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Decision tree shortcomings
– predicting profits so far into the future is hard, prone to error.
– coming up with probabilities is hard, prone to error.
– risk involved in using past experience to predict the future.
– decision tree only gives the mean of the probability distribution – the variance is required for the result to have any real context.
– the discrete probability distribution on which the model is based is unrealistic in the real world.I messed up, I included the initial outlay of 6m/4m in each in each outcome, which I guess isn’t correct.
The high high outcome was the joint probably. I interpret this as if you get one high ie 0.2*6 you are guarenteed to get a high next go ie 1*6 so xP(x) is 7.2. However I then took off the initial 6 so my answer was 1.2 for high high, which is wrong.
I dunno, past papers seem to suggest most of the points are for the discussion rather than the tree itself, I’m trying not to worry about it because I wrote quite a lot so maybe ill pick up marks there
Starting to think my time management might have cost me dear… I left a lot of marks on the table with 2b simply because I did it with 4 minutes left! Did anyone else mention that the loss of the customer means the work in progress should be valued at NRV as it is specialised and probably can’t be resold for more than cost? I did say that the wip was material so hopefully there is a point there at least!
Man I felt OK, not good but ok, yesterday now I’m not sure if I’ll even hit 50. I was so confident going in too, probably the most prepared I had been for any of them.
@dannyw1984 said:
Apparently bananas are banned from exam halls as people have been caught writing answers inside the skin and looking at them during the exam.The ingenuity of this alone deserves a mark. I wonder though, how much could you write in a banana that you would not be capable of rote-memorising in five minutes before the exam?
Hello. Certainly time pressured, I actually managed to do question 1 in 95 minutes, but somehow completely lost my rhythm and had to rush.
Q1a – things I discussed: are additions capex or revex, should interest have been capitalised under ias23, first time consolidating with Nci so risk of mistake, risk of including 12 months of Nci results, no allocation of profit between group and Nci income in income statement, deferred tax asset realisation, new computer system is control risk, deterioration in ratios suggests going concern issue, lack of expert on the audit committee may represent lack of competence so financial statement level risk, should a provision be recognised for the tax case, the use of poor quality tax planners suggests incompetence of management or maybe a fraud risk factor (I decided this wasn’t an external service organisation so I didn’t mention it but now not sure!!!), gain on sale should not be included in p+l as it is an equity transaction, goodwill should probably be impaired due to ratio deterioration
I didn’t mention a load of things, e.g risk that inventory overstated, didn’t talk much about ratios, didn’t mention the product warranty provision, a whole heap of stuff!! Didn’t mention anything about receivables either! A bit annoyed but what can you do.
1b I did UK and I’m sure the question asked to discuss the importance of analytical procedures during planning but it looks above that some people gave examples of procedures… Hoping that was the Int question….. I said something like there are clear relationships between many accounts and balances that the auditor would expect to see, it’s quite clear using analytical procedures if this relationship has broken down so can look there for fraud or errors. Do at planning stage so lots of time to adjust nature timing and extent of audit procedures to match risk etc etc.
1c the tax planning work would be a management and advocacy threat, fairly serious given the fact HMRC were involved. Putting auditor on the board would be self interest and potential intimidation threat.
I messed up 2b, I had 5 mins at the end so just read the first line and winged in. I wrote something about the work in progress being overvalued as it was a specific piece of work for that contract so unlikely to get cost value for it so revalue at NRV… I know the question was going down the line of revrec but I didn’t actually see anything to write about, I saw there had been some cash received but the question said “no other entries have been made” so I sort of ignored it.
