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Swift Transit Solutions Introduction
Swift Transit Solutions (STS) is jointly owned by two Nordland-based conglomerates which manufacture many electronic and electrical products. In its own right, STS is regarded as a world leader in the installation and maintenance of railway transport signaling systems. The company is based in Nordland, where most of its manufacturing units are located, but it has established other plants and marketing facilities in Northlandia, Southlandia, Eastlandia, and Oceania.
Activities of the company
The company specialises in the supply of railway signaling and control systems and employs over 15,000 staff worldwide. In addition to these systems, STS also supplies advanced electronic equipment for safety signaling applications which can be added to systems which have already been installed. Passenger information systems are also manufactured and supplied by the company, which uses advanced technology to provide full displays on railway platforms in stations and on trains.
Over the last two decades, STS has experienced increasing competition within its Nordland and Northlandia markets.
Recent international activities
In addition to carrying out major signaling upgrade work for the Channel Tunnel rail link between Greatlandia and mainland Nordland, STS has recently equipped a high-speed rail line in Eastlandia with electronic equipment. Within Nordland, the company succeeded in winning the tender to build, equip, operate and maintain a rail link between a major Nordic City and its airport.
Research and development
The Chief Executive of STS has stated that the market-oriented approach of the company requires that it should maintain and develop its position as leader in “state of the art” technology. This is facilitated by a large established Research and Development unit which aims to improve product reliability and develop advanced computer software solutions in its business activities, all at lower cost, without compromising quality.
The reduction of life cycle costs and environmental damage, whilst at the same time pursuing technical developments, have been stated by the Chief Executive as key objectives of the company.
Financial position of STS
The latest annual report and financial statements declared that the financial year just ended produced results which were “disappointing”. The Chief Executive indicated that the company had experienced difficult trading conditions and encountered strengthening international competition. Whilst turnover increased, operating profit after tax and overall orders were lower than the previous year. At the year end, the number of orders in the order book was 8% below the level achieved at the previous year end.
Abridged comparative accounting information for the financial years ended 31 December 20X8 and 20X7 are as follows:
20X8
20X7
NC’000
NC’000
Value of orders
3,750
4,600
Turnover
4,400
3,900
Operating profit after taxation
310
320
Shareholders’ equity
935
850
STS had achieved on average a 20% growth in revenue and a 10% increase in operating profit after taxation over the preceding five-year period until the last financial year. The Chairman of one of the parents holding companies has expressed his concern regarding STS’s results in the last financial year. In response, the Chief Executive of STS has outlined his company’s strategy of international acquisition and joint ventures as a means of returning to sustained growth and profitability.
Proposed acquisition
A number of acquisitions and joint venture arrangements have been considered by the Board of STS, aimed at increasing the company’s profile outside Nordland. In particular, the acquisition of a small Westlandian electronics component manufacturer, Westland Transport Components Ltd (WTC) is being actively pursued. If acquired, WTC will provide the basis for STS to increase its range of products in what is considered to be an expanding market with high growth potential.
This acquisition would enable advantage to be taken of the current opportunities for railway development in Westland, notably the Capital City – Port City commuter link, the development of the Western rail line and the Northern City to Border Town section of the national rail network. In addition, WTC would provide a base for further market penetration of other Central Continent countries. WTC is unquoted and owned by a diverse group of shareholders, with family interests in the company controlling 40% of the voting shares.
The directors of STS consider that WTC is under-capitalized. It is currently achieving a 2% return on revenue after interest and tax despite working at full capacity. WTC employs 2,000 people, who possess mixed abilities and skills. Mostly, however, the employees are unskilled or at best very poorly trained. As many as 25% of WTC’s products are rejected by customers because of faults and this proportion has steadily increased over recent years.
The directors of STS are aware that the Westlandian dollar is at risk of ongoing depreciation in value compared with the Nordic Currency, in which STS currently reports. The Westlandian dollar has continually fallen in value compared with the Nordic Currency over a long period and currently stands at an exchange rate of W$6.3 to NC1 whereas a year ago the exchange rate was W$5.3 to NC1.
Required:
(a) Explain the difficulties with which the parent companies may be confronted in assessing STS’s performance.
(b) Recommend and justify what financial and non-financial measures may be applied to assess the performance of STS.
(c) Discuss the strategic objectives and market opportunities available to STS which will be created by its acquisition of WTC.
(d) Discuss the managerial, cultural and financial considerations STS will need to examine before undertaking the acquisition of WTC
(e) Explain the difficulties STS may encounter in objectively assessing the performance of WTC post-acquisition.
It has been suggested that much of the training of management accountants is concerned with cost control whereas the major emphasis should be on cost reduction.
Required:
(a) Distinguish between cost control and cost reduction;
(b) Discuss the proposition contained in the statement.
You are responsible for providing direction to more junior members of the audit department of your firm on technical matters. Several recent recruits have asked for guidance in the area of auditor’s liability. They are keen to understand how an audit firm can reduce its exposure to claims of negligence. They have also heard that in some countries, it is possible to restrict liability by making a liability limitation agreement with an audit client.
Required:
Explain five methods that may be used by an audit firm to reduce exposure to litigation claims.
Kofi Amo and Kwame Osei, who recently qualified as professional accountants, have decided to enter into professional practice under the firm name Amo Osei & Partners. These two were trainee accountants at an audit and assurance firm for three years before qualifying.
For their first engagement, the CEO of Adom Ltd has nominated Amo Osei & Partners for appointment as auditors of his company, though Adom Ltd was a former client of their former firm. Kofi Amo and Kwame Osei were never on the engagement team of Adom Ltd.
As beginners, Kofi Amo and Kwame Osei intend to follow best practice as required by ISOM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Statements or Other Assurance or Related Services. However, they are not clear on the matters they have to consider in their acceptance decision according to the standard. They have approached you, a senior partner of their former firm, for advice. Required:
Advise Kofi Amo and Kwame Osei on the matters they may have to consider in relation to the acceptance decision on their nomination.
Set out possible examples of documentary evidence which should indicate that the auditor has adhered to ISA 220 (Revised) Quality Management for an Audit of Financial Statements.
