Final Proof

Paper SBL
Strategic Professional – Essentials

Strategic Business
Leader
Marking Insight Mock Exam 2018

SBL ACCA

Time allowed:
4 hours including reading, planning and reflective time.

This question paper is an integrated case study with one section

containing a total of 100 marks and ALL tasks must be completed.

All tasks contain Professional Skills marks which are included in the
marks shown above.

Do NOT open this question paper until instructed by the supervisor.

You must NOT write in your answer booklet until instructed by the
supervisor.
This question paper must not be removed from the examination hall.

The Association of
Chartered Certified
Accountants
MachineShop
MachineShop sells small electrical machines and tools to both trade customers (who use the machines/tools in their
work) and retail customers (who use the machines/tools at home). The company is based entirely in Arboria, a prosperous
industrial country with an established consumer culture.
The company has experienced rapid growth within Arboria and the directors now wish to expand into other countries either
by acquisition or organic growth. As the company has grown, the need to establish formal internal control procedures is
also an issue.
The following exhibits (1–6) provide information relevant to MachineShop:
Exhibit 1: ‘About’ page from MachineShop’s website.
Exhibit 2: Financial information about Machine Shop.
Exhibit 3: Business newspaper article about the 50th store opening.
Exhibit 4: Minutes of a meeting of the board of MachineShop
Exhibit 5: Documentation of inventory control and procurement systems at MachineShop.
Exhibit 6: Information about Fabrique Regle de Garrido (FRG).

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 Strategic Evaluation
The case requirements are as follows:

1 It is March 2018. You are Aspen Spencer, a business analyst in the consultancy division of Moore & Charlton, the
auditors of MachineShop. The board of MachineShop is considering the acquisition of Fabrique Regle de Garrido
(FRG), a company based in Ceeland. As agreed at the recent board meeting (Exhibit 4), Viola Wang, the chief financial
officer (CFO), has requested advice from Moore & Charlton about the acquisition. You have been forwarded an email
sent to Dave Deen, the chairman and chief executive officer (CEO) of MachineShop, by a firm of chartered accountants
in Ceeland which provides some background information about FRG (Exhibit 6).

Required:
Write a report to the board of MachineShop, which evaluates the potential acquisition of FRG and recommends
whether MachineShop should acquire FRG. (20 marks)
Professional skills marks are available for demonstrating scepticism skills in questioning the reasons for the potential
acquisition of FRG. (4 marks)

(24 marks)

2 It is April 2018. You are an audit manager at Moore & Charlton responsible for the audit of MachineShop. Moore &
Charlton have been asked by Viola Wang, MachineShop’s CFO, for advice on whether it would be appropriate for an
internal audit function to be set up.
Internal Audit Function - ensure Internal Control System is adhered to

Required:
Prepare a briefing note to the finance director of MachineShop which makes the case for setting up an internal
audit function. (12 marks)
Professional skills marks are available for demonstrating commercial acumen skills in showing the contribution that
internal audit could make. (4 marks)

(16 marks)

3 It is April 2018. You are an IT consultant at Moore & Charlton. Following the board meeting at which Mr Butcher, the
director of operations, first mentioned the greater use of IT, your firm has been asked by the board of MachineShop to
advise on the use of big data and the use of IT in the procurement process.

Required:
(a) Prepare two presentation slides, with accompanying notes which explain the meaning of big data and how it
could be adopted at MachineShop. (8 marks)
Professional skills marks are available for demonstrating communication skills in clarifying complex issues and
conveying relevant information in an appropriate tone. (2 marks)

(b) Write a briefing paper to the board of MachineShop which evaluates the potential application of e-procurement
at MachineShop. (10 marks)
Professional skills marks are available for demonstrating evaluation skills in considering the implications of
e-procurement to MachineShop. (2 marks)

(22 marks)

3 [P.T.O.
4 It is now May 2018. You are a business analyst at Moore & Charlton. Viola Wang has contacted you to thank you
for your report of April 2018 concerning the acquisition of FRG. In preparation for the next board meeting, where the
acquisition will be discussed, she would like your advice on how the acquisition of FRG should be financed. Ms Wang
has asked you to assume that a price of $5 million would be paid to acquire FRG. MachineShop could issue bonds
on the debt market of Arboria. It is estimated that the yield required on such bonds would be 7%. Alternatively, the
company could issue new share capital to Arboria Capital, a venture capitalist operating in Arboria. One million shares
would be issued to the venture capitalist at $5 per share.

Required:
Write a report to Viola Wang which evaluates whether the acquisition of FRG should be financed by an issue of
bonds or an issue of 1 million shares to a venture capitalist at a price of $5 per share. (12 marks)
Professional skills marks are available for demonstrating analysis skills in assessing the two methods of financing.
(4 marks)

(16 marks)

5 It is now June 2018. You are an audit partner at Moore & Charlton, responsible for the audit of MachineShop. You have
developed a good working relationship with Dave Deen.
Dave has just told you, in confidence, that he would like to spend less time managing the day-to-day operations to
pursue other interests. He is thinking of appointing a new CEO from outside MachineShop to take over his operational
responsibilities and would like your opinion on whether it would be a good idea for him to stay on as chairman. He
would also like your views on the desirable qualities of a new CEO.

Required: Corporate Governance - technical knowledge - separation of role

as Chairman and CEO
Write a letter to Dave Deen which:
(a) Discusses the advantages and disadvantages of Dave Deen staying on as chairman after a new CEO has been
appointed from outside Machine Shop. (8 marks)
Professional skills marks are available for evaluation skills for assessing the role of Dave Deen as chairman.
(2 marks)

(b) Explains the qualities which a new chief executive of MachineShop should possess. (10 marks)
Professional skills marks are available for commercial acumen skills in assessing the desirable qualities of a
CEO for MachineShop. (2 marks)

Qualities of CEO (22 marks)

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Exhibit 1

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MachineShop
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About MachineShop
Our mission is ‘empowering homeowners to do it themselves!’
We are Arboria’s leading retailer of electrical machines and tools for home improvement. We sell a range of tools for
both trade professionals and retail customers who need tools for maintaining their own homes
We now have 50 stores across Arboria and continue to open new ones.
We also provide after service support for all products bought from us, through our wholly owned subsidiary EngSup.
We are owned and managed by the people who started MachineShop’s first store 15 years ago. We pride ourselves
in continuing to give customers the same personal service as when we opened our first store. We may have grown
into a big company, but we remain a small company at heart.

5 [P.T.O.
Exhibit 2: Financial information for MachineShop
Summarised consolidated statements of profit or loss
Year ended Year ended
31 December 31 December
2017 2016
$’000 $’000
Revenue 50,000 39,000
Cost of sales (36,000 ) (28,080 )
––––––– –––––––
Gross profit 14,000 10,920
Distribution costs (4,000 ) (3,000 )
Administrative expenses (2,000 ) (2,000 )
––––––– –––––––
Operating profit 8,000 6,000
Interest (500 ) (200 )
––––––– –––––––
Profit before tax 7,500 5,800
Tax at 20% (1,875 ) (1,450 )
––––––– –––––––
Profit after tax 5,625 4,350
––––––– –––––––
Capital employed at 31 December 2017
$000
Long-term debt 7,000
Equity 39,000
–––––––
Capital employed 46,000
–––––––
There are 10 million shares in issue with a nominal value of $1.

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Exhibit 3: Article from ‘Business Life’ 11 January 2018

MachineShop, headed by Dave Deen, goes from strength to strength. The company, which sells small electrical
machines and tools, opened its 50th store last week.
MachineShop sells to both trades people and retail customers. It is estimated that 65% of sales are to retail customers.
MachineShop opened its first store 15 years ago. Currently a further two stores are opened every month. The
company has no direct competitors. Most firms offering similar machines only sell them to trades people. In many
respects MachineShop has defined a new market, a consumer market made up of individuals who wish to do their
own home improvements. MachineShop is the only company which, at present, seems to understand the dynamics
of this market.
MachineShop is a private company, still wholly owned by its directors. CEO Dave Deen is well known as one of our
most successful and colourful entrepreneurs. He is proud of how he has grown MachineShop from one store into a
national chain. All directors work full time for the company, and have been with the company since it was founded.
While the company has been successful in its core business, it has not been so successful in its acquisitions. In 2015,
it acquired two companies based in Arboria which still trade as independent companies. The purchase of LogTrans
was prompted by the need for MachineShop to have a dedicated and reliable logistics supplier. The post-acquisition
performance of the company was spoilt by a dispute between Dave Deen and the senior management of LogTrans.
This was due to a personality clash, caused by a different way of doing business. Eventually, the senior management
of LogTrans was removed and replaced by people more aligned with the corporate culture of MachineShop.
EngSup was also acquired in 2015 to provide an enhanced service facility to people who had purchased machines
from MachineShop. Customer feedback showed that many customers were unimpressed by MachineShop’s after-
sales service. EngSup already provided support for many retail electrical products and so MachineShop bought the
company with the intention of using it to provide support for MachineShop’s customers. However, initial feedback
was negative because EngSup’s service engineers provided a poor level of service, coupled with an arrogant approach
to the customer. A retraining scheme, together with selected redundancies, has now addressed these problems.
As the company reaches 50 stores, we wish it luck with the next stage of its development.

7 [P.T.O.
Exhibit 4: Board meeting minutes
Date: March 2018
Members present: Dave Deen (Chairman and CEO), Mike Baldwin (Chief Buyer), Frank Butcher (Director of Operations)
Viola Wang (CFO)
Apologies: None
Absent: None
Proceedings
Meeting called to order at 2.00pm by chairman, Dave Deen
Chairman’s statement
The chairman expressed satisfaction that MachineShop had just opened its 50th store in Arboria. The current pace of new
store openings shows that the company is still serving a large market, where it can continue to prosper.
Mr Deen reminded the meeting that the directors had always agreed on the importance of growing the business to exploit
MachineShop’s knowledge of the home improvements market before the idea is copied within Arboria or elsewhere in
the world. Mr Deen stated that the board has always been particularly keen to explore international markets to build a
worldwide brand. He informed the meeting that he has identified Fabrique Regle de Garrido (FRG), a company in Ceeland,
as a potential acquisition target. FRG sells large machines to trade customers, although it does not currently serve retail
customers. Macro-economic trends suggest that a consumer society is emerging in Ceeland, which is similar to that of
Arboria. He noted that some of MachineShop’s suppliers are located in Ceeland.
Mr Deen has not yet opened negotiations with FRG as he would need the authority of the board to do that. Mr Deen provided
the directors with a copy of a report which he had commissioned from a local accountancy firm in Ceeland which includes
information about FRG.
Mr Deen sees the potential acquisition of FRG as an opportunity to introduce the MachineShop business model into Ceeland.
He fully expects the country to become increasingly similar to Arboria and so it will be suitable for the sort of service and
products which MachineShop offers. He stated that achieving quick, substantial growth through acquisition will give the
company a powerful bargaining position. It will allow MachineShop to develop economies of scale, including purchasing in
bulk to further drive down product prices. This will help erect barriers to potential competition.
Mike Baldwin was enthusiastic about expanding into Ceeland, and congratulated Mr Deen on identifying a potential acquisition
target. Viola Wang suggested that advice be sought from the consulting division of Moore & Charlton, MachineShop’s
auditors, about the potential acquisition of FRG. It was agreed that Viola Wang would engage Moore & Charlton to provide
advice on this acquisition. Ms Wang also stated that additional finance would be required to buy the company as the
company does not have spare cash balances. Debt might be the best option, as MachineShop’s current gearing is way below
the industry average of 60%. However, she would look into the financing once a decision had been made to go ahead with
the acquisition.
Review of operations
Mr Butcher reported that generally the expansion programme had been successful. All new stores had opened on time and
initial sales had been good. This had been helped by successful advertising campaigns.
However, the additional stores had put pressure on logistics. Some stores had experienced stock outs of some popular
products in the period leading up to the December holiday period. The core reason appears to be unexpectedly high demand
for some products, leading to stores requiring more goods than the central warehouse had available, and emergency orders
had to be placed with suppliers.
Mr Butcher said that he believes that the company needs to invest in more sophisticated information technology systems
to improve the procurement and inventory control both at the stores and at the central warehouse. He also said that many
competitors are investing in big data technology to help them react to changes in customer demand more quickly. While
MachineShop does not currently make sales online, the company’s sales processing systems do provide a considerable
amount of data which could be analysed more.
Viola Wang commented that with the high number of stores which the company now operates, it needs to examine its
internal control needs. Although MachineShop is privately owned and therefore not subject to stock market listing rules, the
external auditors have often suggested that the setting up of a formal internal audit function would be beneficial.

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It was agreed that the external auditors would be asked to advise the board on whether it would be worth setting up an
internal audit function, and to review the controls over purchasing and inventory control.
Conclusion of meeting
There being no further business, the meeting ended.

9 [P.T.O.
Exhibit 5
The following notes were extracted from the audit working papers produced by audit staff at Moore & Charlton.
Inventory control and procurement systems at MachineShop
All stores stock around 10,000 different product lines. The inventory levels for each store are determined in advance by the
purchasing department which is located at head office.
Each store operates a computerised inventory control system. When goods arrive at the store, the receiving department clerk
scans the barcodes on the products, which updates the inventory records automatically. When customers buy products, the
point of sale system at the checkout automatically updates the inventory records.
Each product line has a re-order level and a re-order quantity. Twice weekly, the inventory control system produces a report
showing product lines which have reached their re-order level. It also automatically generates a purchase requisition which
is sent to MachineShop’s central warehouse, requesting replenishment of all product lines which have reached their re-order
quantity. Each store manager has the authority to amend this purchase requisition if they wish, but can only remove items
from the requisition; items cannot be added.
Stores are required to perform physical inventory counts on a continuous basis. The counts are planned to ensure that all
product lines are counted at least twice a year. Physical counts are compared to inventory quantities per the computerised
inventory control system. Any discrepancies are then recorded in the inventory control system.
The central warehouse also operates a computerised inventory control system and aims to hold sufficient inventory to meet
demand for the next two weeks. Each week, purchase orders are placed with suppliers to replace all inventory which has
been delivered to the stores that week.
When the purchase requisitions are received from the stores, warehouse staff check that there is sufficient inventory, and
the goods are taken to the despatch area ready for delivery to the store the following day. Deliveries to all stores occur twice
a week.
If the central warehouse does not have sufficient inventory to satisfy a particular purchase requisition, an emergency order
is placed with the supplier. Suppliers deliver to the warehouse the next working day and goods are then sent to the store in
the subsequent delivery. Suppliers generally charge a 10% premium for emergency orders.

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Exhibit 6

From: Deen, Dave Sent: Wed 14/03/2018 13:54

To: Spencer, Aspen
Subject: RE: Fabrique Regle de Garrido (FRG)
Good afternoon Aspen
As promised, please find below some background information on FRG that has been provided to us by Smith & Patel,
Chartered Accountants in Ceeland.
Best regards
Dave

From: Smith & Patel

To: Deen, Dave
Subject: Fabrique Regle de Garrido (FRG)
Dear Mr Deen
As requested, here is some background information about Fabrique Regle de Garrido (FRG).
FRG currently has 30 depots in Ceeland supplying large machine tools solely to trade customers. It does not sell
products to retail customers. It has an effective distribution network and a sales team which is experienced in selling
to Ceeland businesses.
FRG is a privately owned company, with 30 shareholders, including a local trade union.
Figure 1: Extracted financial information for FRG
All figures in $000 2017
Revenue 9,000
Cost of sales (7,500 )
––––––
Gross profit 1,500
Other expenses (700 )
Finance costs (300 )
––––––
Profit before tax 500
Income tax expense (100 )
––––––
Profit for the year 400
––––––
Capital employed
Share capital 9,500
Retained profit 400
Long-term loans 2,500
This information is based on financial statements filed with the company registrars in Ceeland and newspaper
articles.

End of Question Paper

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