The Institute of Chartered Accountants in England and

Edition 1

LEVEL 4 ACCOUNTING TECHNICIAN APPRENTICESHIP ROLE SIMULATION

The Institute of Chartered Accountants in England and Wales

Supplement

www.icaew.com

ii

ICAEW 2019

© ICAEW 2018

ICAEW 2019 iii

Welcome to ICAEW

As the future of our profession, I’d like to personally welcome you to ICAEW.

Choosing an ICAEW apprenticeship means you are not only investing in your own future but also gaining the skills and values to meet the challenges of technological change and contribute to future business success.

In a constantly changing and volatile environment, the role of the accountancy profession has never been more important to create a world of strong economies, together. ICAEW Chartered Accountants make decisions that will define the future of global business by sharing our knowledge, skills and insight.

Joining over 150,000 chartered accountants and over 27,000 fellow students worldwide, you are now part of something special. This unique network of talented and diverse professionals has the technical knowledge, skills and commitment to help build local and global economies that are sustainable, accountable and fair.

We understand the importance of work experience and applying knowledge and skills to real life. That’s why it is a requirement of our world leading qualification, the ACA. With decades of experience, you can be confident that we will support you throughout your studies and be with you every step of the way.

It’s with our training, guidance and support that our members, and you, will realise career ambitions, develop insights that matter and maintain a competitive edge.

I wish you the best of luck with your studies and look forward to welcoming you to the profession.

Michael Izza Chief Executive ICAEW

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ICAEW 2019

Contents

Page

Title Question Answer

Objective Test Questions Accounting 5 31 Assurance 6 31 Management Information 7 32 Business, Technology and Finance 8 32 Law 9 32

Practice Task 5 Part 5.1 21 35 Part 5.2 24 40 Part 5.3 25 43

This Supplement should be used to prepare for Role Simulation from 2019. It must be used alongside Edition 1 of the Level 4 Accounting Technician Apprenticeship Role Simulation learning materials and should not be used in isolation.

wzimmerman

Sticky Note

Marked set by wzimmerman

Question Bank

2

Accounting Technician Apprenticeship Role Simulation ICAEW 2019

Objective Test Questions

4


ICAEW 2019 Objective Test Questions 5

Brinna plc – Scenario

Brinna plc is a medium-sized, unlisted public company. It provides a range of travel services to businesses and consumers.

Accounting 1 In its statement of financial position Brinna plc had total equity and liabilities of £120.8

million on 31 March 20X1. During the year ended 31 March 20X2 Brinna plc:

made a share issue for £2.1 million made a loss of £1.1 million repaid loan capital of £2 million paid a dividend of £0.5 million.

Requirement

Complete the following statement:

As at 31 March 20X2 Brinna plc has total assets of £__________________ (1 mark)

2 In its initial trial balance as at 31 March 20X3, the balance on Brinna plc’s receivables control account was £6,125,300. The total of the list of balances owed by receivables at that date was £6,201,500. Two errors have been discovered:

An amount of £12,600 owed by Romeo plc was only written off in the receivables ledger; and

A credit balance on Juliet plc’s receivables ledger account of £44,400 was included as a debit balance when casting the list of balances owed by receivables.

Requirement

Complete the following statement:

The amount that should be included as trade receivables in Brinna plc’s statement of financial position as at 31 March 20X3 is £__________________ (1 mark)

3 Brinna plc’s draft statement of profit or loss for the year ended 31 March 20X4 shows an operating profit of £780,000. Two late corrections to the ledger accounts are required:

(1) A prepayment of insurance of £16,000 was miscalculated. It should have been £24,000.

(2) Depreciation on a non-current asset with a carrying amount as at 1 April 20X3 of £100,000 was calculated on the reducing balance at 20% when it should have been 25%.

Requirements

Complete the following statements by indicating whether processing the correction required in each case will, taken alone, increase or decrease Brinna plc’s reported operating profit for the year ended 31 March 20X4:

(a) The effect of processing correction (1) will be to _____________ Brinna plc’s reported operating profit.

(b) The effect of processing correction (2) will be to _____________ Brinna plc’s reported operating profit. (2 marks)

Total: 4 marks

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Assurance 4 Aaron LLP has been the external auditor of Brinna plc for many years. In the year ended

31 March 20X5, Brinna plc replaced its overdraft finance with new debenture finance in advance of a large expansion of operations. Brinna plc engaged Aaron LLP to advise on the debt restructuring and negotiate with the bank on Brinna plc’s behalf.

Requirement

Complete the following statement by identifying one type of threat from ICAEW’s Code of Ethics:

When providing this corporate finance service to Brinna plc in addition to external audit, Aaron LLP faces _______________________ threat. (1 mark)

5 Since 20X2, Brinna plc has been involved in a long-running dispute with HMRC, because a particular aspect of tax law which applies to the company has not been fully established. In December 20X4, Brinna plc engaged Aaron LLP to provide tax services in respect of this dispute, agreeing to pay a fee contingent on how much of a tax saving Aaron LLP could negotiate with HMRC. In addition, Brinna plc requested Aaron LLP to manage its internal audit function.

Requirements

Indicate whether each of the following statements is true or false.

(a) FRC’s Ethical Standard prohibits Aaron LLP from performing tax services in respect of the HMRC dispute for Brinna plc on this contingent fee basis.

(b) FRC’s Ethical Standard allows Aaron LLP to manage Brinna plc’s internal audit function provided appropriate safeguards are put in place. (2 marks)

6 Aaron LLP has prepared a draft of its audit report on Brinna plc’s financial statements for the year ended 31 March 20X5. In the draft audit report, Aaron LLP includes explicit opinions and also reports on requirements that only have to be reported on by exception.

Requirements

Identify whether each of the following is a matter that requires an explicit opinion or a report by exception in Aaron LLP’s audit report.

(a) That adequate accounting records have been kept by Brinna plc.

(b) That the information in Brinna plc’s strategic report and directors’ report is consistent with the financial statements. (2 marks)

Total: 5 marks


Management Information 7 Brinna plc’s finance function is preparing the company’s budget for the 12 months ending

31 March 20X7. In previous years the budget was prepared by senior management and operational managers were tasked with achieving the targets that it contained. Following fundamental changes in Brinna plc’s operations and structure, the finance function has developed the 20X6/20X7 budget in conjunction with operational managers. Every item of expenditure has been justified separately and compared with the benefits it generates.

Requirements

Complete each of the following statements:

(a) Because operational managers have been involved in the preparation of the 20X6/20X7 budget, Brinna plc can be said to have moved to a ______________________ style of budgeting.

(b) Because every separate item of expenditure is fully justified in the 20X6/20X7 budget, Brinna plc can be said to have moved to a system of _______________________ budgeting. (2 marks)

8 Brinna plc is reviewing the prices and costs of some of its services to determine the mark-ups and margins at which it operates. For its most successful service, the Argo, the cost per service is £15 and the selling price is £24 per service.

Requirements

Complete the following statements:

(a) The margin earned by the Argo is _______________ %. (b) The mark-up applied to the Argo is __________ %. (2 marks)

Note. Give your answers to one decimal place.

9 Brinna plc is planning to start a completely new service, the Trito, for customers in the year ending 31 March 20X7. Each Trito will be priced at £32 and will incur variable costs of £7. The budget includes a plan to sell 12,000 Tritos in the year. The fixed costs of the Trito operation will be £200,000 in the year.

Requirements

Complete the following statements:

(a) The breakeven point in terms of number of Tritos is _______________ units.

(b) The margin of safety expressed as a percentage of budgeted sales of Tritos is _________ %. (2 marks)

Note. Give your answer to (2) to one decimal place.

Total: 6 marks

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Business, Technology and Finance 10 Brinna plc is experiencing some cashflow problems. The finance director has told the

marketing director that the level of revenue and therefore cash flows for each service must be at least maintained from one year to the next. The marketing director has established that, if she raises the selling price of the Jaso service to consumers by 5%, she will sell 10% fewer Jasos.

Requirements

Answer the following questions:

(a) What is the price elasticity of demand for Jasos? (b) Is demand for Jasos elastic or inelastic? (c) Will total revenue from Jasos rise or fall if the selling price rises by 5%? (3 marks)

11 Brinna plc’s Meduso service for consumers has an income elasticity of 0.5. Consumer incomes are currently rising.

Requirements

Complete the following statements by identifying which of the words in inverted commas apply:

(a) The quantity of Meduso services demanded by consumers will rise ‘less than’/‘more than’ the proportionate increase in consumer incomes.

(b) Meduso services are ‘luxury’/‘normal’ services. (2 marks)

12 The Jaso service has a low share of its market but the market for Jasos is growing. Medusos have a high share of its market, which has not grown for several years.

Requirements

Complete the following statements by identifying how each service should be classified using the BCG matrix:

(a) The Jaso service is a _______________. (b) The Meduso service is a _______________. (2 marks)

Total: 7 marks


Law 13 Some of Brinna plc’s cashflow problems are caused by late payments by its business

customers. Tapita Ltd owes £680,000 to Brinna plc and has made no payments at all for the last six months. Today Brinna plc’s finance director issued a formal written demand to Tapita Ltd for payment of the debt, with a view to petitioning the court for a winding-up order against the company if it is not paid.

Requirement

Within how many days must Tapita Ltd make payment or offer security to Brinna plc if it is to avoid a petition for winding up? (1 mark)

14 Payment from Tapita Ltd is not received within the required time period so Brinna plc petitions the court.

Requirement

Complete the following statement by identifying which of the words in inverted commas apply:

If the court agrees to Brinna plc’s petition for winding up, Tapita Ltd will be placed in ‘members’ voluntary’/‘creditors’ voluntary’/‘compulsory’ liquidation. (1 mark)

15 The liquidator of Tapita Ltd has established that:

it has fully paid share capital of £1,000,000 and share premium of £2,000,000. the company is insolvent and has no assets available for unsecured creditors.

Requirement

Indicate whether the following statement is true or false.

The liquidator may require Tapita Ltd’s shareholders to contribute £3,000,000 cash to settle unsecured debts. (1 mark)

Total: 3 marks

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Note: The Practice Task in this section is similar in style and format to Tasks in the role simulation.

Practice Task

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ICAEW 2019 Practice Task 5: Exam Paper 13

Practice Task 5 Advance Information

Index of Advance Information

Introduction: FashionNow plc Organisation chart Company ethos and target market Website and app Data analysis Supply chain management Inventories Trading conditions

Appendices:

A Financial statements for the year ended 31 October 20X6 B Notes for the preparation of the financial statements for the year ended 31 October 20X7 C Key performance indicators (KPIs) D Supplier code of conduct E Main operating risks

Introduction: FashionNow plc

It is December 20X7. FashionNow plc is a UK-based online fashion retailer which is listed on the Alternative Investment Market (AIM). The company was established by Shahbaz Mirza in 20X3, who continues to be the majority shareholder and chief executive officer. Since its inception, the company has grown organically and through acquisition to being one of the UK's largest online-only retailers in 20X7. FashionNow does not have any high-street retail outlets and operates from a head office and large single distribution warehouse in Bolton. The financial statements for the year end 31 October 20X7 have not yet been prepared. The prior year financial statements are included in Appendix A and notes relevant to the preparation of the current year financial statements are included in Appendix B.

Organisation chart

FashionNow's organisation chart at 31 October 20X7 was as follows:

Procurement andContracts Director

(Nina Patel)

Warehouse andDistribution Director

(Alicia Bloom)

Sales andMarketing Director

(Elena Rugby)

Finance Director (Connor Rushford)

ProcurementManager

InventoryManager

SalesManagers

FinancialController

ContractsManager

DistributionManager

ApprenticeAccountant *

MarketingManager

Chief Executive Officer(Shahbaz Mirza)

* You are the apprentice accountant reporting to the financial controller. You are training to become a Chartered Accountant with ICAEW.

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Company ethos and target market

FashionNow's mission is to provide its customers with a wide range of quality products at an affordable price. It is highly customer focused, utilising social media to understand changing consumer trends and being able to react to those trends quickly due to its strong supply chain management. It sells clothes, shoes and accessories for men and women, targeting the 16–25 age group via its website fashionnow.com and its app, which was launched this year. It currently accepts and distributes orders only within the UK but the directors have plans for international expansion in the next two years.

Website and app

Having an up-to-date website that offers excellent customer experience, business continuity and stability is essential for FashionNow's success. The website was upgraded at the end of the prior year to a new platform which promised a better customer experience and reduced outages. In general, the new website has been well received by customers and has performed well in the current year compared to prior years, but there was still some instability due to high levels of demand around Black Friday, Christmas and the summer sale.

The app was developed during 20X7 and was launched to users in September 20X7. Customer orders on the app accounted for 10% of sales in 20X7 and this is expected to grow to 50% within the next three years. A successful social media marketing campaign has been in place since the app was launched, offering customers 10% off all orders placed on the app, which helped to increase sales.

Data analysis

FashionNow collects and analyses large amounts of data relating to its own website and app and for the industry in general. It employs a specialist data analytics company to identify trends and patterns in the data that can be used for marketing, promotion and performance measurement purposes. Information relating to trending products, customer clicks on products and items placed in a customer's basket, is provided to the company on a real-time basis, meaning they can send targeted marketing and promotions based on what is most relevant at any point in time.

The data gathered is mainly structured meaning FashionNow collects data each time a user logs into their account, clicks on an item on the website or app, or adds an item to their basket. Many of FashionNow's key performance indicators (KPIs) are measured using this data. More information relating to FashionNow's KPIs is included in Appendix C.

Some of the data collected is unstructured. This is data gathered from social media posts and pictures uploaded by internet users, and is used to identify current market trends and marketing opportunities.

Supply chain management

FashionNow plc has a large number of suppliers across the world. Its ability to source products that are of acceptable quality, are what customers want and can be available to customers quickly, is central to FashionNow's business model. The company has a close relationship with its key suppliers and works together with them to identify popular products and get them to the market. They have linked computer systems with a number of suppliers to allow order information to be passed to suppliers efficiently, inventory on hand at the suppliers to be accessed, and distribution and logistics to be managed.

In addition to selling fashion items that are on-trend, FashionNow's unique selling point (USP) over other affordable clothing retailers is that it transacts with suppliers who support fair trade, pay fair wages and operate good working conditions for their staff. They have a 'fair deal' policy that applies across the supply chain and is widely advertised in the company's marketing material. A supplier code of conduct has been developed in support of the fair deal policy and is included in Appendix D.


Inventories

FashionNow handles a large quantity of inventory movements on a daily basis and managing the security, safe-keeping and movement of inventory is an area of risk for the company. Information regarding the main operating risks is included in Appendix E. Sequentially numbered goods received notes are prepared in respect of inventory received from suppliers. The goods received are checked to the original purchase order to agree the description and quantity are as ordered and are checked for quality by the warehouse operators. Goods that are not as ordered or are of insufficient quality are returned to the supplier immediately and a debit note is raised.

In order to keep up with competitors, the company introduced a 'no hassle' returns policy during the year. The policy requires customers to contact the returns department which will authorise the return and issue a prepaid returns label. FashionNow states on its website that refunds will be processed within 48 hours of the product being returned. As such, FashionNow has experienced a higher than normal level of customer returns in the current year. Warehouse processes relating to customer returns are still being developed and currently the process is simply that returns are sorted into goods that can be placed back into inventory and goods that cannot be placed back into inventory due to quality issues.

As FashionNow tries to be at the cutting edge of fashion retail, there is a risk that inventories held quickly go out of fashion and therefore there is a high obsolescence risk associated with inventories.

Trading conditions

Trading in the UK market as a whole has been difficult in recent years with decreased consumer spending in the clothing sector. FashionNow has outperformed the industry as the target market has a propensity to spend a high percentage of their disposable income on fashion. The target market is also largely unaffected by macroeconomic factors and the 'fair deal' policy described above is a positive differentiator for the target market.

Sales have grown by approximately 25% in the year ended 31 October 20X7 and that is expected to continue as the trend for online fashion is expected to grow. The standing and customer base of FashionNow mean it is well placed to take advantages of opportunities that present themselves. The company paid a large dividend in the year which was well received by its shareholders.

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Appendices Appendix A – Financial statements for the year ended 31 October 20X6

FashionNow's financial statements for the year ended 31 October 20X6 are as follows:

Statement of profit or loss for the year ended 31 October 20X6 £'000

Revenue 26,412 Cost of sales (15,694) Gross profit 10,718 Distribution costs (3,498) Administrative expenses (784) Profit from operations 6,436 Finance costs (876) Profit before tax 5,560 Income tax expense (836) Profit for the year 4,724 Statement of financial position as at 31 October

20X6 £'000

ASSETS Non-current assets Property, plant and equipment 14,376 Intangible assets 4,516 Goodwill 1,492 Current assets Inventory 2,204 Trade and other receivables 241 Cash and cash equivalents 702 Total assets 23,531 EQUITY AND LIABILITIES Equity £1 equity shares 500 Share premium 2,400 Retained earnings 11,436 Total equity 14,336 Non-current liabilities Borrowings 6,400 Current liabilities Trade and other payables 1,877 Borrowings 500 Tax payable 418 Total liabilities 9,195 Total equity and liabilities 23,531


Appendix B – Notes for the preparation of the financial statements for the year ended 31 October 20X7

Accounting system

FashionNow uses computerised accounting software provided by a cloud accounting service provider. The accounting software package is fully integrated with the inventory management system and the human resource management system. The system automatically records the majority of transactions that FashionNow enters into and the financial controller extracts an initial trial balance from the computerised accounting system at the year end date, however a number of adjustments are required in respect of transactions that have not been recorded in the nominal ledger.

Fair presentation

The Finance Director, Connor Rushford, has come under pressure to present the financial statements of FashionNow in the best possible light. He has emphasised the need to present the financial statements fairly.

Tangible non-current assets

FashionNow invested heavily in its tangible non-current assets in the year by introducing robotic equipment in its distribution warehouse to automate the process of selecting products to fulfil a customer order. When a customer order is placed on the website or the app, the system automatically places the order in a picking queue depending on whether the customer has selected standard or next-day delivery. All inventory in the warehouse is uniquely coded and stored such that the automated robotic equipment can find the exact location of the inventory, select the correct line and size and place it on a conveyor belt ready to be packed. This investment was completed in April 20X7 and has led to significant increases in the efficiency of the warehouse operations.

The cost of the robotic equipment purchased in the year has been capitalised, but due to an error with the standing data in the software package, it has not yet been depreciated for the year.

Intangible non-current assets

FashionNow incurred a development cost in respect of the development and launch of the app. The invoice relating to the expenditure was not received until after the year end date and therefore no accounting has taken place for the development costs and no amortisation has been charged.

Accruals and prepayments

FashionNow pays its buildings and contents insurance annually in advance on 1 September each year. It pays its heat and light expense every two months in arrears and communication expenses such as telephone and website provider costs quarterly in arrears. All such expenses are included within administrative expenses in the statement of profit or loss.

Provision for legal claim

During the year, one of the company's employees was injured due to falling off a ladder whilst picking inventory. The company has accepted that the incorrect operating equipment was provided, has accepted the employee claim and has agreed to settle the case out of court. A provision for £10,000 was created in the year in respect of the claim, but the company's lawyers have indicated that the amount payable may be higher than originally expected.

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Appendix C – Key performance indicators (KPIs)

FashionNow's KPIs are mainly based around customer interactions. Customer interactions refer to the instances in which customers connect with the company on the website, app or through social media.

KPI information for the year ended 31 October 20X7 is as follows:

KPI Target Actual Number of registered customer accounts

1.0 million

1.1 million

Number of active shoppers * 720,000 760,000 Number of orders placed per active customer

2.5

2.3

Average value of basket per active customer

£20.00

£18.91

* An active shopper is one that has placed an order with FashionNow in the last 12 months.


Appendix D – Supplier code of conduct

The directors of FashionNow are aware that the industry often comes into criticism for using suppliers who operate in poor conditions overseas, often paying very low wage rates and in some instances employing child labour. In order to maintain its reputation, FashionNow has a code of conduct in place which suppliers must agree with before they are accepted as suppliers.

Employment should be freely chosen (ie, no employees are forced to work for the supplier or restricted from leaving the supplier with reasonable notice).

Child labour (considered to be under the age of 16 irrespective of local legislation) shall not be used.

Suppliers must comply with local laws and regulations.

A living wage must be paid by suppliers, determined by reference to the country in which the supplier primarily operates.

Working conditions must be safe and hygienic. Equipment, such as machinery, must be maintained to a reasonable standard and regular safety checks carried out.

No improper payments, bribes or incentives shall be offered by the supplier to secure contracts with FashionNow.

The supplier must take reasonable steps to avoid environmental damage and must take active steps to repair any damage caused.

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Appendix E – Main operating risks

The top five operating risks identified by the directors of FashionNow are as follows:

1. Online fashion is a highly competitive market and there is a continuing risk that competitors will be able to offer similar products that are lower priced or can be delivered to customers more quickly than FashionNow can offer.

2. The brand name could be damaged by negative press relating to its products, customer service or operating practices.

3. Hardware or software issues or cyber-securty attacks such as malware or ransomware attacks could impact on the continuity of the website leading to a loss of sales, negative customer experience and data security risks.

4. Inventory obsolescence could mean large inventory write offs or deep discounts may be needed if the company fails to stay on top of changing trends and fails to react quickly enough to customer demands.

5. The supply chain could fail as a result of supplier insolvency, disaster affecting materials or denial of supply due to political issues leading to inability to source new products or fulfil customer orders.


Practice Task 5 Exam Paper

This part of the Practice Task contains five parts.

Part 5.1

The financial controller has asked for your assistance in preparing the financial statements for the year ended 31 October 20X7. She has extracted the following initial trial balance from the computerised accounting system and provided you with related information regarding tangible and intangible non-current assets, accruals and provisions. The information provided is as follows:

Initial trial balance as at 31 October 20X7

£'000 £'000Revenue 35,146Cost of sales 25,178 Distribution costs 4,002 Administrative expenses 1,382 Finance cost 830 Income tax expense 1,018 Land and buildings: cost 12,000 Land and buildings: accumulated depreciation at 31 October 20X7 1,980Plant and machinery: cost 7,285 Plant and machinery: accumulated depreciation at 1 November 20X6 2,109Intangible assets: cost 5,480 Intangible assets: accumulated amortisation at 1 November 20X6 964Inventories at 31 October 20X7 2,987 Trade and other receivables 384 Cash and cash equivalents 2,876 £1 equity shares 500Share premium 2,400Retained earnings 11,773Borrowings: non-current 5,900Borrowings: current 500Trade and other payables 1,631Provisions 10Tax payable 509

63,422 63,422

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Related information regarding tangible non-current assets, intangible non-current assets, accruals and provisions

Land and buildings

There have been no additions, disposals or revaluations of land and buildings in the year. Depreciation for the year has been calculated and has been accounted for in the initial trial balance.

Plant and machinery

There has been major investment in plant and machinery during the year ended 31 October 20X7 relating to the automated robotic equipment used for picking inventories.

The purchase cost for the robotic equipment was £1,300,000 on 1 June 20X7 which has been capitalised and is included in plant and machinery cost included in the trial balance. Additional costs of £120,000 were incurred in preparing the warehouse for the instalment of the equipment and £40,000 of staff costs were incurred in testing the equipment which was first brought into use on 1 July 20X7. These costs were included within administrative expenses in the period.

There have been no other changes to plant and machinery in the year.

All plant and machinery has an expected useful life of 10 years with no residual value. Due to an issue with updating the standing data in the accounting system, no depreciation has been charged on plant and machinery in the nine months to 31 October 20X7.

Intangible assets

The only change in intangible assets in the year is in respect of the app development.

Expenditure of £230,000 was incurred in the current year of which £200,000 related to the development and £30,000 related to promotion and marketing of the new app. No accounting entry has taken place in respect of the development costs as the invoice was not received until after the year end date. The app was brought into use on 1 September 20X7 and is expected to have a useful life of five years, after which a major upgrade will be required.

The other intangible assets are being amortised over eight years. No amortisation has yet been charged in the year.

Website service provider accrual

FashionNow receives a bill from its website provider on 5 January, 5 April, 5 July and 5 October in respect of costs for the previous calendar quarter. The costs are included within cost of sales. The quarterly fee was £41,120 for three quarters ended 30 September 20X7 and increased by 5% in the quarter ended 31 December 20X7. No accounting has taken place in respect of the bill received on 5 January 20X8.

Provision for legal case

Following the conclusion of a court case similar to the claim lodged against FashionNow, the company's lawyers consider that their initial estimate was too low and have reassessed the likely outcomes as follows:

Settlement (£) Probability

10,000 20%

20,000 50%

30,000 30%

The financial controller has not yet adjusted the provision to take account of the revised estimate.


Shahbaz Mirza has expressed to the Finance Director, Connor Rushford, that he wants the financial statements for the year ended 31 October 20X7 to present FashionNow in the 'best possible light'. Connor is aware of the requirement to present information fairly within the financial statements and has asked for your assistance in explaining this term to the Chief Executive Officer.

Requirements

With reference to Appendix A and Appendix B in the Advance Information and the trial balance and related information above:

(a) Prepare an extract showing the non-current assets section of the statement of financial position as at 31 October 20X7.

Show your workings. Round figures to the nearest £'000. (9 marks)

(b) Complete the following statement:

The amount to be included in trade and other payables as an an accrual in respect of website service provider costs is £____________. (1 mark)

(c) The amount to be recorded in administrative expenses in respect the provision is £____________. (1 mark)

(d) Prepare the journal entries required to record the accrual and the provision in the financial statements.

Include narratives. (4 marks)

(e) Prepare an email to the Chief Executive Officer, Shahbaz Mirza, to explain what is meant by the term 'fair presentation' in the context of the financial statements. (5 marks)

Total: 20 marks

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This part of the Practice Task contains four parts.

Part 5.2

Inventory obsolescence is included in Appendix E as an operating risk of FashionNow. At a recent directors meeting, it was decided the risk relating to inventory management had increased as a result of the new customer returns policy. The directors understand the importance of identifying risks and for ensuring adequate controls are in place to mitigate the risks to an acceptable level. The Warehouse and Distribution Director, Alicia Bloom, has asked for your assistance in identifying the key risks and control objectives relating to the receipt of goods, both from suppliers and customer returns. She has also asked for assistance in identifying suitable controls that should be put in place regarding the return of goods by customers.

Inventory has also been identified as a key audit risk by the external auditor. The audit team is particularly concerned about the high levels of obsolete inventory in the fashion industry and plans to undertake additional testing in this area in the current year. Shahbaz Mirza is exasperated by the extent of audit work that has taken place in prior years as he finds the process distracting and a drain on FashionNow's resources. He has informed the auditor that he will happily provide any written representations they require if it means they do not need to carry out such detailed testing.

Requirements

(a) Explain the key risks and the control objectives relating to the receipt of goods from both suppliers and customer returns. (5 marks)

(b) Identify suitable control procedures that should be implemented relating to the return of goods by customers. (3 marks)

(c) Describe suitable audit procedures that the external auditor may undertake in respect of obsolete inventory. (3 marks)

(d) Explain when it is appropriate to provide a written representation to the external auditor and identify relevant written representations that may be provided by the directors of FashionNow. (5 marks)

Total: 16 marks


This part of the Practice Task contains four parts.

Part 5.3

FashionNow collects large quantities of data both from its own website and app and from wider sources such as social media. It relies on reacting quickly to the data to ensure that it continues to satisfy changing customer demands and stay ahead of its competitors. The ability to respond quickly to the data is down to strong supply chain management which allows the company to source the right products at the right price and get them to the market quickly.

The Sales and Marketing Director, Elena Rugby, is new to the role and has not before worked with big data.

You recently received a phone call from the Procurement and Contracts Director, Nina Patel, in which she informed you that she had agreed a new supplier contract for inventories at a heavily discounted price and has asked for the supplier to be added to the payables system. You were concerned about why the goods were cheaper than equivalent goods from an alternative supplier and asked the director if the supplier complied with the code of conduct (Appendix D in the Advance Information) because you are required to tick a box on the system to confirm such compliance. The director has advised that the supplier does not necessarily comply with the code of conduct but that she instructs you to add it to the system anyway. She believes it will be good for business. Also, the improved profit margins due to using this supplier may benefit the staff in the form of larger bonuses. She has suggested that your future success with the company depends on you carrying out this request.

Requirements

(a) Explain the benefits to FashionNow of using big data and data analytics. You should refer to Appendix C in your answer. (4 marks)

(b) Identify whether the following statement is true or false.

Supply chain management focuses on a company having contracts for goods with a large number of suppliers in order that it has a backup plan if its regular supplier cannot meet its needs. (1 mark)

(c) Explain the ethical issues that the information received regarding the new supplier presents to you. (6 marks)

(d) Identify the actions that you should take in respect of the Procurement and Contracts Director's instructions, taking into account any ethical issues. (3 marks)

Total: 14 marks

26


Answer Bank

28


Answers to Objective Test Questions

30


ICAEW 2019 Answers to Objective Test Questions 31

Accounting Marks 1 120.8 + 2.1 – 1.1 – 2 – 0.5 = £119.3 million 1

2 £6,112,700

Either: 6,125,300 – 12,600 = £6,112,700

Or: 6,201,500 – (44,400 2) = £6,112,700

1

3 (a) Increase (by £24,000 – £16,000 = £8,000) (b) Decrease (by £100,000 5% = £5,000)

1 1

Total marks 4

Assurance Marks 4 When providing this corporate finance service to Brinna plc in addition to

external audit, Aaron LLP faced an advocacy threat. 1

5 (a) True (see Section 5 of the Ethical Standard).

The problem is that the amount of the fee is contingent on how much of a tax saving the firm manages to secure, which is a self-interest threat to the firm’s fundamental ethical principles. Section 5.85 of the Ethical Standard states that the audit firm shall not undertake an engagement to provide tax services to an audited entity wholly or partly on a contingent fee basis where the outcome of those tax services is dependent on the application of tax law which is uncertain or not yet established.

(b) False (see Section 5 of the Ethical Standard)

Section 5.53 of the Ethical Standard states that the audit firm shall not undertake to provide internal audit services to an audited entity where it is reasonably foreseeable that the audit firm would undertake the role of management.

1

1

6 (a) Report by exception (b) Explicit opinion

1 1

Total marks 5

32


Management Information Marks 7 (a) Because operational managers have been involved in the preparation of

the budget, Brinna plc can be said to have moved to a participative OR bottom-up style of budgeting.

(b) Because every separate item of expenditure is fully justified, Brinna plc can be said to have moved to a system of zero-based budgeting.

1

1

8 (a) (24 – 15)/24 = 37.5% (b) (24 – 15)/15 = 60.0% (own figure rule applies)

1

1

9 (a) £200,000/(32 – 7) = 8,000 units (b) 8,000/12,000 = 66.7% (own figure rule applies)

1 1

Total marks 6

Business, Technology and Finance Marks 10 (a) –10%/5% = –2

(b) Demand is elastic (own figure rule applies) (c) Total revenue from Jasos will fall (own figure rule applies)

1 1 1

11 (a) Demand will rise ‘less than’ the rise in incomes (b) Meduso services are ‘normal’ services

1

1

12 (a) The Jaso service is a question mark (b) The Meduso service is a cash cow

1 1

Total marks 7

Law Marks 13 21 days 1

14 Tapita plc will be placed in compulsory liquidation. 1

15 False

The share capital and premium are fully paid. As Tapita Ltd is a limited liability company, its shareholders need make no further contribution.

1

Total marks 3

Answer to Practice Task

34


ICAEW 2019 Answer to Practice Task 35

Practice Task 5 Answers

Answer

LOs

K marks

S marks

B marks

Total available

marks

Total max

marks 5.1(a) ACC 4 7 11 9 5.1(b) ACC 1 1 1 5.1(c) ACC 1 1 1 5.1(d) ACC 2 2 4 4 5.1(e) ACC 2 4 6 5 Part 5.1 10 13 0 23 20 5.2(a) ASS 6 3 9 5 5.2(b) ASS 2 3 5 3 5.2(c) ASS 2 2 4 3 5.2(d) ASS 3 5 8 5 Part 5.2 13 13 26 16 5.3(a) BTF 2 4 1 7 4 5.3(b) BTF 1 1 1 5.3(c) BTF 2 2 2 6 6 5.3(d) BTF 1 3 4 3 Part 5.3 5 7 6 18 14 Total 15 33 19 67 50 ACC 10 13 0 23 20 BTF 5 7 6 18 16 ASS 0 13 13 26 14

Part 5.1

(a) FashionNow plc Marks Nature

Statement of financial position extract as at 31 October 20X7

Non-current assets Note £'000

Property, plant and equipment 1, 2 14,697 1 Producing Intangible assets 3 4,024 quality and

18,721 accurate info (S)

Marking guide

Marks

36


Marks Nature Note 1 – PPE Land and buildings

Land and buildings cost and accumulated depreciation included in the initial trial balance are at 31 October 20X7 and do not require adjustment. They are included in non-current assets at their carrying amount as follows:

1

Accounting (K)

Initial TB (£'000)

Adjustments (£'000)

Closing (£'000)

Land and buildings cost 12,000 – 12,000 Land and buildings accumulated depreciation (1,980) – (1,980) 10,020

Note 2 – PPE Plant and machinery

The acquisition of the robotic equipment has not been accounted for correctly and requires adjustment. Depreciation also needs to be calculated.

Acquisition of robotic equipment

The purchase cost, cost of preparing the site and the costs of testing the new asset may all be capitalised. The total amount to be capitalised is therefore:

1

Analysis (S)

£'000 Purchase cost 1,300 Costs of preparing the site 120 Testing costs 40 Total 1,460

The purchase cost has already been capitalised and therefore an adjustment is needed in respect of the costs previously written off.

Dr PPE cost £160,000 Cr Administrative expenses £160,000

Being to correct the amount capitalised in respect of new equipment

2 Accounting (K)

Depreciation

Depreciation on the new equipment should be calculated separately from the depreciation on the plant and machinery that was brought forward at the start of the period.

Brought forward assets

(7,285,000 – 1,300,000) /10 years = 598,500

1 Analysis (S)

Robotic equipment

Depreciation should start when the robotic equipment is first brought into use in July 20X7.

1,460,000 / 10 years 5/12 months = 60,833

Total depreciation is therefore = 659,333

Dr Administrative expenses £659,333 Cr Plant and machinery accumulated depreciation £659,333

Being depreciation on plant and machinery


Marks Nature

Plant and machinery should be included in the statement of financial position at its carrying amount as follows:

2 Producing quality and accurate information (S)

Initial TB (£'000)


Closing (£'000)

Plant and machinery cost 7,285 160 7,445 Plant and machinery accumulated depreciation (2,109) (659) (2,768) 4,677

Note 3 – Intangible assets

Of the expenditure incurred in the year, £200,000 meets the criteria for capitalisation and should be included as an intangible asset. The £30,000 relating to promotion and advertising should be accounted for as an administrative expense in the period. As the invoice was not received until after the year end, the amount should be accrued at the year end.

Dr Intangible asset £200,000 Dr Administrative expenses £30,000 Cr Trade and other payables £230,000

Being to accrue for app development costs

1

Analysis (S)

The amortisation should be calculated separately for the intangible assets brought forward which have a useful life of 8 years and the app development which has a useful life of 5 years

Amortisation

The brought forward intangible assets should be amortised over their expected life of 8 years = 5,480,000 / 8 = 685,000

The capitalised cost should be amortised over the expected useful life of the app of 5 years, pro-rata = 200,000 / 5 years 2/12 months = 6,667

Total amortisation is therefore 691,667

1

1

Accounting (K) Analysis (S)

Dr Administrative expenses £691,667 Cr Intangible assets accumulated amortisation £691,667

Being amortisation of intangible assets

Intangible assets should be included in the statement of financial position at their carrying amount, calculated as:

1

Accounting (K)

Initial TB (£'000)


Closing (£'000)

Intangible assets cost 5,480 200 5,680 Intangible assets accumulated amortisation (964) (692) (1,656) 4,024 Total marks 11 Marks available 9

38


Marks Nature (b) £14,392

FashionNow receives a bill from its website provider on 5 January, 5 April, 5 July and 5 October. No adjustment has taken place for the bill received on 5 January 20X8 which covers the quarter ended 31 December 20X7. The fee for the quarter ended 31 December 20X7 is £41,120 105% = 43,176. 1/3 months are accrued to the end of October = £14,392

1 Accounting (K)

Total marks 1 Marks Available 1 (c) £11,000

The estimate should be revised for the new information that has been provided. The amount provided should be based on the weighted average of the possible outcomes.

1 Accounting (K)

Likely outcome Weighted average (£) 10,000 20% 2,000 20,000 50% 10,000 30,000 30% 9,000 Provision required 21,000 Existing provision 10,000 Increase 11,000

Total marks 1 Marks Available 1

(d) Journal entry to record accruals:

Dr Cost of sales £28,784 Cr Trade and other payables £28,784

Being to record accrued website expenses

1 1

Accounting (K) Producing quality and accurate information (S)

Journal entry to record provision for legal claims:

Dr Administrative expenses £11,000 Cr Provision £11,000

Being to record increase in legal claims

1 1

Accounting (K) Producing quality and accurate information (S)

Total marks 4 Marks available 4


Marks Nature (e) Email

To: Shahbaz Mirza From: Apprentice Accountant Re: Fair presentation in the financial statements

To address your request that the financial statements present FashionNow in the 'best possible light', I have explained below the concept of fair presentation.

Fair presentation is one of the underlying assumptions of IAS 1 Presentation of Financial Statements. Fair presentation means the financial statements should present fairly the financial position, financial performance and cash flows of an entity (IAS 1, para. 15). This means that transactions and events that affect the financial statements of an entity should be included in those financial statements in a manner that faithfully represents the underlying economic reality of the transaction or event.

In respect of FashionNow, this means that the legal claim should be recognised and accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and that inventory should be accounted for at the lower of cost and net realisable value in accordance with IAS 2 Inventories in order that inventory returns and obsolete inventory are accounted for correctly. It also means that the development costs in respect of the app are capitalised as they meet the criteria of IAS 38 Intangible Assets. Although, these are specific examples, it is generally assumed that compliance with International Financial Reporting Standards (IFRS) will result in fair presentation. In order to ensure its financial statements are presented fairly, FashionNow should:

select accounting policies that are appropriate to the company, such as whether land and buildings are held at historical cost or revalued, and apply them in a consistent manner

present information in the financial statements in a manner which ensures that information is relevant, reliable, comparable and understandable

provide additional disclosures where relevant, such as to explain the reason for the provision for legal claims, which will enable users to understand the impact of transactions and events on the company's financial statements.

As such, we cannot record and disclose transactions in a manner that presents FashionNow favourably as we must apply relevant accounting standards.

Kind regards

Apprentice Accountant

2

1

2

1

Regulation and compliance (K) Producing quality and accurate information (S) Analysis (S) Communication (S)


40


Part 5.2 Marks Nature (a) FashionNow should consider the following key risks relating to

the receipts of goods from suppliers and from customer returns:

Goods may be accepted from suppliers that have not been ordered.

Goods may not be as described, in terms of size, colour, quantity when ordered.

Goods may be of inferior quality and therefore not be suitable for sale.

FashionNow may not request credit notes in respect of goods that are not as ordered or of inferior quality, resulting in paying invoices unnecessarily.

Customers may return goods that have not been authorised by the returns department.

Customers may return goods that have been worn or otherwise damaged by the customer.

Customers may return goods from a past season which cannot be resold.

Customers may not receive credit in respect of the goods they have returned within the agreed 48 hour period.

Returned goods that are not fit for resale may be placed back into inventories.

Cut-off procedures may not be correctly applied to the receipt of goods around the year end date.

FashionNow may have in place the following control objectives to help to mitigate the identified risks:

All goods received are used for the company's purposes, and not private purposes.

Goods and services are only accepted if they have been ordered, and the order has been authorised.

All goods and services received are thoroughly checked prior to being included in inventories.

Goods received notes, clearly showing any goods that have not been accepted by the warehouse team, should be sent to the finance department on a timely basis in order that all credits to which the company is entitled are claimed and received.

Only customer returns that have been pre-authorised should be processed.

Customer returns should be subject to a time-limit, of say 30 days, to ensure that only current season items are accepted back into inventory.

Adequate follow up procedures should be put in place for goods returned by customers that have not been pre-authorised.

4

2

2

1

Systems and Processes (S) Analysis (S) Adding value (B) Proactivity (B)



Marks Nature (b) FashionNow should implement the following control

procedures relating to the return of goods by customers:

A customer returns policy should be created and clearly stated on FashionNow's website. The returns policy should be adhered to at all times.

Only goods that are unworn, that are received within the agreed time limit, with a pre-authorised returns label and have completed the required documentation should be processed.

The receipt and acceptance of goods returned from customers should be carefully recorded using pre-numbered sequential goods received notes (GRNs).

A thorough examination of goods returned should take place to ensure that they are as described in the returns authorisation, have not been worn and can be agreed to the original sales order and goods dispatched note to confirm that the returned goods are consistent with the goods originally sold.

Any damaged or faulty items should be identified and separated from those that may be placed into inventories.

A copy of the GRN for accepted returns should be passed to the finance department at the end of each day to ensure that credits are processed in a timely manner.

There should be adequate segregation of duties between those agreeing to authorise returns, examining the goods returned and processing the customer credits.

Adequate cut-off procedures should be in place to accrue for goods received around the year end date for which a customer credit has not been processed.

2

2

1

Systems and processes (S) Adding value (B) Proactivity (B)

Total marks 5 Marks available 3 (c) The external auditor is likely to undertake the following tests in

respect of obsolete inventory:

Discuss with management the controls in place regarding inventory management and the identification of obsolete inventory.

Review the inventory count instructions to understand the process for identifying obsolete inventory during the inventory count.

Attend and observe the physical inventory count to ensure that all obsolete inventory is identified as such and counted separately from the saleable inventory.

Select a sample of post year end sales invoices to determine the net realisable value of the obsolete inventory if it can be sold.

Review the inventory listing at year end to agree that obsolete inventory has been written off to zero or is recorded at the lower of cost or net realisable value.

1

2

1

Proactivity (B) Uses systems and processes Adding value (B)

Total marks 4 Total available 3

42


Marks Nature (d) The CEO is not correct in his suggestion that written

representations can be provided in respect of all balances and transactions in the financial statements and that providing written representations is a substitute for undertaking sufficient and appropriate audit procedures. There are however some instances in which written representations should be provided by the directors of FashionNow. Where written representations are provided, they should be dated as near as possible to, but always before, the date of the auditor's report.

General matters

Written representations are required for general matters such as:

that the accounting records have been made fully available to the auditors

that management has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework

that management has provided the auditor with all relevant information and access as agreed in the terms of the audit engagement

that management has recorded and reflected all transactions in the financial statements

Specific areas More specific written representations could be provided by the directors of FashionNow in support of audit evidence gained in respect of the following areas:

Whether the selection and application of accounting policies are appropriate in respect of the app development costs and whether they satisfy the criteria for capitalisation in IAS 38 Intangible Assets

Whether adequate disclosure has been made in respect of judgemental areas such as the provision for the legal claim

Whether goods returned have been removed from revenue, included within inventory and any amounts owed by customers removed from trade receivables

Whether any deficiencies in internal control of which management is aware have been communicated to auditors. This may be in respect of the approval of suppliers in accordance with the code of conduct or the management of the supply chain.

Whether inventories have been valued at the lower of cost and net realisable value and that adequate steps have been taken to identify inventory that may require adjustment

2

1

3

2

Uses systems and processes (S) Leading (S) Adding value (B) Proactivity (B)



Part 5.3 Marks Nature (a) Big data refers to the large volume of information that

companies collect by, for example, recording and monitoring the way in which users interact with their websites such as the number of visitors, the items they place in their baskets compared to the items they actually buy, the frequency with which users visit the website etc. They also collect information from social media platforms which provides information on customer trends, gather information from mobile technology such as customer locations and from the placement of small chips placed in some items of clothing which allows the company to understand where the clothes are being worn, the frequency with which they are worn etc.

The information generated is useful to companies only if it is analysed and the outputs from the analysis are acted upon in a timely manner. This is to allow the company to maximise the benefit it can obtain from the information collected.

The analysis of big data creates insights for companies into issues affecting the business that the company may not have previously understood. In respect of FashionNow, the fashion industry and the KPIs in place, big data can assist in the following ways:

FashionNow operates in a fast-paced industry in which customers demand new trends to be accessible quickly and at a reasonable price. Analysing data such as trends, buying patterns and market price fluctuations can help FashionNow to stay on top of customer demands. In terms of its KPIs, this analysis may help FashionNow to understand whether the number of orders placed per active customer and the average value of the basket is consistent with the market.

Understanding how customers are interacting with the website and app on a real-time basis could lead to performance improvement for FashionNow. If the business has access to information that indicates that a particular product is popular because it is receiving a lot of clicks, but customers are not placing the items in their basket, it could be that, for example the price point it too high which could be immediately rectified via a discount to encourage more customers to purchase the item. This could help to increase the number of orders per customer because it will encourage sales.

FashionNow could understand more about the needs of their target market of 16–25 year old men and women to allow the business to tailor product ranges and prices to that particular market. This could help to increase the number of registered accounts and number of active shoppers monitored as a KPI.

Decisions relating to the stocking of particular inventories, which has an impact on supply chain management and which goods are sourced from which suppliers can be aided by big data analysis relating to

2

2

2

1

Business awareness (K) Analysis (S) Using systems and processes (S) Adding value (B)

44


Marks Nature trending products and the price that customers are willing to pay for products. It will also help the business to quickly understand if there is any particularly positive or negative press associated with its suppliers.

Big data will also be valuable if FashionNow follows its plans for international expansion because it will allow the business to understand the new target markets and provide the market with what it demands, which helps to manage the risks associated with a change in direction.


(b) False

Supply chain management does not involve ensuring a business has a large number of suppliers that can be called upon if a regular supplier cannot meet its needs. Supply chain management often has the opposite focus on having a smaller number of suppliers but having a close relationship with the suppliers through a network in which the parties:

regularly communicate with each other

discuss the changing needs for products

discuss and agree the appropriate price point for products

problem solving across the network as to how to get goods to market quickly

often link IT systems in order that electronic communications are possible.

1 Business awareness (K)

Total marks 1 Marks Available 1

(c) The Procurement and Contracts Director, Nina Patel, has requested that I set up, on the system, a supplier who does not comply with the supplier code of conduct. She has asked me to overlook this fact because there will be benefits for the business and me personally in the form of increased bonuses if this supplier is used. If I set the supplier up as requested, I will be involved in misleading the other directors as to the types of supplier FashionNow is engaging with, and in misleading our customers because the supplier code of conduct is a differentiating factor for the company.

If I comply with his request, I will not be acting with integrity, because I am not being straightforward and honest in the work that I am carrying out and I will be deceiving the directors and our wider stakeholders. I will not be objective because my decision will be influenced by the opportunity to earn higher bonuses as a result of the improved margins that may be possible from using this supplier and my professional behaviour will not be in keeping with what is expected of an ACA.

2

1

2

1

Ethics and standards (K)

Analysis (S)

Ethics and integrity (B)

Professional scepticism (B)


As my superior, Nina Patel's behaviour represents an intimidation threat and I have a self-interest threat as a result of the opportunity for increased bonuses and the reminder that my future promotion depends requires all of the directors to agree.

Total marks 6 Marks available 6 Marks Nature (d) I should not carry out Nina Patel's request to include the

supplier on the approved supplier list because his request is not consistent with me performing my job to the best of my abilities and my obligation to comply with the ICAEW Code of Ethics.

I should discuss the matter with my line manager, the Financial Controller, in the first instance but as she is junior to Nina Patel's, it is likely the matter will need to be escalated to the Finance Director and the CEO.

If the matter cannot be resolved by the directors, I should report it to FashionNow's whistleblowing department or the company’s audit committee. If the matter cannot be resolved internally, I should contact the ICAEW helpline and reconsider my position within the company.

1

2

1

Analysis (S) Ethics and integrity (B) Professional scepticism (B)


46


Documents

The Institute of Chartered Accountants in England and