(c) Discuss TWO limitations of the Boston Consulting Group matrix as a strategic planning tool. (4 marks)

正确答案：

(b) Benchmarking at Marlow Fashion will not be an easy exercise. Marlow Fashion has developed a distinctive way of reaching
its markets that means direct comparisons will be hard to make. Certainly, it can carry out historical benchmarking in
comparing how its own processes and activities have improved, or otherwise, over a relevant period of time. Unfortunately,
this is likely to simply confirm worsening performance. It can compare its own key operations against the ‘best in class’;
regardless of which industry the excellent performer comes from. It could and should have been carrying out competitive
benchmarking on the retail side of the business where information should be more easily available. There may be an
opportunity to benchmark itself against firms that have gone through a similar crisis and achieved a successful turnaround.

In terms of the advantages and disadvantages, the willingness of managers responsible for a key area of performance to
compare themselves against relevant external performance measures should make them take responsibility for any changes
necessary. In Marlow Fashion, the acceptance that things have to be done differently will be the first stage in the turnaround.
Getting managers face-to-face with the problems, accepting responsibility for change and recognising that the necessary
changes are ‘doable’ is an important stage in creating a willingness to change. The disadvantages are that every organisation
and situation is different and there is no one best way. Marlow Fashion thought it had discovered the best way and this created
an unwillingness to change. There is also the danger that you are solving today’s problems with yesterday’s solutions. A good
competitor will be trying to maintain its competitive advantage through constantly improving its processes. It also has a vested
interest in trying to prevent its improvements from being revealed to its competitors. Also, many of the ‘softer’ processes –
typically involving people – are difficult if not impossible to replicate in another organisation. These advantages are to do with
culture and leadership and not easily transferable to another organisation and the context in which it is operating.

正确答案：
(b) Clearly, there is a link between the ability to write a business plan and the willingness, or otherwise, of small firms to carry
out strategic planning. Whilst writing a business plan may be a necessity in order to acquire financial support, there is much
more question over the benefits to the existing small business, such as Gould and King, of carrying out strategic planning.
One of the areas of greatest debate is whether carrying out strategic planning leads to improved performance. Equally
contentious is whether the formal rational planning model is worthwhile or whether strategy is much more of an emergent
process, with the firm responding to changes in its competitive environment.
One source argues that small firms may be reluctant to create a strategic plan because of the time involved; small firms may
find day-to-day survival and crisis management prevents them having the luxury of planning where they mean to be over the
next few years. Secondly, strategic plans may also be viewed as too restricting, stopping the firm responding flexibly and
quickly to opportunities and threats. Thirdly, many small firms may feel that they lack the necessary skills to carry out strategic
planning. Strategic planning is seen as a ‘big’ firm process and inappropriate for small firms. Again, there is evidence to
suggest that owner-managers are much less aware of strategic management tools such as SWOT, PESTEL and mission
statements than their managers. Finally, owner-managers may be reluctant to involve others in the planning process, which
would necessitate giving them access to key information about the business. Here there is an issue of the lack of trust and
openness preventing the owner-manager developing and sharing a strategic plan. Many owner-managers may be quite happy
to limit the size of the business to one which they can personally control.
On the positive side there is evidence to show that a commitment to strategic planning results in speedier decision making,
a better ability to introduce change and innovation and being good at managing change. This in turn results in better
performance including higher rates of growth and profits, clear indicators of competitive advantage. If Gould and King arelooking to grow the business as suggested, this means some strategic planning will necessarily be involved

正确答案：
(b) (i) One company may have revalued its assets while the other has not.
(ii) Accounting policies and estimation techniques may differ. For example, one company may use higher depreciation rates
than the other.
(iii) The use of historical cost accounting may distort the capital and profit of the two companies in different ways.
Other answers considered on their merits.

正确答案：
(b) Benchmarking
Benchmarks enable goals to be set that may be based on either external measures of ‘best practice’ organisations or internal
cross-functional comparisons which exhibit ‘best practice’. A primary aim of the traditional budgeting process is the setting of
realistic targets that can be achieved within the budget period. The setting of realistic targets means that the extent of
underperformance against ‘best practice’ standards loses visibility, and thus short-term financial targets remain the
predominant focus of the traditional budgeting process. It is arguable that because the budgetary reporting system purports
to give managers ‘control’, there is very little real incentive to seek out benchmarks which may be used to raise budgeted
performance targets. Much depends upon the prevailing organisational culture since benchmarking may be viewed as an
attempt by top management to impose impossible targets upon operational managers. The situation is further exacerbated
where organisations do not measure their success relative to their competition.
Balanced scorecard
The Balanced scorecard is often misunderstood as a consequence of the failure by top management to ensure that it is
implemented effectively within the organisation. Thus it may be viewed as the addition of a few non-financial measures to
the conventional budget. In an attempt to overcome this misperception many management teams now establish a
performance-rewards linkage based upon the achievement of Scorecard targets for the forthcoming budget period.
Unfortunately this can precipitate dysfunctional behaviour at every level within the organisation.
Even in situations where the Scorecard has been well-designed and well-implemented it is difficult for it to gain widespread
acceptance. This is because all too often there exists a culture which places a very high value upon the achievement of the
fixed annual targets in order to avoid the loss of status, recognition and rewards.
A well-constructed Scorecard contains a mix of long-term and short-term measures and therefore drives the company in the
direction of medium-term strategic goals which are supported by cross-functional initiatives. On the other hand, the budgeting
process focuses the organisation on the achievement of short-term financial goals supported by the initiatives of individual
departments. Budgets can also act as an impediment to the acceptance of responsibility by local managers for the
achievement of the Scorecard targets. This is often the case in situations where a continued emphasis exists on meeting shortterm
e.g. quarterly targets.
Activity-based models
Traditional budgets show the costs of functions and departments (e.g. staff costs and establishment costs) instead of the costs
of those activities that are performed by people (e.g. receipt of goods inwards, processing and dispatch of orders etc). Thus
managers have no visibility of the real ‘cost drivers’ of their business. In addition, it is probable that a traditional budget
contains a significant amount of non-value-added costs that are not visible to the managers. The annual budget also tends
to fix capacity for the forthcoming budget period thereby undermining the potential of Activity-based management (ABM)
analysis to determine required capacity from a customer demand perspective. Those experienced in the use of ABM
techniques are used to dealing with such problems, however their tasks would be much easier to perform. and their results
made more reliable if these problems were removed.

正确答案：
(e) In order to enhance profitability management might take the following actions:
(i) Increase the maximum capacity of the circus.
(ii) Undertake a detailed review of operating costs which are budgeted at ￡239,200,000. Such a review might identify nonvalue
added costs which may be eliminated thereby increasing profitability.
(iii) Enter into a strategic arrangement with large hotels and travel agencies to offer travel and accommodation inclusive
arrangements for visitors to Cinola Island. This might help to increase the number of visitors to the zoo thereby increasing
profits.
(iv) Change the price structure and entitlement of tickets so that purchasers might visit Cinola Island on two separate days
in order to attend the zoo and circus. Additional revenues would arise as a consequence of the increased number of
visitors to the zoo, thereby increasing profitability.
(v) Hold prize draws for free tickets to the zoo for families on an ‘all-inclusive basis’, including restaurants, photographs,
souvenirs etc.
N.B. Only four initiatives were required to be discussed.

正确答案：
(b) Negotiated transfer prices suffer from the following limitations:
– The transfer price which is the final outcome of negotiations may not be close to the transfer price that would be optimal
for the organisation as a whole since it can be dependent on the negotiating skills and bargaining powers of individual
managers.
– They can lead to conflict between divisions which may necessitate the intervention of top management to mediate.
– The measure of divisional profitability can be dependent on the negotiating skills of managers who may have unequal
bargaining power.
– They can be time-consuming for the managers involved, particularly where large numbers of transactions are involved.

正确答案：
(ii) Sensitivity analysis could be used to assess how responsive the NPV calculated in part (a) in respect of each decision
option change is to changes in the variables used to calculate it. The application of sensitivity analysis requires that the
net present values are calculated under alternative assumptions in order to determine how sensitive they are to changing
conditions. In this particular example then a relatively small change in the forecast cash flows might lead to a change
in the investment decision. The application of sensitivity analysis can indicate those variables to which the NPV is most
sensitive and the extent to which these variables may change before an investment results in a negative NPV. Thus the
application of sensitivity analysis may provide management with an indication of why a particular project might fail. The
directors of Stay Cool Ltd should give consideration to the potential variations in the independent variables which feature
in the decision-making process such as:
– estimated revenues
– estimated operating costs
– estimated working lives
– estimated repair costs
– the estimated discount rate i.e. cost of capital of each alternative investment.
Sensitivity analysis has some serious limitations. The use of the method requires changes in each variable under
consideration are isolated. However management may be focused on what happens if changes occur in two or more
critical variables. Another problem relating to the use of sensitivity analysis to forecast outcomes lies in the fact that it
provides no indication of the likelihood of the occurrence of changes in critical variables.

正确答案：
(b) In a market place such as that in which SSH competes, product and service quality assumes critical significance. Quality is
a key determinant of the financial results and the level of competitiveness achieved by SSH. This will always be the case and
therefore quality may be viewed as a strategic necessity if SSH is to prosper in the future. Therefore, the statements of the
manager of Bonlandia operations are myopic at best and unethical at worst! Businesses use software in a variety of different
ways but poor quality software can do serious harm to businesses. Much will depend on the extent to which a business uses
its information for strategic reasons as opposed to meeting operational needs. The more a business uses its information
systems for strategic reasons then the greater the potential damage suffered as a consequence of poor quality software. It is
wrong for the manager of Bonlandia operations to knowingly promote the installation of poor quality business software in
clients’ businesses. The effects can be costly to clients in terms of poor planning, control and decision-making with potential
losses of client goodwill and reputation.

正确答案：

(a) Except in relation to specifically exempted companies, such as those involved in charitable work, companies are required to indicate that they are operating on the basis of limited liability. Thus private companies are required to end their names, either with the word ‘limited’ or the abbreviation ‘ltd’, and public companies must end their names with the words ‘public limited company’ or the abbreviation ‘plc’. Welsh companies may use the Welsh language equivalents (Companies Act (CA)2006 ss.58, 59 & 60).
Companies Registry maintains a register of business names, and will refuse to register any company with a name that is the same as one already on that index (CA 2006 s.66).
Certain categories of names are, subject to the decision of the Secretary of State, unacceptable per se, as follows:
(i) names which in the opinion of the Secretary of State constitute a criminal offence or are offensive (CA 2006 s.53)
(ii) names which are likely to give the impression that the company is connected with either government or local government authorities (s.54).
(iii) names which include a word or expression specified under the Company and Business Names Regulations 1981 (s.26(2)(b)). This category requires the express approval of the Secretary of State for the use of any of the names or expressions contained on the list, and relates to areas which raise a matter of public concern in relation to their use.
Under s.67 of the Companies Act 2006 the Secretary of State has power to require a company to alter its name under the following circumstances:
(i) where it is the same as a name already on the Registrar’s index of company names.
(ii) where it is ‘too like’ a name that is on that index.
The name of a company can always be changed by a special resolution of the company so long as it continues to comply with the above requirements (s.77).

(b) The tort of passing off was developed to prevent one person from using any name which is likely to divert business their way by suggesting that the business is actually that of some other person or is connected in any way with that other business. It thus enables people to protect the goodwill they have built up in relation to their business activity. In Ewing v Buttercup
Margarine Co Ltd (1917) the plaintiff successfully prevented the defendants from using a name that suggested a link with
his existing dairy company. It cannot be used, however, if there is no likelihood of the public being confused, where for example the companies are conducting different businesses (Dunlop Pneumatic Tyre Co Ltd v Dunlop Motor Co Ltd (1907)
and Stringfellow v McCain Foods GB Ltd (1984). Nor can it be used where the name consists of a word in general use (Aerators Ltd v Tollitt (1902)).
Part 41 of the Companies Act (CA) 2006, which repeals and replaces the Business Names Act 1985, still does not prevent one business from using the same, or a very similar, name as another business so the tort of passing off will still have an application in the wider business sector. However the Act introduced a new procedure to deal specifically with company names. As previously under the CA 1985, a company cannot register with a name that was the same as any already registered (s.665 Companies Act (CA) 2006) and under CA s.67 the Secretary of State may direct a company to change its name if it has been registered in a name that is the same as, or too like a name appearing on the registrar’s index of company names. In addition, however, a completely new system of complaint has been introduced.

(c) Under ss.69–74 of CA 2006 a new procedure has been introduced to cover situations where a company has been registered with a name
(i) that it is the same as a name associated with the applicant in which he has goodwill, or
(ii) that it is sufficiently similar to such a name that its use in the United Kingdom would be likely to mislead by suggesting a connection between the company and the applicant (s.69).
Section 69 can be used not just by other companies but by any person to object to a company names adjudicator if a company’s name is similar to a name in which the applicant has goodwill. There is list of circumstances raising a presumption that a name was adopted legitimately, however even then, if the objector can show that the name was registered either, to obtain money from them, or to prevent them from using the name, then they will be entitled to an order to require the company to change its name.
Under s.70 the Secretary of State is given the power to appoint company names adjudicators and their staff and to finance their activities, with one person being appointed Chief Adjudicator.
Section 71 provides the Secretary of State with power to make rules for the proceedings before a company names adjudicator.
Section 72 provides that the decision of an adjudicator and the reasons for it, are to be published within 90 days of the decision.
Section 73 provides that if an objection is upheld, then the adjudicator is to direct the company with the offending name to change its name to one that does not similarly offend. A deadline must be set for the change. If the offending name is not changed, then the adjudicator will decide a new name for the company.
Under s.74 either party may appeal to a court against the decision of the company names adjudicator. The court can either uphold or reverse the adjudicator’s decision, and may make any order that the adjudicator might have made.

正确答案：
(c) (i) Audit report implications
Audit procedures have shown that there is a significant level of doubt over Dexter Co’s going concern status. IAS 1
requires that disclosure is made in the financial statements regarding material uncertainties which may cast significant
doubt on the ability of the entity to continue as a going concern. If the directors refuse to disclose the note to the financial
statements, there is a clear breach of financial reporting standards.
In this case the significant uncertainty is caused by not knowing the extent of the future availability of finance needed
to fund operating activities. If the note describing this uncertainty is not provided, the financial statements are not fairly
presented.
The audit report should contain a qualified or an adverse opinion due to the disagreement. The auditors need to make
a decision as to the significance of the non-disclosure. If it is decided that without the note the financial statements are
not fairly presented, and could be considered misleading, an adverse opinion should be expressed. Alternatively, it could
be decided that the lack of the note is material, but not pervasive to the financial statements; then a qualified ‘except
for’ opinion should be expressed.
ISA 570 Going Concern and ISA 701 Modifications to the Independent Auditor’s Report provide guidance on the
presentation of the audit report in the case of a modification. The audit report should include a paragraph which contains
specific reference to the fact that there is a material uncertainty that may cast significant doubt about the entity’s ability
to continue as a going concern. The paragraph should include a clear description of the uncertainties and would
normally be presented immediately before the opinion paragraph.

正确答案：
(c) Each of the strategic goals will have a profound impact on the marketing mix as it currently exists. As each goal affects the
market position of Churchill developing an appropriate marketing mix will be the key to successful implementation of the
overall growth strategy. The product, the brand and the reputation it creates are at the heart of the company’s marketing
strategy. Their focus on the premium segment of the market seems a sensible one and one which allows a small family-owned
business to survive and grow slowly. Evidence suggests this is a luxury indulgence market reflecting changing consumer tastes
and lifestyles. Managing the product range will be a major marketing activity. While the core products may develop an almost
timeless quality there will be a need to respond to the product innovations introduced by its much larger competitors. The
company’s emphasis on the quality of its products resulting from the quality of its ingredients is at the heart of its competitive
advantage. Growing the product range will also bring the danger of under performing products and a consequent need to
divest such products. Packaging is likely to be a key part of the products’ appeal and will be an area where constant innovation
is important.
Pricing raises a number of issues. Why is Churchill’s core product priced at ￡1 less than its immediate competition? What is
the basis on which Churchill prices this product? Each of the methods of pricing has its advantages and disadvantages. Using
cost plus may create an illusion of security in that all costs are covered, but at the same time raises issues as to whether
relevant costs have been included and allocated. Should the company price in anticipation of cost reductions as volume
increases? Should the basis for pricing be what your competitors are charging? As a luxury product one would assume that
its demand is relatively price inelastic: a significant increase in price e.g. ￡1 would lead to only a small reduction in quantity
demanded. Certainly, profit margins would be enhanced to help provide the financial resources the company needs if it is to
grow. One interesting issue on pricing is the extent to which it is pursuing a price skimming or price penetration policy –
evidence from the scenario suggests more of a price skimming policy in line with the luxury nature of the product.

Place is an equally important issue – the vertical integration strategy of the company has led to company-owned shops being
the main way customers can buy the product. At the same time, this distribution strategy has led to Churchill’s sales being
largely confined to one region in the UK – although it is the most populous. If Churchill has a desire to grow, does it do this
through expanding the number of company owned and franchised outlets or look for other channels of distribution in
particular the increasingly dominant supermarket chains? Each distribution strategy will have significant implications for other
elements in the marketing mix and for the resources and capabilities required in the company.
Finally, promotion is an interesting issue for the company. The relatively recent appointment of a sales and marketing director
perhaps reflects a need to balance the previous dominance of the manufacturing side of the business. Certainly there is
evidence to suggest that John Churchill is not convinced of the need to advertise. There are some real concerns about how
the brand is developed and promoted. Certainly sponsorship is now seen as a key part of the firm’s promotional strategy. The
company has a good reputation but customer access to the product is fairly limited. Overall there is scope for the company
to critically review its marketing mix and implement a very different mix if it wants to grow.
The four Ps above are very much the ‘hard’ elements in the marketing mix and Churchill in its desire to grow will need toensure that the ‘softer’ elements of people, physical evidence and processes are aligned to its ambitious strategy.

正确答案：
(c) Corporate social responsibility (CSR) is concerned with business ethics and the company’s accountability to its stakeholders,
and about the way it meets its wider obligations. CSR emphasises the need for companies to adopt a coherent approach to
a range of stakeholders including investors, employees, suppliers, and customers. Beth has paid little regard to the promotion
of socially and ethically responsible policies. For example, the decision to not pay the SME creditors on the grounds that they
could not afford to sue the company is ethically unacceptable. Additionally, Beth pays little regard to local customs and
cultures in its business dealings.
The stagnation being suffered by Beth could perhaps be reversed if it adopted more environmentally friendly policies. The
corporate image is suffering because of its attitude to the environment. Environmentally friendly policies could be cost effective
if they help to increase market share and reduce the amount of litigation costs it has to suffer. The communication of these
policies would be through the environmental report, and it is critical that stakeholders feel that the company is being
transparent in its disclosures.
Evidence of corporate misbehaviour (Enron, World.com) has stimulated interest in the behaviour of companies. There has
been pressure for companies to show more awareness and concern, not only for the environment but for the rights and
interests of the people they do business with. Governments have made it clear that directors must consider the short-term
and long-term consequences of their actions, and take into account their relationships with employees and the impact of the
business on the community and the environment. The behaviour of Beth will have had an adverse effect on their corporate
image.
CSR requires the directors to address strategic issues about the aims, purposes, and operational methods of the organisation,
and some redefinition of the business model that assumes that profit motive and shareholder interests define the core purpose
of the company. The profits of Beth will suffer if employees are not valued and there is poor customer support.
Arrangements should be put in place to ensure that the business is conducted in a responsible manner. The board should
look at broad social and environmental issues affecting the company and set policy and targets, monitoring performance and
improvements.

正确答案：
(b) Strategic and operational risks
Strategic risks
These arise from the overall strategic positioning of the company in its environment. Some strategic positions give rise to
greater risk exposures than others. Because strategic issues typically affect the whole of an organisation and not just one or
more of its parts, strategic risks can potentially concern very high stakes – they can have very high hazards and high returns.
Because of this, they are managed at board level in an organisation and form. a key part of strategic management.
Operational risks
Operational risks refer to potential losses arising from the normal business operations. Accordingly, they affect the day-to-day
running of operations and business systems in contrast to strategic risks that arise from the organisation’s strategic positioning.
Operational risks are managed at risk management level (not necessarily board level) and can be managed and mitigated by
internal control systems.
The secrecy option would be a strategic risk for the following reasons.
It would radically change the environment that SHC is in by reducing competition. This would radically change SHC’s strategic
fit with its competitive environment. In particular, it would change its ‘five forces’ positioning which would change its risk
profile.
It would involve the largest investment programme in the company’s history with new debt substantially changing the
company’s financial structure and making it more vulnerable to short term liquidity problems and monetary pressure (interest
rates).
It would change the way that stakeholders view SHC, for better or worse. It is a ‘crisis issue’, certain to polarise opinion either
way.
It will change the economics of the industry thereby radically affecting future cost, revenue and profit forecasts.
There may be retaliatory behaviour by SHC’s close competitor on 25% of the market.
[Tutorial note: similar reasons if relevant and well argued will attract marks]

正确答案：
(ii) Four factors that could be considered are as follows:
(i) The quality of the service provided by NSC as evidenced by, for example, the comfort of the ferries, on-board
facilities, friendliness and responsiveness of staff.
(ii) The health and safety track record of NSC – passenger safety is a ‘must’ in such operations.
(iii) The reliability, timeliness and dependability of NSC as a service provider.
(iv) The potential loss of image due to redundancies within Wonderland plc.

正确答案：
(a) (i) The transfer price of ￡750 proposed by the IT division is based on cost plus 150% from which it can be deduced that
the total cost of a consulting day is (100/250) x ￡750 = ￡300. This comprises ￡240 (80%) variable cost and ￡60
(20%) fixed cost. In this instance the transfer price should be set at marginal costs plus opportunity cost. It is assumed
in this situation that transferring internally would result in the IT division having a lost contribution of ￡750 – ￡240 =
￡510 per consulting day. The marginal cost of the transfer of services to the HR division is ￡190 (￡240 external variable
costs less ￡50 saving due to use of internal video-conferencing equipment). Adding the opportunity cost of ￡510 gives
a transfer price of ￡700 per consulting day. This is equivalent to using market price as a basis for transfer pricing where
the transfer price is set at the external market price (￡750) less any costs avoided (￡50) by transferring internally.
(ii) There is in effect no external market available for one of the required pairs of consultants within the IT division and
therefore opportunity cost will not apply and transfers should be made at the variable cost per consulting day of ￡190.
The other pair of consultants, who would otherwise be 100% utilised in providing consulting services to external clients,
should be charged at a rate of ￡700 per day which represents marginal cost plus opportunity cost.
(iii) The lost contribution from the major client amounts to ￡264,000/(2 x 240) = ￡550 less variable costs of ￡240 =
￡310 per consulting day. Thus, in this instance the transfer price should be the contribution foregone of ￡310 plus
internal variable costs of ￡190 making a total of ￡500 per consulting day.

正确答案：
(ii) Two factors which might reduce the return earned by the investment are as follows:
(i) Poor product quality
The very nature of the product requires that it is of the highest quality i.e. the cakes are made for human
consumption. Bad publicity via a ‘product recall’ could potentially have a catastrophic effect on the total sales to
Superstores plc over the eighteen month period.
(ii) The popularity of the Mighty Ben character
There is always the risk that the popularity of the character upon which the product is based will diminish with a
resultant impact on sales volumes achieved. In this regard it would be advisable to attempt to negotiate with
Superstores plc in order to minimise potential future losses.

正确答案：
(b) Good performance should result in improved profitability and therefore other stakeholder groups may be rewarded for ‘good
performance’ as follows:
– Shareholders may receive increased returns on equity in the form. of increased dividends and /or capital growth.
– Customers may benefit from improved quality of products and services, and possibly lower prices.
– Suppliers may benefit from increased volumes of purchases.
– Government will benefit from increased amounts of taxation.

正确答案：
(a) Of vital importance is the need for reliable information on which to base the decision regarding the potential investment within
Tomorrowland, since the lack of such information will only serve to increase the risk profile of GHG.
The strategic factors that ought to be considered prior to a decision being made to build and operate a hotel in Tomorrowland
are as follows:
The competition
The key notion here is that of the position of GHG relative to its competitors who may have a presence or intend to have a
presence in Tomorrowland. The strategic management accounting system should be capable of coping with changes that can
and will inevitably occur in a dynamic business environment. Hence it is crucial that changes such as, the emergence of a
new competitor, are detected and reflected within strategic plans at the earliest opportunity.
The government
The attitude of the government of Tomorrowland towards foreign organisations requires careful consideration as inevitably the
government will be the country’s largest supplier, employer, customer and investor. The directors need to recognise that the
political environment of Tomorrowland could change dramatically with a change in the national government.
Planning and control of operations within Tomorrowland
Planning and control of operations within Tomorrowland will inevitably be more difficult as GHG might not possess sufficient
knowledge of the business environment within Tomorrowland. Indeed their nearest hotel is at least 3,000 kilometres away.
It is vital the GHG gain such knowledge prior to commencing operations within Tomorrowland in order to avoid undue risks.
The sociological–cultural constraints
While it is generally recognised that there is a growing acceptability of international brands this might not be the case with
regard to Tomorrowland. The attitude towards work, managers (especially foreign nationals) and capitalist organisations could
severely impact on the degree of success achieved within Tomorrowland. In this respect it is vital that consideration is given
to recognition of the relationships in economic life including demand, price, wages, training, and rates of labour turnover and
absenteeism.
Resource utilisation
A primary consideration relates to whether or not to use local labour in the construction of the hotel. The perceived
‘remoteness’ of Tomorrowland might make it an unattractive proposition for current employees of GHG, thereby presenting the
directors of GHG with a significant problem.
Communication
Consideration needs to be given to the communication problems that arise between different countries and in this respect
Tomorrowland is probably no exception. Language barriers will inevitably exist and this needs to be addressed at the earliest
opportunity to minimise any risks to GHG.
The economic factors that ought to be considered prior to a decision being made to build and operate a hotel in Tomorrowland
are as follows:
Resource availability
The hotel should be designed having given due consideration to the prevailing climatic conditions within Tomorrowland which
might necessitate the use of specific types of building materials. It might well be the case that such building materials are not
available locally, or are in such scarce supply in which case local supply would prove to be uneconomic.
Another consideration relates to local labour being available and reliable in terms of its quality.
Currency stability/restrictions
The stability of the currency within Tomorrowland assumes critical significance because profit repatriation is problematic in
situations where those profits are made in an unstable currency or one that is likely to depreciate against the home currency,
thereby precipitating sizeable losses on exchange. Any currency restrictions need to be given careful consideration. For
example, it might be the case that hotel guests would be prohibited from paying accommodation bills in a foreign currency
which would be problematic if the local currency was weak.
Legislation
All local and International legislation should be given careful consideration. It might be the case that local legislation via
various licences or legal requirements favour local hotels.
Demand
The potential demand within Tomorrowland will be linked to the local economy. It is a developing economy and this may
bode well for GHG. However, again the need for reliable information about the size of the market, the extent of competition,
likely future trends etc is of fundamental importance.
Financing
An important decision lies in the availability and associated costs of financing in Tomorrowland which might not have mature
enough capital markets due to its developmental state. Hence GHG might need to finance using alternative currencies.
Note: Other relevant comments would be acceptable.

正确答案：
(ii) Consultation – it may not be possible to hold extensive consultations on specialist issues within a small firm, due to a
lack of specialist professionals. There may be a lack of suitably experienced peers to discuss issues arising on client
engagements. Arrangements with other practices for consultation may be necessary.
Training/Continuing Professional Development (CPD) – resources may not be available, and it is expensive to establish
an in-house training function. External training consortia can be used to provide training/CPD for qualified staff, and
training on non-exam related issues for non-qualified staff.
Review procedures – it may not be possible to hold an independent review of an engagement within the firm due to the
small number of senior and experienced auditors. In this case an external review service may be purchased.
Lack of specialist experience – where special skills are needed within an engagement; the skills may be bought in, for
example, by seconding staff from another practice. Alternatively if work is too specialised for the firm, the work could be
sub-contracted to another practice.
Working papers – the firm may lack resources to establish an in-house set of audit manuals or standard working papers.
In this case documentation can be provided by external firms or professional bodies.

正确答案：
(b) (i) Business risk is defined as a threat which could mean that a business fails to meet an ongoing business objective.
Business risks represent problems which are faced by the management of a business, and these problems should be
identified and assessed for their possible impact on the business.
Financial statement risk is the risk that components of the financial statements could be misstated, through inaccurate
or incomplete recording of transactions or disclosure. Financial statement risks therefore represent potential errors or
deliberate misstatements in the published accounts of a business.
There is usually a direct relationship between business risk and financial statement risk. Generally a business risk, if not
addressed by management, will have an impact on specific components of the financial statements. For example, for
Medix Co, declining demand for metal surgical equipment has been identified as a business risk. An associated financial
statement risk is the potential over-valuation of obsolete inventory.
Sometimes business risks have a more general effect on the financial statements. Weak internal systems and controls
are often identified as a business risk. Inadequacies in systems and controls could lead to errors or misstatements in
any area of the financial statements so auditors would perceive this as a general audit risk factor.
Business risks are often linked to going concern issues, because if a business is failing to meet objectives such as cash
generation, or revenue maximisation, then it may struggle to continue in operational existence. In terms of financial
statement risk, going concern is a very specific issue, and the risk is normally the inadequate disclosure of going concern
problems. In the extreme situation where a business is definitely not a going concern, then the risk is that the financial
statements have been prepared on the wrong basis, as in this case the ‘break up basis’ should be used.
Business risk and financial statement risk concepts can both be used by auditors in order to identify areas of the financial
statements likely to be misstated at the year end. The business risk approach places the auditor ‘in the shoes’ of
management, and therefore provides deeper insight into the operations of the business and generates extensive business
understanding.