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正确答案：
(b) An illustration of each of the problems using the data from the Battamould division/TRG scenario is as follows:
Meeting only the lowest targets
– In the scenario, the budgeted variable cost of $200 per tonne has been agreed. There is no specific incentive for the
Bettamould division to try to achieve a better level of performance.
Using more resources than necessary
– In the scenario, the current budget allows for 5% machine idle time. There is evidence that a move to outsourcing
machine maintenance from a specialist company could help reduce idle time levels and permit annual output in excess
of 100,000 tonnes.
Making the bonus – whatever it takes
– At present, the only sanction/incentive is to achieve 100,000 tonnes of output. There is no mention of any sanction for
example, if processing losses (and hence costs) rise to 20% of material inputs.
Competing against other divisions, business units and departments
– At present, the Bettamould division sources its materials from chosen suppliers who have been used for some years.
There is evidence that materials of equal specification could be sourced for 40% of the annual requirement from another
TRG division which has spare capacity. Why has this not been investigated?
Ensuring that what is in the budget is spent
– In the Bettamould scenario, there is a fixed cost budget allowance of $50,000,000. We are told in the question that
salaries of all employees and management are paid on a fixed salary basis. Bettamould’s management will not want a
reduction in the fixed budget allowance, since this could lead to the need to reduce the number of employees, which
they may see as having a detrimental effect on the ability of the division to meet its annual budget output target of
100,000 tonnes.
Providing inaccurate forecasts
– In the scenario there may have been deliberate efforts to increase the agreed budget level of aspects of measures and
costs. For example, by putting forward the argument that the budget requirement of 15% processing losses is acceptable
because of the likelihood that ageing machinery will be less effective in the coming budget period.
Meeting the target but not beating it
– In the scenario the bonus of 5% of salary is payable as long as the 100,000 tonnes of output is achieved. This does
not require that actual results will show any other aspects of the budget being improved upon. For example there is no
need to consider a reduction in the current level of quality checks (25% of daily throughput) to the 10% level that current
evidence suggests is achieved by competitor companies. The current budget agreement allows the Bettamould division
to transfer its output to market based profit centres at $200 + $500 = $700 per tonne. There is no specified penalty
if costs exceed this target level.
Avoiding risks
– Bettamould has not yet incorporated the changes listed in note 4 in the question. For example why has the sourcing of
40% of required materials from another TRC division not been quantified and evaluated. It is possible that the division
with spare capacity could supply the material at cost (possibly based on marginal cost) which would be less than
currently paid to a supplier external to TRC. It may be that Bettamould have not pursued this possibility because of risk
factors relating to the quality of the material transferred or its continued availability where the supplying division had an
upturn in the level of more profitable external business.

正确答案：
(c) Non-consolidated entities under common control
■ Horizontal groups of entities under common control were a significant feature of the Enron and Parmalat business
empires.
■ Such business empires increase audit risk as fraud is often disguised through labyrinthine group structures. Hence
auditors need to understand and confirm the economic purpose of entities within business empires (as well as special
purpose entities (SPEs) and non-trading entities).
■ Horizontal groups fall outside the requirement for the preparation of group accounts. It is not only finance that is offbalance
sheet when controlled entities are excluded from consolidated financial statements.
■ In the absence of consolidated financial statements, users of accounts of entities in horizontal groups have to rely on the
disclosure of related party transactions and control relationships for information about transactions and arrangements
with other group entities. Difficulties faced by auditors include:
? failing to detect related party transactions and control relationships;
? not understanding the substance of transactions with entities under common control;
? excessively creative tax planning;
? the implications of transfer pricing (e.g. failure to recognise profits unrealised at the business empire level);
? a lack of access to relevant confidential information held by others;
? relying on representations made in good faith by those whom the auditors believe manage the company when
control rests elsewhere.
■ Audit work is inevitably increased if an auditor is put upon inquiry to investigate dubious transactions and arrangements.
However, the complexity of business empires across multiple jurisdictions with different auditors may deter auditors from
liaising with other auditors (especially where legal or professional confidentiality considerations prevent this).

正确答案：
(c) Non-executive directors
Roles of NEDs
Non-executive directors have four principal roles.
The strategy role recognises that NEDs are full members of the board and thus have the right and responsibility to contribute
to the strategic success of the organisation for the benefit of shareholders. The enterprise must have a clear strategic direction
and NEDs should be able to bring considerable experience from their lives and business experience to bear on ensuring that
chosen strategies are sound. In this role they may challenge any aspect of strategy they see fit and offer advice or input to
help to develop successful strategy.
In the scrutinising or performance role, NEDs are required to hold executive colleagues to account for decisions taken and
company performance. In this respect they are required to represent the shareholders’ interests against the possibility that
agency issues arise to reduce shareholder value.
The risk role involves NEDs ensuring the company has an adequate system of internal controls and systems of risk
management in place. This is often informed by prescribed codes (such as Turnbull in the UK) but some industries, such as
chemicals, have other systems in place, some of which fall under ISO standards. In this role, NEDs should satisfy themselves
on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.
Finally, the ‘people’ role involves NEDs overseeing a range of responsibilities with regard to the management of the executive
members of the board. This typically involves issues on appointments and remuneration, but might also involve contractual
or disciplinary issues and succession planning.
Tutorial note: these four roles are as described in the UK Higgs Report and are also contained in the Combined Code 2003.
Tensions in NED roles in the case
This refers to a potential tension in the loyalties of the NEDs. Although the NED is accountable, through the chairman to the
shareholders and thus must always act in the economic best interests of the shareholders, he or she is also a part of the board
of the company and they may, in some situations, advise discretion. Withholding information might be judged correct because
of strategic considerations or longer-term shareholder interests. In most situations, NEDs will argue for greater transparency,
less concealment and more clarity of how and why a given action will be in the interests of shareholders.
The case of mallerite overestimation places the WM NEDs in a position of some tension. Any instinct to conceal the full extent
of the overestimate of the reserve for the possible protection of the company’s short-term value must be balanced against the
duty to serve longer-term strategic interests and the public interest. Whilst concealment would protect the company’s
reputation and share price in the short term, it would be a duty of the NEDs to point out that WM should observe transparency
as far as possible in its dealing with the shareholders and other capital market participants.

正确答案：