1. FAE 2013 Mock Exam

2. Primary Indicators
Prepare a comprehensive and motivating one page summary of MIL’s mission strategy
Prove that the group do not see the full value of MIL
Prepare an assessment of what impact the possible sale of 30% of MIL may have on the share price of the Mayflower Group
Calculate the impact of the sale of the 30% stake of MIL will have on the group financial statements including journal entries

3. Primary Indicators
Classify the Internal Audit findings and explain your logic for each
Consider the issue with regard to the staff who have a moral dilemma (three step approach; identify the issue; clarify and evaluate; action and review)
Consider the position of the MIL board
Provide advice on which MIS we should go for

4. True economic performance of MIL
PBT per forecast results €600
Reverse the allocation of R&D – there’s a strong argument for reversing all of the €2,100 as we’re told on page 10 that the group don’t do any R&D for MIL
Group administration costs should be allocated based on something like turnover rather than employee numbers as we don’t subcontract out staff costs – therefore add back approx €1,500

5. True economic performance of MIL
Transfer pricing
50% of consulting sales is intercompany priced at VC + 10% (€2,420 *50% * 110*) = €1,331
Total sales = €3,993 meaning that the other half of sales are charged out at (3,993-1,331) €2,662
As a result we’re undercharging the intercompany sales by €1,300

6. Economic value of MIL Profit per management accounts €600
Group R&D €2,100
Administration costs €1,500
Transfer pricing €1,300
True profitability €5,500

7. Impact on the share price of a 30% disposal of MIL
Current market value of MIL (using PE of 8)
€600*.8*8 = €3,840 (pre tax profit 600, tax rate 20%)
Realistic value of MIL (based on AME and a PE of 22);
(€5,500)*.8*22 = €96,800
Current value of MG equity = 400m shares at €1 = €400,000
Take out the €3,840
Increase it by the cash we receive on selling 30% of MIL (30% * 96,800) = €29,040 less 20% CGT = €23,232
Add back the value of the remaining 70% of MIL (96,800*.70) = €67,760
Total = €487,152 (or €1.22 per share)
(error in solution, uses 400 as current earnings instead of 600)

8. Mission Statement
Not excessive in length! (one page summary MAX – as per the case)
Part of a plc
Aim to be leading RCV manufacturer in Europe
Will invest in R&D
Will attract best people
Will invest as necessary
Link with manufacturing
Importance of consulting

9. Internal Audit considerations
Point
Significant
Routine
Urgent
Non urgent
No Disaster Recovery plan in
place x
Automatic reversing journals
are not retrospectively reviewed
FAR does not record purchase invoice number
Reconcile all major supplier statements monthly
GRNI account balances older than one year
Register of Directors
Staff mapping by department
Balances with group companies to be reconciled on
a monthly basis
Misstated bills of materials
Customers payments in advance

10. Accounting for disposal
IFRS 10 – didn’t lose control, continue to consolidate
Based on my earlier valuation (ignoring tax charge) €32,208
Dr Bank (less transaction costs of 200) 32,008
Cr Payables 200
Cr NCI (net asset value * 30%) 900
Cr equity 30,908
No impact on earnings
Transaction costs go to equity
Disclosures re NCI on face of SOCI and SOFP