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Question of judgement

The Case Study examining team explain how they assess the crucial skill of applying judgement

Applying judgement (AJ) is one of the four skills that ACA students must demonstrate. As the table shows, the way in which AJ is assessed changes through the qualification, culminating in the higher skills demanded by the Case Study (CS) – and it is the skill with which CS candidates often have most difficulty.

What is Applying Judgement in the Case Study?

AJ is the link between structuring problems and solutions (SP&S) and conclusions and recommendations (C&R). The examiners are looking to assess your abilities in AJ through various criteria, such as:

  • recognising linkages;
  • prioritising key points;
  • demonstrating professional scepticism, objectivity or an appreciation of bias;
  • evaluating options;
  • using knowledge of ethical codes and professional experience;
  • questioning any assumptions provided or explaining own assumptions.

The AJ columns of the marking key will always include elements of these (though the wording may be adapted to suit the specific scenario). But what do they mean in practice?

Assessed skills Professional Stage
Advanced Stage
Knowledge modules Application modules Technical Integration Case Study
Assessing quality of information Objective testing Specified in simple scenario Specified in complex scenario Underlying requirement within complex scenario
Assessing options and priorities including ethical issues Options given Options included in simple scenario Options included in complex scenario Balanced judgement of priorities and risks in unstructured scenario
Considering other perspectives Not assessed Possible alternative provided Alternative(s) provided Alternatives identified using professional experience

How has AJ been assessed in the requirements in recent CS exams?

CS candidates are given accounts and other (numerical or factual) information, which they must analyse to form conclusions and make recommendations for a client or other audience.

Requirement 1 (R1):

R1 is usually financial statement analysis based on historical financial information, which is assumed to be accurate unless specifically indicated otherwise.

  • In the case of Watchwell ( July 2011), candidates were asked to assess current year performance against the previous year using headline financial information and KPIs.
  • In 4DVD (November 2011), candidates were asked to analyse current year accounts which showed significant losses on disposals of non-current assets.

In both instances candidates were expected to demonstrate their judgement by extending their analysis to consider the implications beyond the specific task.

  • For Watchwell: Rationalising the implications of their analysis of revenue or costs with judicious reference to the KPIs. This included: assessing trends in revenue per hour among key clients; using the accounts to explain changes in payroll expenditure; considering how one (financial) figure might relate to another (non-financial) figure, for example training costs vis-à-vis ‘training days’; or evaluating the impact of contracts inherited from another company.
  • For 4DVD: Considering the results of their analysis on the key areas of revenue, gross profit and EBITDA but also the specific implications of the huge (distorting) losses on disposals. That reflective consideration included questioning whether these losses implied a general under-depreciation; whether the accelerated timing of the disposal had affected receipts; whether profits and remaining assets were overvalued; and whether changing asset values would impact 4DVD’s bank covenants.

In both cases AJ was demonstrated by considering the wider implications of the analysis and the context in which it was performed.

Requirement 2 (R2):

R2 typically comprises financial data analysis using a mixture of financial and non-financial information:

  • In the case of Luvlox ( July 2012), candidates were asked to gauge the financial and operational impact of a fire at one of Luvlox’s three hairdressing salons, using figures from the client’s own market research.
  • In Fluent Speech (November 2012), they were asked to consider a proposal for the client (a language school operator) to reopen a site that had been closed as a result of a possibly erroneous decision.

In both cases, they were expected to perform calculations using the figures provided, but then to query the underlying assumptions and practical implications through professional scepticism – a key tool for any chartered accountant – so as to advise the client on the best way forward. This entailed among other things:

  • For Luvlox: Querying the size and rigour of the survey sample; linking the customer discount being proposed with that offered by another salon owner who had been in a similar situation; identifying whether the two remaining salons could adequately service the work being transferred to them.
  • For Fluent Speech: Considering changes in the competitive or political environment; looking at other location options; questioning the timing of the transaction; quantifying the financial risk involved.

In Luvlox the assumptions were listed in an exhibit, but the request to question them was implied rather than explicit. In Fluent Speech the request to question assumptions was specific, but the assumptions were scattered throughout an exhibit. Identifying and evaluating such assumptions is a critical part of AJ.

Requirement 3 (R3):

R3 generally entails evaluating an extension of the organisation’s activities, a new proposal or course of action, usually with an ethical dimension. This always relates to existing lines of activity and so builds from current operations in line with business strategy, linking advance information and the exam paper.

  • In Luvlox, candidates had to assess an opportunity to open a new salon, subsidised by a product supplier (Indigo). The salon would be in a shopping mall and would contain beauty facilities – features both new to Luvlox.
  • In Fluent Speech, they had to evaluate potential new Brazil-related business opportunities associated with developments by Fluent Speech’s clients across its primary revenue streams.

In both cases, candidates were expected to think about the potential positive financial impact of the new activity (next steps) against the potential business and ethical concerns. This meant:

  • For Luvlox: Gauging the impact of identified ethical issues (sunbeds, non-compete restrictions) by assessing their reputational risk, considering the downsides of the Indigo proposal – such as loss of control, challenging the basis of numerical information supplied by the mall developer (a party with a clear vested interest) and questioning the sketchy facts provided about both Indigo and Sullivan (a supermarket looking to open an in-house salon within the same mall).
  • For Fluent Speech: Considering the potential identified for each of three new or existing clients in each revenue stream, tempered by issues of unknown local Brazilian business practice, concerns over quality of translation work, working in a new area of business (financial services) with questionable business ethics and not having the appropriate linguists to provide the necessary services.

In both instances candidates’ judgement was assessed by their ability to provide a balanced evaluation of the potential development.

Conclusion

In summary, when exercising judgement, you may be:

  • challenging the reasonableness or robustness of assumptions or quality of information;
  • making your own assumptions;
  • choosing between or balancing options;
  • selecting the key issues;
  • dealing with differences in views;
  • assessing weaknesses in decisions; and
  • evaluating ethical issues.

You must be able to stand back and reflect on the underlying analysis they have performed and what it means for the organisation – an essential skill for anyone seeking to become an ICAEW Chartered Accountant. 

New exam resource: if you are preparing for the Case Study, we highly recommend you watch the informative video How to pass the Case Study at icaew.com/examresources

This article originally appeared in the April 2013 edition of VITAL.