TPE – 2011 ROBOTIC ROUNDABOUTS
Examination in October 2007 – 2½ hrs am, 3 hrs pm. Pass rate 75.4% (79% first time sitters).
TPE – 2011 ROBOTIC ROUNDABOUTS
TPE – 2011 ROBOTIC ROUNDABOUTS/1
It is October Yr 7
You have just returned to the principal office of Galileo & Co, Chartered Accountants, a national UK firm
with ten offices, from a training course on ethics for newly qualified accountants. You are scrolling through
your unread e-mail messages when the telephone rings. It‟s Callisto, your firm‟s Small Business Unit
manager. “Good morning Miho, would you come through to my office? I‟ve got an interesting task for you
You walk into Callisto‟s office and she looks up. “Ah, there you are. Take a seat,” Callisto beckons. “I hope
you learned something from your training course. What I am about to ask you to do means you will have to
use a modicum of common sense in addition to using your technical knowledge.
“Originally, I was due to have a lunchtime meeting later today with two somewhat unusual clients, Alexander
McDonald and Billie Campbell. Both run similar but completely separate unincorporated businesses
operating in the robotics industry, which is a sector about which I have very little knowledge. As I had not
met either of them before the planned meeting, it was my intention to become more acquainted with the
industry and with their files this morning. But, unfortunately, I am required at a hastily rearranged managers‟
meeting in ten minutes time that is likely to last until mid-day. So this is where you come in.”
“Are you aware that I too have had very little experience with the robotics sector?” you chip in, flagging up
“Yes, but don‟t worry. Your CA training is one of the best in the world so I know you will cope with new
challenges outside your experience,” replies Callisto.
“You said that you were originally due to have a meeting with them. Does this mean the meeting has been
cancelled?” you enquire.
“Not exactly,” replies Callisto. “By way of background information, until December Yr 5, Alexander and
Billie both worked as robotic engineers for a UK-based subsidiary of an American automotive company.
The reason for their departures was that Alexander, who held a senior position as a general production
manager, decided he wanted to start his own business importing and selling, via the internet, ready-assembled
robotic arms from China. When Billie heard of his plans she was very interested in joining Alexander as a
partner in the business.
“However, due to their differing personal commitments, Alexander was not so keen to form a partnership
with immediate effect. As a compromise, they decided that Billie would run a completely separate, but
similar business importing ready-assembled robotic hands and after a couple of years they would review the
possibility of working as a partnership. They are at that stage now.
“Yesterday afternoon, just as I was leaving, Alexander and Billie came to my office, unannounced, saying they
needed to speak to me urgently prior to today‟s meeting. They were very flushed because they had been
discussing a potential merger of their businesses, when a number of issues came to light and they wanted my
input. So I stayed to listen.
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“It turns out Billie‟s robotic hand business has expanded faster than she anticipated and she is currently
employing a couple of friends to help her operate the business. According to Billie, her friends are claiming
tax credits and, in order to avoid having the benefits reduced, Billie is paying her friends approximately £500
each per week in cash without any tax or national insurance contributions being deducted. It seems the cash
comes from sales of components which have also been purchased by customers in cash. Seemingly none of
this is being recorded, nor enters the banking system. As far as she is concerned, this is the only way she can
run a profitable business and she stated she has no intention of changing her practices.
“When we discussed the margins of the businesses, Billie put her healthy margins down to using some
components that did not comply strictly with UK electrical standards. She claimed they were adequate for
the job and saw no reason for paying for higher quality than was absolutely necessary. Furthermore, when
the goods are imported to the UK, she has agreed with the supplier that the description of the goods on the
paperwork is slightly different from what the goods actually are. This has the advantage of a lower rate of
import duty being applied to the goods.
“When Alexander heard of this he was astounded. He said that if this was how Billie ran her business he
wanted nothing to do with her. Billie took this badly and tried to defend her action by arguing that if she did
not do this, she could not sell her robotic hands at the price she does and thus would not be in business. In
any event, she claims it is common practice and does not think there is anything wrong with it.
“At this point Billie turned to me and asked for my opinion. All I managed to say was that all businesses
should comply with the law of the land and that I could not condone fraud, whatever the circumstances.
Perhaps I could have chosen my words more carefully, because, at that point, Billie became very angry. She
stood up abruptly, knocking over a chair in the process and started to shout at both Alexander and me. I
must admit I did not understand some of the technical language being hurled at me but I did learn some
interesting uses for robotic arms and hands. Despite my efforts and those of Alexander, Billie stormed out
of the meeting and her parting words were that she never wanted to see Alexander again and that she would
be appointing another firm of accountants to advise her with immediate effect.”
“Wow!” you exclaim. “Who says the life of an accountant is always dull? What happened next?”
“Well, after we had rearranged the furniture, Alexander said that he always had reservations about Billie and
that was why he didn‟t want to form a partnership with her when he first started his business. He still
wanted to meet me today to discuss some issues in connection with the way he has been conducting his
business for the past two years. He also said he has a number of ideas for the future direction of the
business, which he wanted to discuss with me. When I asked for more details he said he would reveal all at
today‟s meeting. With that he apologised for turning up without an appointment, bid me goodnight and
“Where does that leave us in connection with this afternoon‟s meeting?” you ask.
Callisto continues. “It transpires that although the necessary engagement letters are in place, Dione, who is
the engagement partner for both Alexander and Billie and our firm‟s Money Laundering Officer, has met
with them only once, and that was very briefly in June Yr 6. At that point they wanted only to appoint a firm
of accountants and did not want to pay for business advice, so none was given. It was their intention to have
a subsequent meeting but they kept arranging and then cancelling the meeting, on five separate occasions, so
it never took place. At the original meeting they provided notes and details about themselves and their
businesses including a profit forecast. These have not been updated since Yr 6 and were transcribed onto
our computer system for future reference. I have just been browsing through Alexander‟s file and I think
you will find the information useful.”
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Callisto hands you Alexander‟s file with the following information:
Alexander McDonald‟s CV (highlights) (Section 1)
Systems notes (Section 2)
Information about the robotic arm (Section 3)
Press coverage and internet articles of the electronics industry (Section 4)
Forecast profit and loss accounts for Alexander for the three years ending 31 December Yr 8 (Section 5)
“In summary, Alexander operates an internet based business buying and selling ready-assembled robotic
arms. The business is structured such that when a customer places and pays for an order, Alexander places a
back-to-back order, that is the same order, with his principal supplier, who then delivers the assembled arm
directly to the customer. No stock is held. It is quite neat and simple really.”
“It sounds a nice business,” you comment. “But it can‟t be that simple otherwise many others would do the
same, wouldn‟t they?”
“Yes, they would, and do,” replies Callisto. “The trick is to find a niche product to sell. However, all
businesses are exposed to some risk and Alexander‟s will be no different. As you know, I‟m not entirely clear
what the meeting is going to be about. Given the length of time since the business started and the lack of
communication with anyone at the firm, I suspect there may be some tax and accounts preparation issues he
wants to discuss, but I can‟t be sure.
“When I was flicking through his file I noticed there are some obvious weaknesses and gaps in his
accounting system. I think it would be very helpful to both Alexander and me if you would produce a
briefing note commenting on these together with your suggestions on how to improve them. If you could
use the headings: Weakness, Implication and Recommendation, it would assist our reading and
understanding of your comments.
“At the moment my main concern is ensuring I am up to speed on the key issues affecting the robotics
industry and their impact on Alexander‟s business. I would like you to prepare an evaluation of the key
issues by identifying what is relevant and then analysing and explaining them in a suitable format for my
meeting. Do remember I am unlikely to have much time to read it, so ensure it is concise and to the point.
“It would also do no harm to understand the risks involved, especially those directly related to Alexander‟s
business. If you have time, you may want to make a note of any that you think of. In any event, it will aid
your understanding of the client. In my opinion, identifying risks is one of the first stages in being able to
give pro-active advice to clients in the long-term. Also, give some consideration to the disagreement between
Alexander and Billie. This has implications beyond merely the falling out of two individuals.”
In preparation for answering the case study question this afternoon you will find it useful to undertake the
following tasks during the morning session:
Read all the information carefully and note down any points you feel may be significant.
Prepare the evaluation requested by Callisto. This should include an assessment of any matters which
affect the robotics industry and their impact on Alexander‟s business.
Prepare the briefing note commenting on the accounting system as requested by Callisto in the format
of: Weakness, Implication and Recommendation.
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Alexander McDonald’s CV (highlights as provided by Mr McDonald)
Name Alexander McDonald
Marital Status Married ▪ daughter (16) ▪ son (14)
Qualifications 8 GCSEs
3 A Levels
BSc (Hons) ▪ Physics and Electronics, University of St Andrews
MBA, University of Edinburgh
Yr 6 – Present Started an internet-based business selling robotic arms imported from China.
Yr 5 – Yr 5 Appointed as a joint general production manager of a UK based subsidiary of a multi-
national American automotive company, (AAC (UK) Ltd). This involved overseeing the
smooth running of the assembly robots and developing the next generation of Artificially
Intelligent machines capable of increasing the efficiency of the assembly plant.
12 years ago – Yr 4 Assistant manager and then manager of a large defence contractor (plc company with
over 5,000 employees). Responsibilities included the development and testing of missile
guidance systems. This involved managing a department of 40 staff and reporting direct
to board level.
17 years ago –
12 years ago Trainee electronic design engineer with a family-owned company operating in the
educational market. As one of a team of four, was responsible for developing new
training aids for physics and science classes. Further responsibilities included manning a
technical help desk for customers whose training aids developed faults.
Interests Water polo ▪ scuba diving ▪ gardening
Other Current chairman of local scuba diving club
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Systems notes as provided by Alexander McDonald
I set out below notes on my accounting system and the typical processes that take place within the business,
such as they are.
As a result of differing electrical standards throughout the world I only intend to sell to UK customers.
Enquires will come via a number of channels including:
e-mails generated from the website
direct e-mails from other sources
telephone and verbal communication
Details of the enquiry and the response are written onto a paper note and kept in an in-tray for about two
weeks. If no further response is obtained from the potential customer, an e-mail is sent requesting whether
or not they require further information or details. After another week or so the note is destroyed.
1. Website orders
Customers enter details of the order and method of payment into pre-formatted fields on the website
via means of a shopping trolley/cart system. The order details are stored on the server (third party
machine which hosts the website) until accessed by myself by downloading from the website. The
process of downloading involves communicating with the server via an encrypted signal. Upon
receiving instructions the server transmits, again via an encrypted signal, the order details to my
computer where the order is stored as a file in an orders directory.
When required I print off details of the order, including payment details (some orders will have credit
card information). These are placed in an in-tray separate to the enquiries. The server is reviewed for
sales as and when I remember, which on average is approximately every three days.
2. Postal, telephone and other orders
The order details and payment details are recorded on a paper „order form‟ and placed in the
Payment from customers
Goods are not ordered from my supplier until payment from the customer has been received. I accept the
following methods of payment:
Cheques and cash are paid into my personal bank account.
2. Credit card
I have a credit card machine that accepts the major credit and debit cards. Information from the order
forms is manually entered into the machine. This includes security check information such as post
code and address number details. Two receipts are generated, one for the customer and one for my
records. Both receipts have full details of the credit card.
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The customer receipt is forwarded to the customer with an acknowledgement and intimation of the
expected despatch date. My copy is filed with the business bank statements. As most of the customer
payments are received by credit card, at the end of each day when a credit card sale has taken place, a
banking report is produced via the credit card machine. This summarises the amounts transferred into
my business bank account and the summary is filed with the file copies of the individual transactions
that make up the daily banking total. The credit card charges of 2.85% are deducted from my business
bank account seven days following the end of the month in which the transaction took place.
The „order form‟ is updated with the payment details.
3. Electronic receipts
I am able to accept electronic payment transfers via an electronic payment provider called
WorldAlbaBank. About 10% of my customers pay for the goods using this facility. My website has an
icon which directs customers to the secure site that allows customers to pay directly into this account.
When a payment has been received WorldAlbaBank send me an e-mail advising of the amount, date
and payer details. The transaction charge of 3% is deducted from the payment prior to the funds
being lodged in my WorldAlbaBank account. I allow the funds to build up in this account and no
transfer has been made to either of my bank accounts. I refer to this money as my „slush fund‟,
although it has been generated from legitimate sales.
Upon receipt of funds from customers, an order is placed by e-mail with my sole supplier in China.
Details of the customer are provided to enable prompt despatch directly to the customer. The average
time from placement of the order to despatch is five working days.
The supplier invoices me in US dollars and is paid by my personal credit card, details of which are held
by the supplier. Payment is made for each item ordered and is charged to my credit card shortly after
the placing of the order.
Returns are sent to my home where I inspect them. Any refund, less an administration charge of £50
if the goods are not faulty, is made using the same method as the receipt of funds. Any returns
received will be retained for spares. I don‟t expect to receive many, if any returns.
Other accounting records
All purchases of goods are from one supplier and the payments are recorded on my personal credit
Overhead payments such as advertising, web hosting fees etc. are either paid by cheque or by personal
credit card. Where they are paid by cheque the cheque number is written on the invoice and the
invoice filed in a file marked „paid invoices‟. Invoices paid by credit card are stapled to the credit card
statement to which it relates. The entries on the credit card statement are analysed under appropriate
expense headings and the statement and attached invoices are filed in the „paid invoices‟ file.
All cash payments are recorded on and attached to a monthly claim sheet and filed in the „paid
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Information about the robotic arm
The JGCA Model 1 robotic arm is assembled in a factory 50km from Beijing, China. The supplier exports
primarily to the USA and is keen to expand into Europe. Over 1,000 different robotic arm and hand kits are
produced at the factory and it has the capability of producing and supplying one-off arms/kits as required.
JGCA Model 1 Robotic Arm Kit
About the Robotic Arm
The JGCA Model 1 delivers repeatable movement that is both fast and accurate. The robot features:
shoulder, elbow and wrist motion as well as base and wrist rotation. The arm comes with a plastic gripper
but this is not functional and should be replaced with a hand or gripper to suit. The JGCA Model 1 robotic
arm is based on a design that has stood the test of time and has been enhanced with the inclusion of the
latest electronic circuitry (Central Processing Unit). It is an affordable model that is built to last. Everything
needed to operate the robotic arm is supplied with the hardware. This includes the electronics, a PC cable
and the necessary software. The robotic arm is made from tough, durable aluminium that ensures the
structure is very light. The servo brackets are made from galvanised steel. Other parts are custom injection
A Bluetooth wireless transceiver kit is available with appropriate software.
One of the terms and conditions of distributing the robot imposed by the Chinese supplier is that the total
retail selling price in the UK is fixed at £400.
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Press coverage and internet articles of the
Wall Street Innuendo National Telegraphic News
28 September Yr 6 30 May Yr 7
A surge in US crude oil supplies sent oil prices The substantial increase in internet-based retail
below $61 a barrel yesterday. As a result share sites has seen the price of goods fall significantly
prices in the aviation and manufacturing industries in the last quarter, a recent report issued by the
rose strongly. Internet Trade Association claims. The fall has
been most steep in luxury products and
surprisingly, in non-mainstream electrical
products such as robots. It seems the cheap
Rutland Daily Reflection electrical component prices, from the Far East has
1 December Yr 6 encouraged many enthusiasts to start up their own
Shares in the Dunfermline based electronics businesses by importing the components and
components‟ company Dunelecom plc rose after building the robots to order. A quick review of
its managing director said it aims to start sourcing some of the sites showed many are now offering a
its wholesale robotic components from the Far service whereby a bespoke robot is built for a
East. Apparently this move will increase the gross specific purpose, for example, hoovering rooms,
margin by over 3%. preparing fruit and vegetables for cooking and
general household chores.
Some businesses are concentrating on niche
National Telegraphic News markets such as the cleaning industry or the home
14 January Yr 7 help sector. There are now robots available for
Internet sales over the important Christmas nearly all repetitive tasks and the prices are
period increased by more than 40% over the tumbling fast.
corresponding period last year. This is putting
pressure on the High Street stores but is good
news for internet retailers. Perhaps it is a good
time to pick up courier company shares whose Rutland Daily Reflection
market will expand with the increase in internet 7 June Yr 7
sales. Similarly, recycling company shares could Following the verdict in the „robot versus human‟
be in for a boom time recycling all that cardboard case, a lengthy court case drama that has gripped
used to post the internet goods. Remember, you the nation for nearly a year, yesterday the court
read it first in this column. awarded £5 million damages to the family plus
legal costs. The judge said he hoped this would
send a strong signal to the burgeoning business of
Downing Street Press Release
28 February Yr 7 A spokesperson for the insurance company of the
The education minister has praised initiatives by defendant said the award was outrageous and
certain schools to include robotics as an optional wondered if the judge was in fact human. While
course. She fully supports the move citing the they accept the guilty decision of the jury, an
increase in the demand for both domestic and appeal against the award would be lodged
commercial robots. She said “It is good to see an immediately.
innovative development within our schools,
especially in an up and coming area associated The tragic accident occurred last year at a „high-
with manufacturing. Robotics combines tech‟ hotel in Auchertool. One of the elderly
knowledge of electronics and mechanical guests was exiting a lift when a cleaning robot
engineering with a bit of biology and is an bumped into her and sent her tumbling down the
excellent subject to stimulate young minds.” stairs adjacent to the lift. She suffered multiple
injuries and now has to spend the rest of her life
needing round-the-clock treatment.
TPE - 2011 ROBOTIC ROUNDABOUTS/9
A forensic examination of the robot showed that Robotic Weekly
the movement and infrared sensors that detected 24 August Yr 7
motion and heat sources had malfunctioned and The recent explosive growth in portable electronic
that the back up Bumper Skirt system had also multi-media devices has led to the increased
failed. While the components of the sensors were manufacture of Central Processing Unit
found to be operational, a solder joint linking the microprocessor chips (CPUs). This increase has
electrical output from the sensors to the CPU had brought about economies of scale resulting in a
become detached. fall in the price.
The outcome of this case could significantly
reduce the relentless expansion of the use of
robots within environments which bring them
into contact with humans. It is now clear the
courts expect a high standard of duty of care
towards the public by robot manufacturers and
The Hourly Times
1 September Yr 7
The upsurge in activity for investment bankers
Robotic Weekly continues unabated with the news that another US
10 July Yr 7 niche electronic component supply company has
The demand for the recently released interactive been taken over by one of the leading US
robot website based on a popular TV series had manufacturing companies. The increased intra US
proved so popular that the site crashed a number merger activity has been put down to the
of times due to too many users trying to access protectionist policy of the US government. By
the site at the same time. not allowing foreign investors to own more than
Critics who have reviewed the website are 25% of the shares of certain companies, the
unanimous in their opinion. “It is quite simply government has encouraged inefficient working
the best release seen this decade”, quoted Boffin practices to prevail. This in turn has encouraged
Bob, the leading robotic critic. “The ability to US companies seeking to expand to purchase US
upload one‟s own robotic specifications onto the rivals rather than overseas competitors.
site and to test it against any other robot on the
market is just fantastic.”
The Daily Times
30 September Yr 7
Miners Monthly It has been observed that Chinese electronic
21 July Yr 7 manufacturers are growing at an incredibly fast
The price of lightweight metals has been very pace. The increase in the production facilities in
volatile of late. The fluctuations in the price are China is helping to keep prices low. However, the
causing havoc with some manufacturers, Chinese companies are starting to expand globally
especially those whose products have a high with the purchase of overseas electronic
percentage of lightweight metal as their input component distribution companies thus limiting
costs. Larger companies that have treasury the choice of suppliers.
functions can make use of the futures market but
smaller companies often do not have this facility
and are exposed to the price movements.
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Wall Street Innuendo
8 October Yr 7
The pound rose 0.5% against the dollar yesterday.
Financial commentators attributed this to the
recent trend in UK interest rates and increased
The Straits Herald
9 October Yr 7
The Chinese currency, the RMB, rose sharply
against the pound as well as other western
currencies yesterday. Strong economic forecasts
for the Chinese electronics sector, financial sector
and the service sector, ahead of next year‟s
Olympics, fuelled the rise.
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Forecast profit and loss accounts for Alexander for the three years ending 31 December Yr 8 (as
prepared by Alexander in April Yr 6 from anticipated cash receipts and expenditure)
Actuals Forecast Total Forecast Forecast
3 months tos April Yr 6 to Year ending Year ending Year ending
31 Mar Yr 6 31 Dec Yr 6 31 Dec Yr 6 31 Dec Yr 7 31 Dec Yr 8
Sales (units) 15s 160 175 400 800
£s £ £ £ £
Sales (Note 1) 6,000s 64,000 70,000 160,000 320,000
Cost of sales 3,000s 32,000 35,000 80,000 160,000
Gross profit 3,000s 32,000 35,000 80,000 160,000
Website hosting fee 300s - 300 400 500
Website maintenance 100s 300 400 500 500
Website advertising (Note 2) 300s 1,800 2,100 4,000 8,000
Other advertising 1,000s 2,000 3,000 5,000 5,000
Telephone 500s 1,500 2,000 2,000 2,000
Printing and stationery 500s - 500 500 500
Motor expenses (Note 3) 500s 1,500 2,000 2,000 2,000
Travelling/subsistence 5,000s 5,000 10,000 5,000 5,000
Entertaining 1,000s 1,000 2,000 1,000 1,000
Bank charges 180s 1,920 2,100 4,800 9,600
Computer and software (Note 4) 3,000s - 3,000 500 500
Business use of home 150s 450 600 600 600
Sundry 100s 300 400 500 500
Accountancy 300s 900 1,200 1,300 1,400
12,930s 16,670 29,600 28,100 37,100
Profit/(loss) (9,930) 15,330 5,400 51,900 122,900
1. Approximately 25% of the annual sales are made in December.
2. Based on visitor numbers.
3. Based on 40p per mile.
4. Only capital expenditure incurred in the period.