Page 1 of 7
CMA DECEMBER, 2020 EXAMINATION STRATEGIC LEVEL
SUBJECT: P3. PERFORMANCE STRATEGY
Time Allocated: Three hours Total Marks: 100
Instructions to Candidates
There are three sections (that is A, B & C) in this paper. You are required to answer ALL questions.
Answers should be properly structured, relevant and computations need to be shown wherever necessary.
You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or sub-questions).
ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking.
Start answering each question from a fresh sheet. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering.
Section No of questions in the Section
No of sub-questions in the Section
Marks allocation
A 01 08 20%
B 01 05 40%
C 02 02 40%
TURN OVER
Page 2 of 7 SECTION A – 20 MARKS
This section consists of 1 question and 8 sub-questions.
You are advised to spend no longer than 36 minutes on this section. Section will carry 20 marks and one sub-question will carry 2.5 marks each.
Question 01
(a) Does the company have an assessment process for identifying risks? Describe the process.
(2 ½ Marks) (b) Customer retention is more powerful than customer satisfaction. Why?
(2 ½ Marks) (c) Define Internal Control System with example.
(2 ½ Marks) (d) Mention some threats arise from IT systems.
(2 ½ Marks) (e) What is the main objective of remuneration committee?
(2 ½ Marks) (f) Enumerate the responsibilities of an audit committee.
(2 ½ Marks) (g) What do you mean by credit risk? Briefly describe the process of managing credit risk of
an organization.
(2 ½ Marks) (h) What is CAATs? How it is work out in auditing practice?
(2 ½ Marks) (2 ½ Marks × 8 Questions = 20 Marks)
END OF SECTION A SECTION B Starts on page 3
Page 3 of 7 Section B– 40 MARKS
This section consists of 1 question and 5 sub-questions.
You are advised to spend no longer than 14.4 minutes on each sub-question in this section.
Section will carry 40 marks and one sub-question will carry 8 marks each.
Question 02
(a) Identify and explain the characteristics of the four basic types of derivatives.
[Marks: 8]
(b) Assume you are the financial manager with GH plc, a large, multinational company. The company wishes to raise finance to fund an increase in working capital requirements, caused by a decision to implement a more aggressive sales and marketing policy. Its current finance is largely US dollars–denominated although it has some borrowing in pounds sterling. The company treasurer believes there are advantages to borrowing at a floating rate of interest in the Eurobond market and entering into a swap arrangement with JJ plc, a UK-based company in the same industry but which, because of its smaller size, has a lower credit rating. JJ plc would prefer to borrow at fixed rates to finance an acquisition. GH plc currently has a credit rating of AAA and is able to raise fixed-rate finance in the Eurobond market at 8.5 per cent and floating-rate finance at LIBOR+0.5 per cent. The smaller company can raise fixed-rate finance at 10.5 percent and floating-rate finance at LIBOR+1.1 percent. The swap will be arranged through GH plc’s bank, which will charge fees of 0.15% of the principal sums. The bank is suggesting the following swap terms to open negotiations:
● JJ plc will pay 9 percent fixed to GH plc;
● GH plc will pay LIBOR+0.0 percent to JJ plc.
Required:
Discuss the advantages and disadvantages of fixed and floating-rate finance in general and in the context of this scenario. Comment also on the advantages and disadvantages to GH plc of raising money in the Eurobond market as compared with the bond market in the United States.
[Marks: 8]
(c) Evaluate the limitations of capital investment appraisal techniques, budgets and non- financial performance measures as methods of management control.
[Marks: 8]
(d) You are the newly appointed financial controller of Erasmus, a fully owned subsidiary of the Think Group. The following matters have come to your attention:
(1) Your assistant, a newly qualified Management Accountant, is heavily in debt to a junior member of the finance staff, who has a considerable amount of personal wealth in spite of his fairly junior position in the company.
(2) The CEO of the company was in the habit of making accounting adjustments to the financial statements prepared by the finance director in order to ‘smooth out variances’ if actual performance was not going to plan.
SECTION B Continues on page 4
Page 4 of 7
(3) A member of your department, another Management Accountant, recently made significant errors in completing the sales tax returns to the tax authorities, which resulted in a fine and interest charges for an underpayment of the sales tax liability.
Required:
Discuss how you would deal with each of these three problems in order to bring about an improvement in the ethical standards in the systems of management. Indicate any problems you might expect to arise when you attempt to bring about change.
[Marks: 8]
(e) Roberto & Sons buys T-shirts in bulk, applies its own trendsetting silk- screen designs, and then sells the T-shirts to a number of retailers. Roberto wants to be known for its trendsetting design, and it wants every teenager to be seen in a distinctive Roberto T-shirt.
Roberto presents the following data for its first two years of operations, 2019 and 2020:
SL. No. 2019 2020
1 Number of T-shirts purchased 200,000 250,000 2 Number of T-shirts discarded 2,000 3,300 3 Number of T-shirts sold 198,000 246,700 4 Average selling price Tk.25 Tk.26 5 Average Cost per T-shirt Tk.10 Tk.8.50 6 Administrative capacity (number of customer) 4,000 3,750
7 Administrative cost Tk.1,200,000 Tk.1,162,500
8 Administrative cost per customer Tk.300 Tk.310
9 Design staff 5 5
10 Total Design Costs Tk.2,500,000 Tk.275,000 11 Design cost per employee Tk.50,000 Tk.55,000 Administrative cost depends on the number of customer that Roberto has created capacity to support, not on the actual number of customer serves. Roberto had 3500 customers in 2019 and 3500 customers in 2020. The design staff and its costs have no direct relationship with the number T-shirt purchased & sold.
Required:
(i) Is Roberto’s strategy one of product differentiation or cost leadership? Explain briefly.
(ii) Describe briefly key measures that you would include in Roberto’s balanced scorecard and the reasons for doing so.
[Marks: 8]
END OF SECTION B SECTION C Starts on page 5
Page 5 of 7 Section C– 40 MARKS
This section consists of 2 questions.
You are advised to spend no longer than 45 minutes on each question in this section. Section will carry 40 marks and allocation of marks for each sub-question is indicated next to the sub- question.
Question 03
Described below are three situations which have arisen as three unrelated audit clients of your firm. The year end in each case is 31st December, 20x4
Popular Ltd. (Popular)
Popular has made payments to a trust fund set up for the benefit of Anna Oaken, the niece of Hans North, Popular’s managing director and majority shareholder. Your firm has concluded that the payments should be disclosed as a related party transaction in Kristoff’s financial statements. Hans has refused to include the necessary disclosures as he considers the payment to be of a sensitive nature and does not wish the rest of his family to be aware of them.
He has threatened you firm removal form office if it pursues this issue any further.
Meghna Ltd. (Meghna)
Meghna has included a note in financial statements disclosing a possible tax liability of Tk. 22 million. NBR (Tax authority) claims Meghna has evaded taxes on some of its outcome of the tribunal will not be determined until after the auditor’s report has been signed. The directors have assessed that it is possible, but not probable, that the claim will be upheld by the tribunal and you firm agrees with the assessment. A provision has not been included in Meghna’s financial statements in respect of the claim. Your firm has concluded that a provision not required and that the note, describing the uncertainty, in Meghna’s financial statements is adequate. The directors of Meghna have requested that your firm provides a team of tax experts to support them through the appeals tribunal.
The total assets of Meghna at 31st December 20x4 are Tk. 450 million and the profit before tax for the year ended 31st December, 20x4 is Tk. 18 million.
Standard Ltd. (Standard)
Standard is you firm’s largest listed audit client. On 31st October 20x4, Standard expanded by acquiring a significant overseas subsidiary, Queen SARL (Queen). Your firm is the group auditor, but Queen’s financial statements for the year ended 31st December, 20x4 have been audited by an overseas auditor, Blizzard. Your firm planned to rely on Blizzard’s work. However, during the audit Blizzard refused to cooperate. Your firm has no alternative audit procedures it can perform in respect of Queen’s financial statements. Queens’s result are highly material to a large number of items in Standard’s group financial statements. The directors of Standard have requested that your firm accepts appointment as external auditor of Queen for the year ending 31st December 20x5 in order to avoid this issue arising next year. Your firm estimates the total fee for the 20x5 audit of the Standard group will be Tk. 1.4 million and your firm’s total annual fee income is likely to be Tk. 20 million.
Required:
For each of the situations outlined above:
(i) Identify and explain the threats to your firm’s objectivity and state the steps that your firm should take to address them.
(ii) State whether you would modify the audit opinion. Give reasons for your conclusions and describe the modification(s), if any, to each auditor’s report.
[Marks: (12+8) = 20]
SECTION C Continues on page 6
Page 6 of 7 Question 04
MJS, Inc., has recently decided to expand its international trade relationship by exporting to the United Kingdom. Jogs, Ltd., a British retailer, has committed itself to the annual purchase of 200,000 pairs of Speedos, MJS’ primary product, for a price of £80 per pair. The agreement is to last for two years, at which time it may be renewed by MJS and Jogs.
In addition to this new international trade relationship, MJS continues to export to Thailand. Its primary customer there, a retailer called Entertainment Products, is committed to the purchase of 180,000 pairs of Speedos annually for another three years at a fixed price of 4,594 Thai baht per pair. When the agreement terminates, it may be renewed by MJS and Entertainment Products.
MJS also incurs costs of goods sold denominated in Thai baht. It imports materials sufficient to manufacture 72,000 pairs of Speedos annually from Thailand. These imports are denominated in baht, and the price depends on current market prices for the rubber and plastic components imported.
Under the two export arrangements, MJS sells quarterly amounts of 50,000 and 45,000 pairs of Speedos to Jogs and Entertainment Products, respectively. Payment for these sales is made on the first of January, April, July, and October. The annual amounts are spread over quarters in order to avoid excessive inventories for the British and Thai retailers. Similarly, in order to avoid excessive inventories, MJS usually imports materials sufficient to manufacture 18,000 pairs of Speedos quarterly from Thailand. Although payment terms call for payment within 60 days of delivery, MJS generally pays for its Thai imports upon delivery on the first day of each quarter in order to maintain its trade relationships with the Thai suppliers. MJS feels that early payment is beneficial, as other customers of the Thai supplier pay for their purchases only when it is required.
Because MJS is relatively new to international trade, Saiful Alam, MJS’ chief financial officer, is concerned with the potential impact of exchange rate fluctuations on MJS’ financial performance. Alam is vaguely familiar with various techniques available to hedge transaction exposure, but he is not certain whether one technique is superior to the others.
Saiful Alam would like to know more about forward, money market, and option hedges and has asked you, a financial analyst at MJS, to help him identify the hedging technique most appropriate for MJS. Unfortunately, no options are available for Thailand, but British call and put options are available for £31,250 per option. Saiful Alam has gathered and provided you with the following information for Thailand and the United Kingdom:
Thailand United Kingdom
Current spot rate BDT.0230 BDT1.50
90-day forward rate BDT.0215 BDT1.49
Put option premium Not available BDT.020 per unit
Put option exercise price Not available BDT1.47
Call option premium Not available BDT.015 per unit
Call option exercise price Not available BDT1.48
90-day borrowing rate (non annualized) 4% 2%
90-day lending rate (non annualized) 3.5% 1.8%
SECTION C Continues on page 7
Page 7 of 7
In addition to this information, Saiful Alam has informed you that the 90-day borrowing and lending rates in Bangladesh are 2.3 and 2.1 percent, respectively, on a non annualized basis.
He has also identified the following probability distributions for the exchange rates of the British pound and the Thai baht in 90 days:
PROBABILITY SPOT RATE FOR THE THAI BAHT IN 90 DAYS
SPOT RATE FOR THE BRITISHPOUND IN 90 DAYS
5% BDT1.45 BDT.0200
20 1.47 .0213
30 1.48 .0217
25 1.49 .0220
15 1.50 .0230
5 1.52 .0235
MJS’ next sales to and purchases from Thailand will occur one quarter from now. If MJS decides to hedge, Saifu lAlam will want to hedge the entire amount subject to exchange rate fluctuations, even if it requires over hedging (i.e., hedging more than the needed amount).
Currently, Saiful Alam expects the imported components from Thailand to cost approximately 3,000 baht per pair of Speedos. Saiful Alam has asked you to answer the following questions for him:
Required:
(i) Comparing the hedging alternatives for the Thai baht, do you think MJS should hedge or remain unhedged? If MJS should hedge, which hedge is most appropriate?
(ii) Given MJS’ exporting agreements, are there any long-term hedging techniques MJS could benefit from? For this question only, assume that MJS incurs all of its costs in Bangladesh.
[Marks: (15+5) = 20]
* End of Question Paper *
