Institute of Chartered Accountants in England and Wales (ICAEW) ACA Advanced Level: Strategic Business Management Flashcards

24 sample cards from the Advanced Level: Strategic Business Management deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Identify the main board committees recommended for a listed company and one core duty of each.

   Audit committee (oversee financial reporting, internal controls and the external auditor), Remuneration committee (set director pay aligned to performance), Nomination committee (board composition, succession and appointments), and often a Risk committee (oversee risk management framework).

2. What is the difference between a rules-based and a principles-based approach to corporate governance?

   Rules-based (e.g. US Sarbanes-Oxley) imposes detailed legal requirements with penalties for non-compliance. Principles-based (e.g. UK Code) sets broad principles applied with judgement on a 'comply or explain' basis, offering flexibility but relying on disclosure and investor scrutiny.

3. List the five fundamental principles of the IESBA / ICAEW Code of Ethics.

   Integrity, Objectivity, Professional competence and due care, Confidentiality, and Professional behaviour. These underpin all ethical decision-making by chartered accountants.

4. Name the five categories of threat to compliance with the fundamental ethical principles.

   Self-interest, self-review, advocacy, familiarity, and intimidation threats. Each must be evaluated and reduced to an acceptable level by appropriate safeguards or by declining/withdrawing from the engagement.

5. Define professional scepticism.

   An attitude that includes a questioning mind, alertness to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of evidence. It means not accepting management's assertions at face value.

6. What is the ICAEW/IESBA ethical conflict resolution process when facing an ethical dilemma?

   Gather the relevant facts; identify the ethical issues and principles threatened and the parties affected; consider established internal procedures; evaluate alternative courses of action; consult (internally, professional body, or legal advice if needed); document; and if unresolved, consider withdrawing from the engagement or employment.

7. In sensitivity analysis, how is the sensitivity margin of a variable calculated?

   $$\text{Sensitivity margin} = \frac{NPV}{PV \text{ of the variable}} \times 100\%$$ It shows the percentage change in that single variable that would reduce the project's NPV to zero, isolating the most critical assumptions.

8. What is a key limitation of standard sensitivity analysis, and how does simulation address it?

   Sensitivity analysis flexes only one variable at a time and ignores probabilities and interdependence. Monte Carlo simulation overcomes this by assigning probability distributions to multiple variables and running many iterations to produce a distribution of NPV outcomes.

9. What is the expected value (EV) of an outcome and a limitation of decision-making by EV alone?

   $$EV = \sum p_i x_i$$ the probability-weighted average of outcomes. Limitations: it is a long-run average rarely equal to any single result, it ignores the decision-maker's risk attitude and the spread/skew of outcomes, and probabilities are often subjective.

10. Define a real option and name three common types in investment appraisal.

    A real option is the right, not the obligation, to take a future action on a real (physical) investment, adding value that NPV ignores. Common types: option to delay/defer, option to expand (follow-on), option to abandon, and option to switch/redeploy.

11. What distinguishes relevant costs from irrelevant costs in strategic decision-making?

    Relevant costs are future, incremental cash flows that differ between decision alternatives (including opportunity costs). Irrelevant: sunk costs (already incurred), committed costs, non-cash items like depreciation, and absorbed fixed overheads that do not change with the decision.

12. What is target costing and how is the target cost derived?

    Target costing starts from a market-driven selling price and a required profit margin, then derives the maximum allowable cost: $$\text{Target cost} = \text{Target price} - \text{Required profit}$$ The firm then engineers the product/process to meet this cost; any gap is the cost gap to be closed.

13. Explain life-cycle costing and why it matters for pricing decisions.

    Life-cycle costing accumulates all costs over a product's entire life — R&D, design, production, marketing, distribution and end-of-life — rather than period by period. It supports pricing and product decisions by revealing total profitability, especially where large up-front design and development costs dominate.

14. Compare cost-plus pricing with market-based (demand) pricing.

    Cost-plus adds a mark-up to cost — simple and covers cost, but ignores demand, competitors and customer value. Market/demand-based pricing sets price from what customers will pay and competitive position — captures value and volume effects but requires good market information and may not cover cost.

15. What does Activity-Based Costing (ABC) improve over traditional absorption costing?

    ABC traces overheads to activities and then to products using cost drivers that reflect actual resource consumption, rather than a single volume-based rate. It gives more accurate product/customer costs in complex, overhead-heavy environments, improving pricing and profitability decisions.

16. What are the characteristics of a good performance measure (and what is 'gaming')?

    A good measure is relevant, controllable, aligned to objectives, clearly defined, timely, and balanced (financial and non-financial). 'Gaming' is manipulating a measure to look good without improving underlying performance (e.g. deferring maintenance), a key dysfunctional risk to design out.

17. Distinguish Return on Investment (ROI) from Residual Income (RI) as divisional measures.

    $$ROI = \frac{\text{Controllable profit}}{\text{Controllable investment}}$$ a percentage that can cause managers to reject good projects below the divisional ROI. $$RI = \text{Profit} - (\text{Investment} \times \text{cost of capital})$$ an absolute figure that promotes goal congruence by accepting all projects with positive RI.

18. What is Economic Value Added (EVA) and how is it calculated?

    $$EVA = NOPAT - (WACC \times \text{Invested capital})$$ where NOPAT is net operating profit after tax (adjusted for items like R&D and goodwill). Positive EVA means the business earns above its cost of capital, signalling genuine shareholder value creation.

19. What is the danger of relying solely on short-term financial performance measures?

    They can encourage short-termism — cutting R&D, training, maintenance and marketing to boost current profit at the expense of long-term value. Non-financial leading indicators (quality, customer satisfaction, innovation) are needed to balance the picture, as in the Balanced Scorecard.

20. In data analysis for decisions, distinguish descriptive, predictive and prescriptive analytics.

    Descriptive analytics explains what has happened (reporting, dashboards). Predictive analytics forecasts what is likely to happen (regression, machine learning). Prescriptive analytics recommends what action to take (optimisation, scenario modelling). They form an increasing-value hierarchy of decision support.

21. What are the 'four Vs' often used to characterise big data, and why does data quality matter for MI?

    Volume, Velocity, Variety and Veracity (sometimes Value). Veracity/quality matters because decisions based on inaccurate, incomplete, biased or outdated data ('garbage in, garbage out') lead to poor strategic choices regardless of analytical sophistication.

22. In a simple linear regression forecast $y = a + bx$, what do $a$ and $b$ represent and what is a key reliability indicator?

    $a$ is the intercept (fixed element) and $b$ is the slope (variable element per unit of $x$). The coefficient of determination $r^{2}$ indicates the proportion of variation in $y$ explained by $x$; values near 1 imply a stronger, more reliable relationship for forecasting.

23. When integrating audit, tax and reporting knowledge in a scenario, what is a typical trigger for a deferred tax liability?

    A taxable temporary difference between an asset's carrying amount and its tax base — for example, accelerated tax allowances (capital allowances) exceeding accounting depreciation. Under IAS 12 a deferred tax liability is recognised at the rate expected when the difference reverses, affecting reported profit and distributable reserves.

24. When communicating advice to a client in an SBM scenario, what structure and qualities make a recommendation effective?

    Tailor to the audience and their objectives; state a clear recommendation with reasoned justification linked to the scenario data; present a balanced view of advantages, risks and alternatives; quantify impacts where possible; flag ethical and commercial implications; and use a logical, professional report structure (purpose, analysis, conclusion, recommendation).

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Advanced Level: Strategic Business Management flashcards FAQ