cap Co. Select ALL that apply:

A. It will not provide a systematic explanation as to why one business sector of Cap Co has more favourable prospects than another.
B. It is remote from the actions that create value for Cap Co.
C. The inputs to the measure may vary substantially between Cap Co and its competitors.
D. It does not provide enough insight into the dynamics and balance of Cap Co’s individual business units and the balance between them.

Question # 14

Rose Co manufactures and sells cutlery and kitchen appliances. For many years, it has been recognized as a successful company and has become a household name. The products are distributed through a multi-channel network comprising its own stores and online business, franchises, and retail partners. Identify which of the following is/are financial objectives for Rose Co. Select ALL that apply:

A. Rose Co has a target to increase its return to investors by 20% this year.
B. Rose Co-directors plan to hold the highest market share in the year 20X8.
C. Rose Co wants customer complaints to reduce to half of the current level.
D. Rose Co-directors plan to improve the efficiency of operating cash flows by 15%.

Question # 15

Which ONE of the following is NOT a key characteristic of not-for-profit organizations?

A. Revenue orientation for different customers.
B. Operate for purposes other than to provide goods or services at a profit.
C. Transparency in the organization’s mission and finances.
D. Receive significant contributions from providers who do not expect returns.

Question # 16

Which ONE of the following is NOT an example of ways natural monopolies are regulated to ensure that the public are not the victims of the monopoly power these companies?

A. Disallowing them from making products with higher profit margins.
B. Capping the selling process.
C. Taxing super-profits.
D. Applying a limit to the profits these organisations are allowed to make.

Question # 17

The Highway Company (THC) was considering two options for a new highway connecting two cities. Route 1 involved cutting a channel through an area designated as being of special importance because it is the natural habitat of the national animal, now considered an endangered species. The alternative was Route 2, which would involve the compulsory purchase and destruction of Mr. Dan’s factory. Mr. Dan threatened legal action if Route 2 was chosen as it would cause significant damage to his business and loss of jobs for 100 employees. On the other hand, a local environmental pressure group, ‘Endangered Species’, was outraged at the plan to choose Route 1. It criticized THC for ignoring the sustainability implications of the decision and accused the company of profiting at the expense of the environment. The project for Route 1 has a higher NPV than Route 2. THC is having trouble selecting the final route for the new highway.Which of the following statements concerning stakeholders of THC is/are CORRECT? Select ALL that apply.

A. All of THC’s shareholders would be impartial to both routes as long as the route is profitable.
B. THC’s shareholders will be unanimously in favour of the construction of Route 1.
C. THC is likely to have a poor reputation with environmental activists already, so investment in Route 2 is unlikely to damage it any further.
D. If THC chooses Route 1, it would be less sustainable but more favourable to shareholders and the stakeholders in the factory.

Question # 18

The finance ministry of country D is analyzing the impacts of an increase in the inflation rate from 5% to 11% within 3 years. So far they have considered the following trends as a result of this inflation. Which of the following is/are a TRUE reflection of the inflation rate changes taking place in the economy?

A. Some manufacturing organizations have decreased their prices because the demand for products has lowered.
B. As a result of the increase in inflation and therefore the interest rate, the demand for borrowing has increased.
C. The lower exchange rate resulting from high inflation has lowered export prices

Question # 19

The ministry of finance of Beta country is making a budget for their next fiscal year. The main challenge being faced is that the inflation rate has fluctuated a lot recently. The finance minister predicts that the rate of inflation will rise on average by 8% during the next year. The interest rate may fluctuate between 6% and 9.5%. Which of the following is/are TRUE regarding this increase in inflation rate? Select ALL that apply:

A.  An inflation rate under 10% is considered to be acceptable, not harmful.
B. Traders of Beta may delay purchases because they predict lower prices later.
C. There will be a better distribution of wealth in Beta.
D. Fluctuations in the inflation rate make it difficult for entrepreneurs in Beta to predict the economic future and accurately calculate prices and investment returns.

Question # 20

Adjusted Present Value (APV) consists of two different elements, i.e. the investment element and the financing element. The present value of the costs and benefits associated with a financing package is calculated for the financing element. Select ALL of the following that are side-effects of financing:

A. Pre-tax issuance costs of the finance.
B. Tax allowable deduction on the finance cost paid on loans used.
C. Government grants.
D. Tax relief on subsidized loans.

Question # 21

Mina, a management accountant in Nordisk plc, a Swedish company, is investigating the company’s weighted average cost of capital. She has discovered that the capital structure is as follows:Which ONE of the following is Nordisk’s weighted average cost of capital based on the above date?

A. 7%
B. 8.7%
C. 8.5%
D. 9.5%Top of Form

Question # 22

Neon Co is a television manufacturing company. It is planning to start a project to manufacture a new television. Why should Neon Co make sure that this new project is in the same risk class as existing operations before using the WACC as the discount rate?

A. If Neon Co uses the WACC of existing operations to evaluate the new project without regarding the risk class of the project, the risk of the company will increase over time.
B. Only projects with risk similar to that of present operations can result in positive NPV for Neon Co.
C. If the new project will decrease risk, Neon Co should reject it.
D. A new project that is in a different risk class must be analysed using the WACC of the firm's existing operations.

Question # 23

The weighted average cost of capital (WACC) includes multiple factors in its calculation. What will be the impact of a decrease in the corporation tax rate on the calculation of WACC? Select ONE correct answer.

A. It will decrease the WACC of a firm with no debt in its capital structure.
B. It will decrease the WACC of a firm with debt in its capital structure.
C. It will increase the WACC of a firm with debt in its capital structure
D. It will increase the WACC of a firm with debt and equity in its capital structure.
E. It will not affect the calculation of WACC of a firm with debt in its capital structure.

Question # 24

The company WACC is often used as a discount rate when using net present value or internal rate of return calculations. Select THREE conditions that have to be met when using WACC as a discount rate:

A. If the capital structure changes, the weightings in the WACC will also change.
B. The new investment does not carry a different business risk profile to the existing company's operations.
C. The discount rate of the intended investment is a replica of the company’s existing activities.
D. The company is completely equity-financed.

Question # 25

A portfolio manager at Capital Asset Management Services, a well-known investment manager in the USA, is constructing a new equity portfolio consisting of a large number of randomly chosen stocks. Of the options below, select the MOST accurate statement with regard to the effect on the expected levels of systematic and unsystematic risk as the number of stocks in the portfolio increases: Systematic UnsystematicA Increases Remains the same B Decreases Increases C Remains the same Decreases D Remains the same Remains the same

A. Option A
B. Option B
C. Option C
D. Option D

Question # 26

Delta Co has hired a recently qualified CIMA Accountant. He is using an SML to determine the feasibility of a project. What should the status of the project be if its beta and IRR coordinates plot above the SML?

A. The project should be accepted.
B. The project should be rejected.
C. It will depend on the NPV of the project.
D. Further information will be required for a decision.

Question # 27

Which of the following is TRUE if the estimated cost of equity of a project is calculated using the security market line SML approach? Select ALL that apply.

A. SML shows the relationship between the level of systematic risk and the corresponding required return.
B. SML is the representation of the capital asset pricing model.
C. SML applies only to firms with stable dividend growth rates.
D. SML estimate is adjusted for risk.
E. To implement this approach, estimates of a market risk premium and a beta coefficient have to be made.
F. The quality of the estimate from the SML approach is sensitive to the quality of the estimates of the variables in the model.

Question # 28

Delta Co-directors have calculated its Beta factor to be 0.6. A Beta (ß) of 0.6 means that:

A. The total return on the shares is 60% of the stock market average.
B. The total risk of the company is 60% of the stock market average.
C. The market risk of the shares as regards economic fluctuations is 60% of the stock market average.
D. The non-systematic risk of the company is 60% of the stock market average.

Question # 29

The risk that a shareholder of a company requires an extra return for (risk premium) is:

A. The systematic + unsystematic risk of the share
B. The unsystematic risk of the share
C. The systematic risk of the share
D. The systematic – unsystematic risk of the share

Question # 30

AB Constructions is a building developer based in Spain. For its next investment, the company is considering purchasing a large piece of land in the suburbs of Madrid. The land is currently owned by the local government, who would like AB Constructions to build both residential apartments and office space. AB Constructions has calculated that the net present value (NPV) of the project is negative. However this would be the first contract with the local government, and, if the company delivers on time, the government will offer AB Constructions more investments to build, and also the rates for the land will be more preferential. Which ONE of the following real options is included within the construction project?

A. Option to delay
B. Option to follow on
C. Option to return
D. Option to abandon

Question # 31

Which ONE of the following is NOT a category of real option?

A. The abandonment option
B. Timing options
C. The commitment option
D. Strategic investment options
E. Follow-on options

Question # 32

The NPV approach to investment appraisal makes two assumptions. Which TWO of the following are NOT assumptions in the NPV approach to investment appraisal?

A. A project is reversible
B. A project is irreversible
C. A project can be delayed
D. A project cannot be delayed

Question # 33

The Certainty Equivalent Method is an approach to dealing with risk in a capital budgeting context. It is used as an alternative to using higher discount rates to incorporate risk. The following data is for a potential project by Orange Co. Cashflows are ($20m), $18m and $15m for Year 0,1 and 2, respectively. The certainty equivalent factor is 1.00, 0.95, and 0.90, respectively. The risk-free discount rate used by the company is 10%. Calculate the NPV of the project using the following data as per the certainty equivalent method.

A. $6.08m
B. $6.69m
C. $10.60m
D. $13.00m

Question # 34

Alpha Co is evaluating a new investment project for which it will have to invest in a non-current asset worth $1,200,000. The cashflows from the project for the next four years will be as follows: Sales = $2,000,000 per year Costs = $1,200,000 per year Tax rate of the company for the entire duration of project will be 25%, and the asset will be depreciated on a straight line basis over the life of project. The cost of capital of Alpha Co is 8%. By what percentage can sales fall before the NPV of the project becomes zero (sensitivity to sales)?

A. 9.9%
B. 10.8%
C. 11.9%
D. 20.8%

Question # 35

Alpha Co is evaluating a new investment project for which it will have to invest in a non-current asset worth $1,200,000. The cash flows from the project for the next four years will be as follows: Sales = $2,000,000 per year Costs = $1,200,000 per year Tax rate of the company for the entire duration of the project will be 25%, and the asset will be depreciated on a straight-line basis over the life of the project. The cost of capital of Alpha Co is 8%.  What will be the NPV of the project?

A. $538,800
B. $787,200
C. $1,035,600
D. $1,987,200

Question # 36

Which THREE of the following statements are CORRECT regarding the internal rate of return (IRR) method?

A. The rate at which discounted cash inflow is more than discounted cash outflow
B. The internal rate of return does not consider the time value of money.
C. IRR can be viewed as a breakeven cost of capital.
D. The IRR allows for sensitivity analysis on the estimated discount rate.
E. If the IRR of a project is 10%, its NPV, using a discount rate greater than 10%, will be less than 0.

Question # 37

Which ONE of the following is NOT an advantage of incorporating risk in discount rate while calculating Net Present Value?

A. A positive NPV should indicate that the project return is sufficiently high to compensate for the risks involved and still give the shareholders again.
B. A risk management policy can be seen to be beneficial if either it improves future cash flows and/or reduces the cost of capital (discount rates) used.
C. Cash flows can be improved by risk management because volatile profits may subject companies to higher tax rates in certain years than if profits had been more stable.
D. Costs of financial distress can be avoided.
E. Lower perceived risk should result in a higher cost of equity and no change in the cost of debt.

Question # 38

The concept of "time value of money" assumes that money received now is worth more than the expectation of the same amount being received at a later time in the future – the timing of a cash flow affects its perceived value to us. Select ALL the underlying features that apply to this concept of the time value of money:

A. Cash received sooner could be invested and earn a return.
B. Cash received sooner could be used to repay finance, thus saving interest.
C. Cash received sooner will buy more goods because inflation erodes the purchasing power of the money.
D. The higher the level of risk, the less certain the expectation of future cash flows become, thus making them less valuable to us when making a decision.

Question # 39

Lina Co is a large private company whose business activity is events management, involving the organisation of conferences, meetings and celebratory events for companies. Lina Co was founded 10 years ago by Danny Hudson and his sister, Stella, who still own the majority of the company’s shares. The company has grown rapidly and now employs more than 150 staff in 20 offices. Currently there is a small internal audit team, under the supervision of Lindsay Montana, a recently qualified accountant. Before heading up the internal audit department, Lindsay was a junior finance manager of the company. The members of the internal audit team will be reassigned to roles in the finance department if internal audit is outsourced. The internal audit team has three employees, including Lindsay, who reports to the finance director. The other two internal auditors are currently studying for their professional examinations. The team was set up two years ago and initially focused on introducing financial controls across all of LinaCo’s offices. Nine months ago the finance director instructed the team to focus their attention on introducing operational controls in order to achieve cost savings due to a cashflow problem being suffered by the company. The team does not have time to perform much testing of financial or operational controls. In the course of her work, Lindsay found many instances of management policies not being adhered to and that the managers of each location were generally reluctant to introduce controls as they wanted to avoid bureaucracy and paperwork. As a result, Lindsay’s recommendations are often ignored. Three weeks ago, Lindsay discovered fraudulent activity at one of the offices while reviewing the procedures relating to the approval of new suppliers and payments made to suppliers. The fraud involved an account manager authorising the payment of invoices received from fictitious suppliers, with payment actually being made into the account manager’s personal bank account. Lindsay reported the account manager to the finance director, and the manager was immediately removed from office. This situation has highlighted to Danny and Stella that something needs to be done to improve controls within their organisation. ? Which ONE of the following statements is incorrect? 

A. Keeping internal audit in-house will be beneficial as Lindsay has relatively more experience of financial reporting, auditing techniques and commercial and business awareness
B. It is beneficial to outsource internal audit because, if the recommendations come from an independent source that has authority and is supported by senior management, they are more likely to be followed.
C. Outsourcing the function will allow an immediate increase in the resource base, meaning that more work can be quickly performed
D. Lindsay and the rest of her team can be reallocated to other parts of the business. The finance team may benefit from extra resources if the company continues to grow.

Question # 40

Lina Co is a large private company whose business activity is events management, involving the organisation of conferences, meetings and celebratory events for companies. Lina Co was founded 10 years ago by Danny Hudson and his sister, Stella, who still own the majority of the company’s shares. The company has grown rapidly and now employs more than 150 staff in 20 offices. Currently there is a small internal audit team, under the supervision of Lindsay Montana, a recently qualified accountant. Before heading up the internal audit department, Lindsay was a junior finance manager of the company. The members of the internal audit team will be reassigned to roles in the finance department if internal audit is outsourced. The internal audit team has three employees, including Lindsay, who reports to the finance director. The other two internal auditors are currently studying for their professional examinations. The team was set up two years ago and initially focused on introducing financial controls across all of LinaCo’s offices. Nine months ago the finance director instructed the team to focus their attention on introducing operational controls in order to achieve cost savings due to a cashflow problem being suffered by the company. The team does not have time to perform much testing of financial or operational controls. In the course of her work, Lindsay found many instances of management policies not being adhered to and that the managers of each location were generally reluctant to introduce controls as they wanted to avoid bureaucracy and paperwork. As a result, Lindsay’s recommendations are often ignored. Three weeks ago, Lindsay discovered fraudulent activity at one of the offices while reviewing the procedures relating to the approval of new suppliers and payments made to suppliers. The fraud involved an account manager authorising the payment of invoices received from fictitious suppliers, with payment actually being made into the account manager’s personal bank account. Lindsay reported the account manager to the finance director, and the manager was immediately removed from office. This situation has highlighted to Danny and Stella that something needs to be done to improve controls within their organisation. ? Which ONE of the following statements is incorrect?

A. Keeping internal audit in-house will be beneficial as Lindsay has relatively more experience of financial reporting, auditing techniques and commercial and business awareness
B. It is beneficial to outsource internal audit because, if the recommendations come from an independent source that has authority and is supported by senior management, they are more likely to be followed
C. Outsourcing the function will allow an immediate increase in the resource base, meaning that more work can be quickly performed.
D. Lindsay and the rest of her team can be reallocated to other parts of the business. The finance team may benefit from extra resources if the company continues to grow. 

Question # 41

Walsh Co sells motor vehicle fuel, accessories and spares to retail customers. The company owns 25 shops. The company has recently implemented a new computerised wages system. Employees work a standard eight-hour day. Hours are recorded using a magnetic card system; when each employee arrives for work, they hold their card close to the card reader; the reader recognises the magnetic information on the card identifying the employee as being ‘at work’. When the employee leaves work at the end of the day the process is reversed, showing that the employee has left work. Hours worked are calculated each week by the computer system using the magnetic card information. Overtime is calculated as any excess over the standard hours worked. Any overtime over 10% of standard hours put in a computer-generated report and emailed to the financial accountant. If necessary, the accountant overrides overtime payments if the hours worked are incorrect. Statutory deductions and net pay are also computer-calculated, with payments being made directly into the employee’s bank account. The only other manual check is the financial accountant authorising the net pay from Walsh’s bank account, having reviewed the list of wages to be paid. Which TWO of the following statements are correct?

A. Test data can be used to check that the overtime report is being created correctly and audit software can monitor that only the accountant’s password can be used to override the overtime payment
B. Using test data, the auditor can check the deduction and net pay calculations of a significant proportion of wages calculations – or all of them if necessary
C. After initial setup costs, using computer-aided audit techniques is likely to be cost effective; the same audit software programs can be run each year as long as accounting systems do not change.

Question # 42

Fizzipop manufactures and distributes soft drinks. Its inventories are controlled using a real-time system that provides accurate records of quantities and costs of inventories held at any point in time. This system is known within the company as the ‘Stockpop’ system and it is integrated with the purchases and sales system. No year-end inventory count takes place. Inventories are held in several large warehouses where nonstop production takes place. Inventories include finished goods and raw materials (water, sugar, sweeteners, carbonating materials, flavourings, cans, bottles, bottle tops, fastenings and packaging materials). Fizzipop has an internal audit department whose activities encompass inventories. The internal audit department is considering the use of computer-assisted audit techniques in carrying out their work. Which ONE of the following is an example of such a technique?

A. Use test data to determine whether the system rejects entries outside certain pre-determined parameters.
B. Use test data to perform certain preliminary analytical procedures to establish which warehouses to visit (such as those where the records indicate that large volumes of inventories are held)
C. Use test data to review all exception reports produced by the system to see if there are any recurring or old items and to ensure that all errors and exceptions are being dealt with on a timely basis. 

Question # 43

Which ONE of the following statements regarding internal audit’s responsibility relating to fraud is correct? 

A. Internal auditors are primarily responsible for identifying material misstatements in the financial statements
B. Internal auditors have no specific responsibility with regard to immaterial fraud. 
C. Internal auditors may be given an assignment to assess the likelihood of fraud, or if, fraud has been discovered, to assess its consequences. 

Question # 44

In a recent meeting with the chief internal auditor, the difficulty of staff recruitment and retention was discussed. Over the past year, five junior internal audit staff have left the company but only two have been recruited. Recruitment problems identified include the location of Octball’s head office in a small town over 150 kilometres from the nearest major city and extensive foreign travel, often to cold climates. Together with the chief internal auditor, you believe that outsourcing the internal audit department may be a way of alleviating the staffing problems. You would monitor the new outsourced department in a part-time role, taking on additional responsibilities in other departments, and the chief internal auditor would accept the post of finance director (FD) on the board, replacing the retiring FD. Two firms have been identified as being able to provide the internal audit service: The NFA Partnership, a local firm specialising in provision of accountancy and internal audit services. NFA does not audit financial statements or report to members, and T&M, Octball’s external auditors, who have offices in 75 countries and employ in excess of 65,000 staff. Which of the following are relevant factors T&M need to consider before they could accept appointment as internal auditors for Octball? Select ALL that apply.

A. Staff from T&M will be expected to take steps to avoid conflicts of interest or other independence issues such as close personal relationships building up with staff in Octball
B. There may be fee pressure on Teither to maintain the cost effectiveness of the internal audit department or to maintain the competitiveness of the audit fee itself in order to keep the internal audit work.
C. They may not be able to provide this service to Octball as they are a local firm and therefore the issue of travel and working away from home would remain
D. As external auditors, T&M will already have knowledge of Octball. This will assist in establishing the internal audit department as systems documentation will already be available and the audit firm will already be aware of potential weaknesses in the control systems.

Question # 45

In a recent meeting with the chief internal auditor, the difficulty of staff recruitment and retention was discussed. Over the past year, five junior internal audit staff have left the company but only two have been recruited. Recruitment problems identified include the location of Octball’s head office in a small town over 150 kilometres from the nearest major city and extensive foreign travel, often to cold climates. Together with the chief internal auditor, you believe that outsourcing the internal audit department may be a way of alleviating the staffing problems. You would monitor the new outsourced department in a part-time role, taking on additional responsibilities in other departments, and the chief internal auditor would accept the post of finance director (FD) on the board, replacing the retiring FD. Two firms have been identified as being able to provide the internal audit service: The NFA Partnership, a local firm specialising in provision of accountancy and internal audit services. NFA does not audit financial statements or report to members, and T&M, Octball’s external auditors, who have offices in 75 countries and employ in excess of 65,000 staff. Which TWO of the following are advantages of outsourcing to NFA?

A. The NFA partnership may not be able to provide this service to Octball as they are a local firm and therefore the issue of travel and working away from home would remain.
B. There are chances that Octball can negotiate a lower fee for independent audit as both services will be provided together
C. They will be able to provide the necessary expertise for internal audit work. They may be able to provide a broader range of expertise as they serve many different clients, and therefore staff that Octball could not afford to employ may be available for specialist work.
D. Outsourcing will remove the need for training internal staff. Effective training will be provided for ‘free’ as the outsourcing firm will be responsible for keeping staff up to date with new auditing techniques and processes.

Question # 46

Gran Ltd engages in many social activities and supports local charities. As a significant amount of money was donated recently to a few non-profit organisations, a social audit was scheduled. Please indicate ONE contribution to society and community that should not be part of the social audit.

A. Donations 
B. Education 
C. Sustainability reporting 
D. Health and Safety 

Question # 47

Someone blows the whistle when they tell their employer, a regulator, the police or media about wrongdoing, risk or malpractice that they are aware of through their work. Which ONE of the following statements regarding whistleblowing is INCORRECT?

A. The fear of being shunned by other employees can influence the potential whistleblower 
B. The organization's anti-fraud culture and reporting processes can influence the potential whistle blower
C. It is important to communicate to the staff that the board of directors and senior management are responsible for combating fraud

Question # 48

In the context of means of minimising risk of fraud in the purchasing process, identify ONE incorrect statement:

A. Best value through competitive quotations should be negotiated by the purchase department. 
B. The superior who approves the purchase should be separate from the individual who makes entries in the accounts.
C. The originator who specifies the goods should be the same as the individual who selects the supplier and approves the payment for the order placed.

Question # 49

Four months ago Voldemort Co shut down one of its five factories in response to deteriorating market conditions, with all staff employed at the factory made redundant on the date of closure. While monitoring the monthly management accounts, the finance director found that the monthly total payroll expense had reduced by 3% in the months following the factory closure – not as much as expected, given that 20% of the total staff of the company had been made redundant. Initial investigations performed last week by the Finance Director (FD) revealed that many of the employees who had been made redundant had actually remained on the payroll records, and salary payments in respect of these individuals were still being made every month, with all payments going into the same bank account. As soon as she realised that fraud may be being conducted within the company, the FD stopped any further payments to the redundant employees. The FD is aware that the senior accountant has been absent from work since she conducted her initial investigation last week, and it has been impossible to contact him. The FD believes that he may have been involved with the suspected fraud. Identify the TWO incorrect statements with reference to the situation above:

A. Evidence gathered during the investigation must be sufficient and relevant to the accusations being made
B. The legal framework is likely to require evidence of the motive for the fraud and the ability of the alleged fraudster to conduct the fraud.
C. Any attempt made by the alleged perpetrator/s to conceal the crime would also be relevant evidence. 
D. The investigative procedures should establish how the controls that should have been operating in the payroll system were circumvented.
E. It seems that authorisations to alter payroll details have been carried out effectively. 
F. Investigative procedures should try and identify any bank account receiving the pay of more than one individual.
G. Identification of employees who have not taken holiday or sick leave is not a relevant investigative procedure in this scenario.

Question # 50

Fraud risks exist in the selling process. Those involved can include any combination of the clients’ management and the organisation’s own management or staff, with or without any collusion. Which of the following can be indicators of fraud in the selling process? Select ALL that apply

A. Diversion of orders to a competitor 
B. Bribery of a customer by one of the organisation’s own sales representatives 
C. Giving out free issues/samples as per company practice 
D. Bribery of a customer by a competitor – no proper explanation of why the contract went elsewhere 
E. Knowing insider information, e.g. competitor’s prices. 

Question # 51

The fraud response plan should reiterate the organisation’s commitment to high legal, ethical and moral standards in all its activities and its approach to dealing with those who fail to meet those standards. Identify the incorrect statements. Select ALL that apply.

A. It is only the strategic level of management that needs to be aware of the risk of fraud and other illegal acts.
B. The fraud response plan can only be used to communicate the means of enforcing the rules or controls that the organisation has in place to counter fraud risks to internal 
C. Regulated financial services companies have a choice as to whether or not to keep identified cases of fraud an internal issue if they believe it will cause embarrassment for the management. 

Question # 52

Which of the following are possible methods of fraud detection? Select ALL that apply. 

A. External audit 
B. Risk management 
C. Law enforcement investigation 
D. Whistleblowing hotline 

Question # 53

Which TWO of the following statements regarding fraud detection and prevention are INCORRECT?

A. Recovery of historical losses is only possible through fraud prevention. 
B. Potential recovery of losses is the only objective of a detection programme so fraudulent behaviour should be ignored if no recovery of losses is expected.
C. Fraud prevention and fraud detection both have a role to play and it is unlikely that either will fully succeed without the other

Question # 54

You have been looking into various investment options for the money that you have saved up for the past 5 years. You were recently introduced to Mr Double S, a famous entrepreneur who you have read about in the newspapers. He has given you the following statements: “Based on my experience and the numerous successful ventures that I have been involved in, I should be able to double your investment within 3 months at the most. I am currently working with a new company that is launching a product that will revolutionise the telecommunications industry. I cannot give you any further details right now, as this a highly secretive venture and they do not want the competitors to get access to this ‘formula’. This is the best opportunity for you to become a distributor of this product. All you have to do is make an advance payment for an order of 1000 units, as the company only wants credible distributors to be involved. But don’t worry too much about your money being tied up - all you need to do is recruit more distributors, and I will give you a commission of 10% of the advance order that they place. So this is a win-win situation for everyone!” Which THREE of the following statements are CORRECT for the above situation?

A. If such a scheme is intended mainly to sell the product to outside customers, it could well be legal. 
B. This is indicative of a fraud called advance fee fraud. 
C. In fraud like this, investors who get in later take their profits from investors who join earlier. At some point, no new investors can be found and as a result the last investors lose their money
D. Such schemes involve making money by recruiting businesses or people rather than by selling real and legitimate products.
E. We need to be wary of schemes or products that claim a guaranteed income. 

Question # 55

Which THREE of the following are fraud prevention measures? 

A. Employee training 
B. Data mining 
C. Fraud awareness 
D. Analytical procedures to highlight anomalies 
E. Policies, procedures and controls 

Question # 56

Which ONE of the following statements is correct? 

A. Fraud prevention techniques are worth investing in as they provide 100% protection. 
B. The aim of preventive controls is to remove temptation from potential offenders. 
C. Fraud detection aims to reduce the opportunity for fraud. 

Question # 57

Ophelia and sons is a family-owned business. The internal auditors uncovered a caes of fraud when they identified that a board member’s spouse (who was employed at the company) used the company diesel card to buy petrol for his own car. On closer scrutiny, it was also identified that a company cheque for £75,000 made payable to the spouse’s personal account. It was concluded that the company’s complex accounts system allowed the spouse to disguise cheques payable to himself as creditor payments. Which ONE of the following statements is NOT correct, on the basis only of the information given above

A. The company was susceptible to fraud as the opportunity for fraud existed. 
B. Fraud was committed because the spouse was able to rationalise his action. 
C. Fraud occurred due to inefficient accounting systems and undue trust. 

Question # 58

Which of the following activities can be described as ‘fraud’? Select ALL that apply. 

A. Embezzlement 
B. Acceptance of kickbacks 
D. Extortion 

Question # 59

Maverick is a company producing calculators. Recently a review was performed that found that Maverick is prepared for its building collapsing, in that its employees are well-aware of the procedure to be followed in that event. However, nobody has thought to create a backup server room somewhere offsite, and the IT team has not performed any backups of the system in the last 6 months. What is the MOST relevant thing that Maverick should implement ASAP?

A. Business Continuity Plan - BCP 
A. Business Continuity Plan - BCP 
C. System backups 

Question # 60

Amino LLP is manufacturer of wool in Southeast Asia. In order to become more competitive, they have decided to purchase an off-the-shelf computer system that will help them optimise their production process. The stages they have gone through so far include purchase and installation of the hardware, software development, system testing, staff training and the creation of system documentation. What is the next thing they should do?

A. Changeover and review 
B. File conversion, database creation and changeover 
C. File conversion, database creation and review
D. Changeover and maintenance 

Question # 61

Major LLC is a retail high street designer. Major has identified the following critical success factor (CSF): "To have an excellent quality product." Indicate the most suitable key performance indicator (KPI) for this CSF:

A. Increase quality by 60% over the next year 
B. Increase the amount of quality training for production staff 
C. Reduce the average time to deal with a complaint by 20% 
D. Reduce the number of defects identified by the quality control team and customers by 25% 

Question # 62

Choose ONE correct answer. Virus protection, data encryption and firewalls are examples of: 

A. Software controls
B. Network controls 
C. Application controls 
D. System development controls 

Question # 63

Marc is a junior management accountant responsible for entering data into the transaction journal. This system required the four eyes principle, which means that his supervisor has to approve Marc's transactions in the system before they are processed. Marc's boss, David, is off sick during the month end close. Marc is being pushed to release a big chunk of transactions in the system, but he doesn't have the necessary access. Finally, David calls Marc and, after a long discussion, he decides to give Marc access to his account as the transactions have to be released today. Which type of control has been violated here?

A. General 
B. Application 
C. Software 
D. Network 

Question # 64

The Data Protection Act contains eight "data protection principles". Identify which TWO of the following are amongst them:

A. Personal data should be held and used only for specific purposes 
B. Personal data should be confirmed by the data subject 
C. Usage of personal data should be reapproved by the data subject every 3 years 
D. A data subject is entitled to access data and have them corrected or erased 

Question # 65

Blinderex is a large manufacturer of metal window blinders. There were founded 30 years ago and are still being run as a family business. The newly appointed CTO has just completed implementation a new ERP system. This change required exchange of hardware and adjustment of current software. All staff have completed the required half-day training on how to use the systems. Identify the THREE main risks to the information systems at Blinderex from the following list:

A. An employee has received a virus by email that could be introduced into the system.
B. An employee thinks that the newly implemented system is not intuitive and therefore doesn't want to utilise it.
C. The ERP servers could be stolen from the offsite server room. 
D. Newly trained staff can make unintentional mistakes while using the ERP within the first 2 weeks. 
E. A hacker might break into the server. 

Question # 66

Horace Hoi has led his vigorous campaign in favour of animal protection for the past 25 years. As a highly competent self-publicist for his charity and an engaging media performer, he has raised the public profile of his charity substantially. His charity is called the ‘Horace Hoi Organisation’ (HHO) and its stated aim is to ‘stop animals suffering’. Mr Hoi has recently become the subject of criticism by the media because of allegations that he lived a lavish lifestyle and personally owned a large mansion and a number of classic cars. The HHO recently bought a private jet to support Mr Hoi in his travels around the world for speaking engagements and for his work for the HHO charity. One journalist reported that most of the donors to HHO are well-meaning individuals, mainly of modest means, who care greatly about animal suffering and who would be ‘horrified’ if they knew of the luxury in which Mr Hoi lived. Despite the fact that Mr Hoi had claimed that he personally takes only a modest salary from the organisation for his work, a journalist recently estimated Mr Hoi’s personal wealth, thought to be gained from the HHO, to be around $10 million. When challenged to disclose the financial details of the HHO and Mr Hoi’s own personal earnings, a HHO spokesman simply replied that this was not required under the law of Laland. The HHO makes no disclosures about its governance structures and was once criticised as being ‘intentionally opaque in order to hide bad practice’. In yielding to media pressure to provide some information on its financial affairs, HHO eventually published a pie chart on its website showing that its expenditure was divided between animal shelters (57%), field work helping animals (32%), administration (6%) and other causes (5%). This was the totality of its public financial disclosure. Which THREE of the following statements are CORRECT? 

A. At HHO, there are internal risks that the controls need to be capable of controlling. 
B. There are grounds for believing that inadequate remuneration policies exist at HHO and grounds for suspecting some financial dishonesty
C. Being a not-for-profit organisation with no shareholders, HHO does not face compliance risk. 
D. There seems to be a lack of accountability for the behaviour and actions of Horace Hoi.

Question # 67

Susan Paullaos was recently appointed as a non-executive member of the internal audit committee of Gluck and Goodman, a publically listed company producing complex engineering products. Barney Chester, the executive finance director who chairs the committee, has always viewed the purpose of internal audit as primarily financial in nature and, as long as financial controls are seen to be fully in place, he is less concerned with other aspects of internal control. When Susan asked about operational controls in the production facility, Barney said that these were not the concern of the internal audit committee. This, he said, was because as long as the accounting systems and financial controls were fully functional, all other systems may be assumed to be working correctly. Susan, however, was concerned with the operational and quality controls in the production facility. She spoke to production director Aaron and asked if he would be prepared to produce regular reports for the internal audit committee on levels of specification compliance and other control issues. Aaron said that the internal audit committee had always trusted him because his reputation as a manager was very good. He said that he had never been asked to provide compliance evidence to the internal audit committee and saw no reason why he should start doing so now. Gluck and Goodman used to have a full time internal auditor but when he left a year ago, he wasn’t replaced. The audit committee didn’t feel it needed an internal auditor because Barney Chester believed that only financial control information was important and he could get that information from his management accountant. Which of the following statements are CORRECT? Select ALL that apply.

A. Mr Chester as chairman undermines the purpose of the committee as far as its role in governance is concerned
B. Mr Chester is correct in his belief that fully functional effective accounting systems and financial controls are an indication that all other systems are working correctly
C. Aaron’s performance was trusted without supporting evidence because of his reputation as a good manager. An audit committee must be blind to reputation and treat all parts of the business equall
D. The absence of an internal audit department can be indicative of a weak control environment.

Question # 68

The board of Worldwide Minerals (WM) was meeting for the last monthly meeting before the publication of the year-end results. There were two points of discussion on the agenda. First was the discussion of the year-end results; second was the crucial recent report on minerals reserves. WM is a large listed multinational company that deals with natural minerals that are extracted from the ground, processed and sold to a wide range of industrial and construction companies. In order to maintain a consistent supply of minerals to its principal markets, an essential part of WM’s business strategy is seeking out new sources and measurement of known reserves. Investment analysts have often pointed out that WM’s value rests principally upon the accuracy of its reserve reports as these are the best indicators of future cash flows and earnings. In order to support this key part of its strategy, WM has a large and well-funded geological survey department that, according to the company website, contains ‘some of the world’s best geologists and minerals scientists’. At the board meeting, the head of the geological survey department, Ranjana Tyler, reported that there was a problem with the latest report because one of the major reserve figures had recently been found to be wrong. The mineral in question, mallerite, was WM’s leading mineral in volume terms and Ranjana explained that the mallerite reserves in a deep mine in a certain part of the world had been significantly overestimated. Ranjana explained how the situation had arisen. The major mallerite mine was in a country new to WM’s operations. The WM engineer at the mine said it was difficult to deal with some local people because, according to the engineer, ‘they didn’t like to give us bad news’. The engineer explained that when the mine was found to be smaller than originally thought, he was not told until it was too late to reduce the price paid for the mine. This was embarrassing and it was agreed that it would affect market confidence in WM if it was made public. Which ONE of the following statements is INCORRECT? 

A. Internal control helps to manage quality throughout the organisation and it provides management with information on internal operations and compliance. These features are important in ensuring quality at all stages in the WM value chain from the extraction of minerals to the delivery of product to the customers
B. Internal control systems are essential in providing information for internal and external reporting upon which, in turn, investor confidence rests
C. Relying in verbal evidence regarding reserve quantities should be effective control provided the responsible person reporting it is deemed honest by the board. 
D. There are indications that there was inadequate due diligence in respect of the purchase of the mallerite mine 
E. There appears to be a need to audit geological reports at an appropriate level in the organisation in future.