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Dear Tutor
What is the appropriate answer structure for Risk of Material Misstatement and Business Risk.I have had challenges because the examiners answer is too long to written within the minutes allocated.
How many points should be written for a 12 mark Risk of Misstatements question?is it 6 or 9 or 12.
Below is an extract of Question 1 for December 2012 which is request an answer structure will be derived from
Grohls Co. principal activity remains the production of circuit boards.One of the key materials used in the production is copper wiring,all of which is imported.As a cost cutting measure,in April 20×2 a contract with new overseas supplier was signed and all of the company s copper wiring is now supplied under this contract.Purchases are denominated in a foreign currency but the company doesnt use forward exchange contracts in relation to its imports of copper wiring
Generally, for 12 marks, you need 12 separate, relevant, markable points
‘I have had challenges because the examiners answer is too long to written within the minutes allocated’
Why are you even bothering to hope to emulate the examiner’s answers? There’s NO WAY that you’re going to get anywhere near them – neither in terms of length nor in terms of content quality.
Accept it! It’s not going to happen
You’re looking for 12 sentences, 2 – 3 lines each, each one of them containing ONE markable point
If that’s 6 separate ideas with an explanation (identify and explain) or
4 separate ideas (identify, explain and illustrate) or even
3 separate ideas with fuller comments about those 3 …
… it doesn’t matter.
So long as you have 12 separate, relevant, markable points!
the scenario is rather brief but immediately springing to my mind are risks associated with:
– supply chain break down
– foreign currency exposure risk
– lack of risk awareness with no forward exchange contracts
The supply chain break down can be further sub-divided into:
– actions beyond our control:
– strikes at the copper mines
– inventory shortages
– too heavy reliance on a single supplier
– inability to source alternative supplies if the existing supplier should let us down
– industrial action anywhere along the route from supplier to Grohls
– risk of variable quality (does copper wire have variable quality?)– within our control:
– excessive inventory holding tying up resources
– resultant strain on liquidityRe foreign currency exposure risk
– within our control:
– negotiate contracts at fixed rates of exchange
– hold sufficient inventory to see us through seasonal peaks and troughs
– more effective use of forward exchange contractsThat surely must be the basis of a 12 mark answer
Isn’t it?
Thanks so much for taking your time off to respond to my question.
‘You’re looking for 12 sentences, 2 – 3 lines each, each one of them containing ONE markable point’
GOT ITWould this answer guarantee me marks:
RISK OF MATERIAL MISSTATEMENT
In accordance to IAS 21-effects of foreign exchange,income and expenses denominated in foreign currency should be re translated at the average rate
Assets and liabilities should denominated in foreign currency should be re translated at the closing rate.
There is a risk that purchases are misstated because an inappropriate foreign exchange rate has been used for re translation purposes.
Is this answer structure appropriate where?
1.The accounting standard with the all the requirements indicated
2.Stating the effect of breaching the standard with the following words understated or overstated’If YES then thats the reason I over ran on time.
How would you answer the my above answer in 2-3 lines
and what would be your answer(2-3lines) for a business risk with the following points raised above
‘In accordance to IAS 21-effects of foreign exchange,income and expenses denominated in foreign currency should be re translated at the average rate
Why are you wasting time quoting the IAS number and title? There are NO marks for doing this
Assets and liabilities should denominated in foreign currency should be re translated at the closing rate.
There is a risk that purchases are misstated because an inappropriate foreign exchange rate has been used for re translation purposes.’
Your first 2 points – identifying what the IAS directs as appropriate accounting is not answering the question
The question (unspecified in your posts) concerns Risks of Material Misstatement
Your answer COULD have gone straight in and read something like:
‘There is a risk of material misstatement arising from the translation of transactions from foreign currency to the reporting currency
Purchases, like all line items in the statement of profit or loss, should be translated at the rate that obtained on the date of the transaction (an average rate may be used as a close approximation)
If an inappropriate rate has been used, the cost of sales figure could be materially misstated
This could result in a major distortion of the key ratios of gross and net profitability
Similarly, assets and liabilities could be materially misstated on the statement of financial position if they have been translated at any rate other than closing rate as required by the standard’
Without knowing the precise wording of the question, that’s the sort of length of sentence that I would aim for and you may appreciate that instead of making the standard the main part of the story, my attempt has used the risk of material misstatement as the driver and used the standard as back-up
Does that make sense?
Dear Mr Mike,
Refer to badala’s question, please correct me if I understand wrong:
If the question requires us to identify and explain risk of material misstatements (12 marks), then:
– We need 6 ideas (6 risks).
– Each risk, we need to write at least 2-3 sentences (1 for identify, 1-2 for explain).
Hence, 1 mark will be awarded for identify sentence, 1 mark for explain sentences.
– In total, we still write at least 12 sentences to get full marks, 2 sentences for each risk.Dear Mike
my attempt has used the risk of material misstatement as the driver and used the standard as back-up’
‘
GOT IT.There is a risk of material misstatement arising from the translation of transactions from foreign currency to the reporting currency
Purchases, like all line items in the statement of profit or loss, should be translated at the rate that obtained on the date of the transaction (an average rate may be used as a close approximation)
If an inappropriate rate has been used, the cost of sales figure could be materially misstated
This could result in a major distortion of the key ratios of gross and net profitability
Similarly, assets and liabilities could be materially misstated on the statement of financial position if they have been translated at any rate other than closing rate as required by the standard’
How many marks does this answer score?
And I could use your help with the answer structure for a business risk from the above scenario in my first post.
Binh, correct!
Badala – I don’t know the question and I don’t know how many marks are available
You asked me about a hypothetical scenario in some way involving risk of material misstatement.
I’ve given you a brief extract of the way I would have tackled such a question (without knowing precisely what the question asked
Additionally I gave you examples of business risks:
‘– strikes at the copper mines
– inventory shortages
– too heavy reliance on a single supplier
– inability to source alternative supplies if the existing supplier should let us down
– industrial action anywhere along the route from supplier to Grohls
– risk of variable quality (does copper wire have variable quality?)’Each of those could be given as a business risk faced by Grohls. If you’re asked to ‘identify and explain’ you’re now looking for an explanation about these identified risks
You may be asked also as to how Grohls could manage these risks
How do you manage the risk of stock-outs?
How do you manage the risk of too heavy reliance placed on one individual supplier?
How do you ….?
Use your imagination! Put yourself mentally into the boardroom of Grohls – you’re the CEO now.
Now, tell me, how can you inspire your fellow directors to manage the risks that your entity faces
Back to your original question … the answer is still ‘one sentence, one point, one mark’
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