pa 1 exam simulation

ISSUES IN PROFESSIONAL PRACTICE [PA1] EXAM SIMULATION

PA1

For students taking this exam independently, please adhere to the four hour time constraints in order to best gauge your performance compared to your peers when the exam is taken up.

READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.

To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.

Glossary of Assessment Terms

Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer.

Calculate Mathematically determine the amount or number, showing formulas used and steps taken. (Also Compute)

Compare Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned.

Contrast Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between)

Criticize Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons.

Define Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes.

Describe Provide detail on the relevant characteristics, qualities, or events.

Design Create an outcome (e.g., a plan or program) that incorporates the relevant issues and information.

Determine Calculate or formulate a response that considers the relevant qualitative and quantitative factors.

Diagram Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description. (Also Draw)

Discuss This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors.

Evaluate This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient.) Cite authorities. Cite advantages and limitations.

Explain In explanatory answers you must clarify the cause(s), or reasons(s). State the “how” and “why” of the subject. Give reasons for differences of opinions or of results. To explain briefly requires you to state the reasons simply, in a few words.

Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario.

Illustrate Make clear by giving an example, e.g., a figure, diagram or concrete example.

Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it.

Justify Prove or give reasons for decisions or conclusions.

List Present an itemized series or tabulation. Be concise. Point form is often acceptable.

Outline This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details.

Prove Establish that something is true by citing evidence or giving clear logical reasons.

Recommend Propose an appropriate solution or course of action based on an evaluation or analysis of a scenario.

Relate Show how things are connected with each other or how one causes another, correlates with another, or is like another.

Review Examine a subject critically, analyzing and commenting on the important statements to be made about it.

State Clearly provide a position based on an evaluation, e.g., Agree/Disagree, Correct/Incorrect, Yes/No. (Also Indicate)

Summarize Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations.

Trace In narrative form, describe progress, development, or historical events from some point of origin.

Part A: Multiple-choice questions

Note: For multiple-choice questions, select the best answer. Answer each item by giving the number of your choice. Incorrect answers will be marked as zero. Multiple-choice questions must be completed and included in your Word document submission for marking along with the case questions.

Question 1 (50 minutes)

a. John was a self-employed accountant. He died on March 31, 20X8. He has not yet filed returns for 20X6 and 20X7. Which of the following are the due dates for his tax returns for the two years?

1. June 30, 20X8, for year 20X6 and 20X7 2. June 15, 20X7, for year 20X6 and September 30, 20X8, for year 20X7 3. June 15, 20X7, for 20X6 and June 30, 20X8, for 20X7 4. April 30, 20X8, for 20X6 and September 30, 20X8, for 20X7

b. Josh Lucas, the loans director at Eazy Loan Inc., tells his CFO, “I have four very effective and motivated

loan managers on my team. My sales numbers have been increasing each quarter and in spite of the sluggish economy, we are still market leaders in this segment. My concern, however, is the increasing delinquencies in the loans. Our uncollectible loans have increased from 2.4% five years ago to 6.6% per the latest report, and most of these are for loans initiated in the last one year. The quality of the loans has been decreasing. Therefore I would like to include quality as a criterion for the bonus that is part of the compensation package being offered to the loans managers.”

Which of the following criteria would best meet the needs suggested by Josh?

1. Bonus based on total sales for each quarter made by the loans manager with variable percentage bonus based on the borrower’s credit rating less outstanding amounts on delinquent loans

2. Variable rate bonus based on factors such as total loans written, percentage of regular loans, departmental profits, and collection of delinquent loans with an increased percentage for collection on loans that were delinquent for more than one quarter

3. Bonus based on a weighted average of factors such as total loans written, percentage of regular loans, collection costs, and departmental profits

4. Staggered payment of the bonus with 50% paid at the end of the quarter in which the loan is made, 25% at the mid-point of the loan term if the loan is in good standing, and the remaining 25% when the loan is paid in full

Continued…

PA1 Exam Simulation Page 1 of 17

c. It is currently June 2013 and the new CFO of Peninsula Footware (PF) advises you, the Controller, that he wishes to change a couple of accounting policies. The most recent amendments to IAS 32 — Financial Instruments: Presentation policy are not required to be adopted until January 1, 2014, but the CFO wants to implement them at this time. In addition, the CFO proposes that the company switch from straight-line depreciation in accounting for production equipment to a declining balance method, as this better represents how the value of the equipment is utilized in production, and maintenance costs for the equipment increase steadily over time. The Accounting Handbook sets out the conditions under which it is appropriate to change accounting policies. Which of the following describes the most appropriate response to the CFO?

1. None of the accounting policy changes should be implemented without approval from the shareholders.

2. The depreciation policy changes should not be implemented, since this will impact the CCA rates. 3. The financial instrument policy changes should not be adopted until they are required. 4. The suggested accounting policy changes are appropriate under the handbook and should be

implemented.

d. Which of the following is acceptable, according to the Code of Ethical Principles and Rules of Conduct (CEPROC)?

1. A CGA in a public accounting practice also runs an office cleaning business under the name White Glove Care, CGAs in partnership with two non-CGAs.

2. A CGA operating as a freelancer refers clients to other CGAs and obtains commission on such referrals.

3. A CGA lodges a written ethics complaint against his fellow CGA co-worker as soon as he becomes aware of the unethical act.

4. A CGA carries out the compilation agreement of a company where her sister is the accounting manager.

e. Jackson earns $245,000 annually from his proprietorship and expects to use all of the after-tax income to

meet personal obligations. Jackson is considering incorporating the business. With respect to the annual income, which of the following statements is true?

1. Incorporation will create little, if any, tax advantage. 2. Incorporation will create a significant permanent tax advantage because of the small business

deduction. 3. Incorporation will create a significant tax deferral because of the small business deduction. 4. Incorporation will create significant tax savings because of the increased number of available

deductions from income. f. Given below is the capital structure and related costs of Avenue Construction Inc.

Funds Cost Ordinary shares $255,000.00 15% Debt 96,000.00 6% Debt 49,000.00 11%

What is the weighted average cost of Avenue Construction Inc.’s capital?

1. 11.65% 2. 12.15% 3. 12.35% 4. 13.51%

Continued…


g. We Care For Pets is a non-profit animal shelter. The shelter’s objective is to provide short-term shelter and veterinary services for stray dogs and to arrange for adoptions of these dogs once they meet basic health criteria. You, a CGA and external consultant for We Care For Pets, have been asked by the chairperson to provide information to the board that will be used as a basis for soliciting donations.

Which of the following is the best financial measure to produce information that is relevant to prospective donors based on past-year statistics?

1. Report on the number of animals adopted 2. Analysis of number of surgeries handled in-house 3. Cost of care per animal for each month over the past year 4. Listing of number of volunteer hours provided

h. Crunchy Cereals is a medium-sized Canadian food processing company that purchases raw materials from

local suppliers and ships the finished product across Canada. Significant growth coupled with accounting staff turnover has resulted in delays in paying invoices on a timely basis. A few payments from customers have not been processed and several sales transactions have not yet been posted to the financial records. The company is experiencing cash flow issues which have recently become more significant. The new controller has been asked to recommend actions which should be taken to improve the current situation.

Which of the following actions is the most important to implement immediately?

1. Implement a checklist with deadlines to ensure sales transactions are posted by the deadline. 2. Develop an aging system for the receivables to identify how many are older than 30 days. 3. Determine how many payables have not been paid and ensure they are paid immediately. 4. Record all payments received on a daily basis and ensure they are deposited on a timely basis.

i. Mason Uniforms Limited (MUL) produces custom uniforms. For the past 10 years, the majority of its

sales revenue comes from a fixed contract with the government. Production is labour intensive and margins are tight. Workers need specific skills to work on the machinery and it is difficult to find experienced staff. The machinery is financed by a bank loan and MUL must report its debt to equity ratio to the bank every quarter. MUL is implementing a balanced scorecard this year and is looking at four performance measures to use in the scorecard. Which of the following is the best choice for MUL?

1. Net retail profit, sales growth, return on assets, and debt-to-equity ratio. 2. Sales growth, customer retention, staff turnover, and number of days to complete month end. 3. Customer retention, staff turnover, customer percentage of market, and job satisfaction. 4. Gross margin, staff turnover, efficiency of manufacturing process, and customer satisfaction.

j. Claire is a partner in a CGA firm that has been asked to conduct an audit of IRL Inc.’s financial

statements. Which of the following is true?

1. Claire should assume that she has independence of IRL unless a threat to her independence arises. 2. Claire must consider whether there are any threats to her independence before accepting the audit

engagement. 3. If Claire’s firm audited the client last year, this would likely create the appearance of bias and she

would not be seen to be independent by the general public. 4. It would not affect her independence if a family member owned shares in IRL as long as Claire does

not own any shares in the company.

Continued…


k. Premium Health Care is a not-for-profit organization whose mandate is to prevent and reduce workplace injuries, administer payment of benefits for workplace injuries, and promote workplace health and safety practices. The corporation faces pressure from the public to be more accountable for the use of public funds in return-to-work efforts, both from injured workers who want faster claims processing and benefits payment, and from employers who want to reduce or prevent further increases to the premiums assessed.

Which of the following is the best course of action for Premium Health Care’s CEO in assessing accountability for the use of employer premiums and delivering value for money for public funding?

1. The CEO should review the trend in claims duration as measured in days per claim. 2. The CEO should inform the board of directors of pressure from the public at regular board meetings. 3. The CEO should maintain or lower the premiums by cutting administrative costs. 4. The CEO should lower premiums and increase benefits by 2% to workers to keep pace with the cost-

of-living index.

l. Master Manufacturing (MM) purchased a piece of equipment for clean energy generation worth $500,000. Because of this purchase, MM will qualify for a $50,000 investment tax credit. The company ordered the equipment in September 20X6 for delivery by December 15 so that the old equipment could be removed and the new equipment installed before Christmas. Due to a strike at MM’s plant, the equipment was not delivered until January 5. However, as per the commitment made to the equipment supplier, payment in full was made on December 15, 20X6. The old equipment, which cost $325,000, was installed on July 1, 20X2. For accounting purposes, the old equipment was depreciated on a straight-line basis with no expected salvage value at the end of four years. The old equipment is in a separate CCA class; the CCA rate is 50%. UCC at the beginning of 20X6 was $30,469. The company’s fiscal year ends on December 31. Which of the following describes how this purchase will impact MM’s CCA and depreciation?

1. In 20X6, both depreciation and CCA will be higher than the amounts taken in 20X5. 2. In 20X6, both depreciation and CCA will be lower than the amounts taken in 20X5. 3. CCA will be higher in 20X6 than in 20X5, and depreciation will be lower in 20X6 than in 20X5. 4. CCA will be lower in 20X6 than in 20X5, and depreciation will be higher in 20X6 than in 20X5.

m. Distance Support Limited (DSL) is a call centre servicing clients in a variety of industries. Overhead costs

are low since most of the employees work from home. The company has been successful and has strong cash flow with little indebtedness. Many of the calls are of a confidential nature, and DSL has a privacy policy published on its website in which the company commits to maintaining the confidentiality of client information. The new president has recognized the benefit of using a risk management matrix to mitigate enterprise risk. He has asked the office manager to develop a list of risk factors to be included in the risk management matrix. Which of the following is the most critical risk for DSL?

1. Staff claiming ineligible expenses on their work-from-home expense reports 2. Unauthorized phone calls during work hours have been identified 3. Customer information has accidentally been disclosed on the company website 4. Some of the phone lines have not been working properly in the past month

Continued…


n. Distinctive Outerwear Limited (DOL) is a small manufacturing company based in Canada. DOL manufactures woollen outerwear for a small segment of the Canadian market and imports zippers from a company in Germany. Workers manually mix the dyes in order to provide the unique combinations of colors in the wool. This process ensures that no two outerwear pieces look exactly the same. DOL would like to establish a niche market for its uniquely coloured outerwear but is not well known outside of Manitoba. DOL has hired a systems technician to develop a specialised technology system to assist the company in the achievement of its strategic goals.

Which of the following features of the proposed technology system will be the most important for DOL in the short term?

1. The system has a foreign exchange risk-management component. 2. The system provides automated color dye mixing. 3. The system has an online sales and marketing component. 4. The system can be expanded since the business may grow in the future

o. During the audit of Games Play the auditor has become concerned about fraud detection. Which of the

following events would most likely cause the auditor to become concerned that fraud may have occurred?

1. A suggestion from management to rely on its internal control system 2. The retirement of the chair of the audit committee 3. The availability of only photocopies of documents where originals should be available 4. A higher than usual number of errors in the accounts payable procedures

p. Gregory Smith, CGA, is an external auditor who is working on an audit that involves an extensive

recalculation of the value of numerous types of inventory parts for automobiles. He works late at the office and is forced to take his work home to tie up some loose ends. The audit working papers are due first thing the next morning to his team manager. Exhausted, he asks his wife, Maria, a business analyst, to complete the working papers for him that night.

Which of the following best describes your assessment of Gregory’s actions?

1. Gregory has most likely violated CAS only. 2. Gregory has most likely violated CEPROC only. 3. Gregory is not in violation of CEPROC or CAS. 4. Gregory has most likely violated both CEPROC and CAS.

q. Jasmine is a CGA student, and this is her first job with a public accounting firm. On her first audit, she has

been assigned the examination of the office expense account. Jasmine has noticed that monthly payments for $10,000 have been coded to this account. The vendor’s name is Marcy Saunders. Jasmine knows that the office manager’s wife’s name is also Marcy Saunders. When Jasmine questions the office manager about the monthly expenses, the manager becomes very angry and refuses to discuss the payments with Jasmine, telling her that the payments were never questioned in the past and that she should stick to examining “material” entries.

Which of the following is the best course of action for Jasmine to take?

1. Jasmine should consult ethics handbooks to determine what to do next. 2. Jasmine should rely on her own common sense in dealing with the situation. 3. Jasmine should ensure that all actions taken are documented in writing. 4. Jasmine should consult a senior auditor in the firm who has both professional experience and

education.

Continued…


r. Peter Posten, CGA and auditor for Matheson Inc., has scheduled a meeting with the chief financial officer (CFO) during the initial stages of the audit engagement. The CFO informs Peter, “I’m not sure if it’ll help you with your audit, but we made no major capital asset acquisitions during the year.” Which of the following is the best course of action?

1. Peter should review the minutes of the directors’ meetings from the current and previous years. 2. Peter should document his conversation with the CFO to protect the firm against liability in any future

lawsuits. 3. Peter should believe the CFO. As a senior manager, the CFO would know about the client’s

significant transactions. 4. Peter should review the previous year’s audit working papers to determine if capital asset acquisitions

were increasing or decreasing.

s. Eugene is contemplating establishing a new business. Eugene has a net worth in excess of $2 million comprised of personal assets owned jointly with his wife, Franca. Eugene recognizes that his new business entails undertaking significant risk and that there is a relatively high threat of failure. If his concept catches on, the payoff will be enormous. The maximum that Eugene is prepared to lose is his $100,000 initial investment. While Eugene and Franca will both work in the business, Eugene will make all of the business decisions. Because of their diverse and jointly owned investment portfolio, Eugene and Franca want to structure this business to maximize income-splitting possibilities.

Which of the following forms of business organization is the most appropriate to recommend to Eugene?

1. Incorporate the business, and issue a different class of shares to each of Eugene and Franca. 2. Incorporate the business, and issue one class of shares owned 100% by Eugene. 3. Establish a partnership owned by Eugene and Franca. 4. Operate the business as a sole proprietorship owned by Eugene.

t. Super Scissors Ltd. (SSL) is a Canadian-controlled private corporation (CCPC), and management is

planning for future expansion. As part of its long-term planning sessions, management identified the need for significant capital investment in the fall of 20X8 and is considering obtaining additional investors through an initial public offering. Assuming that SSL’s net income levels do not change, if SSL’s plans to become a public company are successful, which of the following will be the effect on the company’s tax liability?

1. Income taxes will increase because SSL will no longer be allowed to use LIFO for accounting purposes.

2. Taxable income will decrease because share issue costs are deductible. 3. Net income will increase because SSL will no longer qualify for the small business deduction. 4. Income taxes will increase because the basic federal tax is greater for public companies than for

private.

u. As controller of Cambridge Inc., a privately held Canadian corporation which conducts some of its business in the U.S., you are considering adopting the International Financial Reporting Standards (IFRS). Cambridge is contemplating an initial public offering in three years’ time. As such, you are aware that Cambridge should adopt a transition plan to adopt IFRS. It is predicted that in the long run IFRS and U.S. GAAP are likely to converge.

If you decide to begin a transition to IFRS now, which of the following will be the least important consideration during the transition phase?

1. Obtain sufficient training and knowledge of IFRS. 2. Identify the key accounting issues. 3. Develop a convergence strategy. 4. Ensure compliance with U.S. GAAP.

Continued…


v. It is January 5, 20X8, and you, a recently designated CGA working as the chief accountant at a small publicly traded music system company, have just started work on year-end duties for 20X7. This morning you received an e-mail from the president of the firm, also a CGA, informing you that the company received a purchase order for installation of a music system and two years’ of after-sales services worth a total of $150,000. Since the purchase order was dated December 21, he requested that you enter it into the books for 20X7. He said he would follow up with hard copies of the invoices.

Which of the following is the best course of action for you to take?

1. Process the journal entries for the current fiscal year (20X8) because the past fiscal year cannot be changed.

2. Process the journal entries for the last fiscal year (20X7) because the president is an experienced accountant.

3. Send an e-mail to the president and request further details of the purchase order, including the split between the music system revenue and after-sales services revenue.

4. Find out whether the music system was delivered prior to year end and the amount of after-sales service revenue included in the purchase order.

w. Valley View Seniors Lodge (VVSL) implemented a new system to provide authorized family members with online access to residents’ billing information, medical data, and activity files. Family members are able to view monthly invoices and medical information online, as well as schedule family visits. VVSL uses the new system to electronically generate invoices for medications and monthly expenses, instead of manual paper-based billing. Which of the following is of greatest concern to VVSL’s auditors?

1. Privacy issues regarding patient medical data 2. Inadequate control and security over the new system database 3. Transition from the paper system to the online billing system 4. Inadequate staff training on the new system

x. In-Home Mobility Care (INHC) sells and rents furniture, fixtures, and supplies to people with mobility

issues or other medical needs. Sales are made in person at the company’s store, online, and by telephone. Many customers peruse the company’s catalogue on its website prior to visiting the store or phoning in their order. Online sales were introduced five years ago; they represented 5% in the first year, 10% in the second year, 15% in year three, 25% in year four, and 50% in the current year, the fifth year of online sales. Payments for online purchases are made with credit cards or by using an online payment service (PAY-ALL). Goods are shipped from the company-owned warehouse nearest the customer within three business days. For hard goods (such as canes, walkers, and lift chairs), customers have 10 days to return the product for a full refund. Soft goods (such as foot cushions, insoles, and personal care products) are non-returnable. Approximately 1% of hard goods are returned for a full refund, although the customers generally order an alternative product. At year-end, the accounts receivable balance is 130% of the balance at the previous year-end.

Which of the following risks should the auditor be alert to the possibility of?

1. Inadequate allowance for sales returns 2. Early revenue recognition 3. The fraudulent reporting of sales 4. Inadequate allowance for doubtful accounts

Continued…


y. On September 3, 20X7, Sebastian received a Notice of Assessment, dated August 28, 20X7, regarding his 20X6 income tax return. Which of the following dates is the latest for Sebastian to file a notice of objection?

1. November 26, 20X7 2. April 30, 20X8 3. December 2, 20X7 4. August 28, 20X8

Part B: Short case analyses Question 2 (50 minutes)

Pierce Pipelines Limited Pierce Pipelines Limited (PPL) is a privately owned construction company located in Saskatchewan that installs pipelines comprised of mid and large diameter pipe. PPL is involved in pipeline projects primarily in Saskatchewan and Manitoba. The company has another department which handles road construction. This department handles the restoration for both the road construction and pipeline contracts, where applicable. Sam Pierce is the owner and President of PPL. He is preparing to bid on a lucrative contract (Exhibit 2-1) to build a natural gas connector pipeline running through northern Saskatchewan and Alberta which has recently been sent out to tender by NW Energy. The portion of the pipeline which runs through northern Alberta will be more difficult to construct since the terrain has many steep slopes and rock outcroppings which impede the progress of the equipment used for construction of the pipeline. Sam has discussed the contract with a business associate, Scott Hamish. Hamish owns and operates a small pipeline company, Merlin Pipelines Limited (MPL), which handles contracts that require either directional drilling or conventional trenching. MPL works on projects from Saskatchewan to British Columbia and has experience in installing pipeline in a wide variety of terrain. Sam has proposed that the two companies combine their workforces to bid on the contract. Each company has an insufficient workforce to manage a contract of this size with such tight deadlines, but together they are in a position to bid on the NW Energy project. Sam and Hamish have contacted a third company to join them to create a joint venture in which each party has joint control over operations. PPL and MPL typically subcontract the welding portion of the work they undertake, but they have determined it would be more profitable and lead to better control over the project if they brought in a third company that specializes in welding. Wellington Welding Incorporated is a small welding company that can handle the welding work that PPL would typically contract out. The joint venture would ensure all the joint venturers have the same focus on the success of the project and would result in more commitment from WWI rather than acting as a subcontractor. It is August 1st, 20X1, and the bid for the contract must be in by mid-September 20X1. The project is scheduled to commence in November 20X1. Sam has had initial discussions with NW Energy and has found out that the successful company in this tender will be a considered for future projects; however if there are any significant problems during the project then this company will not be eligible to submit any tenders for future projects, Sam has discussed the organization of the joint venture with Scott Hamish and Arnie Dixon, president of WWI. There is an expectation that the successful completion of the NW Energy project will enable the joint venture to establish a good reputation and be in a position to bid on upcoming projects in the energy industry. Sam is wondering how PPL’s financial statements will be affected when the joint venture is undertaken.

Continued…


PPL has consistently maintained a good safety record and advertises these statistics on its website. A good safety record attracts customers and enables PPL to better manage related expenses. Sam is aware that WWI has had some issues with safety recently and that there was an accident at one of the welding shops. However, Arnie Dixon has assured Sam that safeguards were being implemented to ensure this does not happen again. PPL will provide the survey crew and the restoration crew for all four stages of the project. The trenching crew and the pipe construction crew for the two stages that take place in Saskatchewan are provided by PPL and MPL provides these crews for the two stages that take place in Alberta. WWI is responsible for providing the welding crew that will work on all four stages. PPL will transfer one accounting clerk to the joint venture payroll. This clerk has been recently hired and previously worked in a not-for-profit organization. She has expressed interest in learning the accounting for the pipeline industry and will be preparing all of the accounting entries for the joint venture. This information will be used by each joint venturer to record their share of the net profit, assets and liabilities. Before PPL and MPL worked together, PPL had issues in the past with another joint venture regarding poor record keeping which resulted in a CRA reassessment. PPL has a debt covenant in place for its existing bank loan and line of credit. PPL will draw on the line of credit to provide some capital for the joint venture. Each of the joint venturers will have rights to the net assets of the joint venture. PPL has some idle equipment it will sell to the joint venture once operations commence. You are Paul Kinsella, CGA, a consultant who works for Amsten and Reagan, CGAs. You have provided consulting services for PPL in the past, and Sam Pierce is confident in your ability to provide useful advice. He has asked you to prepare a report which addresses various implications for PPL of the proposed joint venture. It has been decided that there will a bonus structure in place for the foremen managing each work group. Each foreman has a critical role in ensuring the workgroups are on schedule since Sam and the other two presidents will not be on site to monitor the progress of the work. Sam has asked you for some direction on an effective bonus. He noted that the bonus can be paid out at specific time frames or can be paid in one piece at the end of the project. The joint venture will invest in an information technology system to assist in its management of the pipeline project. Since there are three companies involved, control over activities and shared knowledge will be important. PPL will be responsible for selecting and implementing the information technology system. Sam has asked you to provide your comments on what information should be tracked in this system. Sam requests that you used the information provided to prepare a contractual agreement that lays out the details of control of the joint venture. As the largest stakeholder in the joint venture, PPL has taken responsibility for managing all key documentation required to establish the joint venture partnership. It is expected that the joint venture will have an August 31st fiscal year end. PPL prepares its financial statements in accordance with IFRS and its fiscal year end is December 20X1. Sam has noted that PPL’s auditors will be on site for preliminary audit planning in mid-December. He is concerned that PPL’s involvement in the new joint venture will increase the audit work and result in significantly higher audit fees. Sam has asked you to provide a preliminary assessment of some of the audit risks that might be identified by the audit firm so that he is better prepared for any discussions with the auditors.

Continued…


Exhibit 2-1 Tender requirements for NW Energy Pipeline Project #S15687 Extract from delivery schedule

Reference Pipeline length Site Completion Date Stage 1 12,000 meters NW Saskatchewan area 1A March, 20X2 Stage 2 35,510 meters NW Saskatchewan area 1B October, 20X2 Stage 3 24,200 meters NE Alberta April, 20X3 Stage 4 5,880 meters NW Alberta June, 20X3

Extract from terms and conditions Payment: Upon completion of each stage, the applicable segment of the contract payment due will be paid within 15 days. Penalties: If the completion date is not met for any of the 4 stages, there will be a 10% penalty levied for each day of the delay, to a maximum of 50% of the payment for that stage. Restoration work: The restoration of each site is to be completed within 1 month of each stage. Working conditions: All work sites must be in compliance with the Worker Safety Standards Act. Required Prepare a report for Sam Pierce (approximately 1,000 to 1,100 words) that addresses various aspects of the proposal to engage in a joint venture (JV) with two other joint venturers and the impact on the upcoming PPL audit. Note: use the accounting standards effective in 2013.

Question 3 (50 minutes)

Swanson Storage Solutions Ltd.

Swanson Storage Solutions Ltd. (Swanson) is a private Canadian corporation based in Woodstock, Ontario, that manufactures bookcases and storage cabinets. Swanson sells most of its product to retailers across Canada and also operates a small outlet store in Woodstock where it sells leftover stock that has not been sold to the retailers. During its 10-year history, the company has grown substantially, gaining many new customers each year as well as maintaining a base of existing customers. The company has provided a high standard of living for its owner, Ricardo Sequeira. Ricardo believes it is important to also reward his employees who have contributed to the success of his company, and he pays them a generous bonus based on gross margin on all products sold. Ricardo has a longstanding friendship with the owner of Barcelona Disenos S.A. (BD), a Spanish furniture design and manufacturing company based in Barcelona, Spain. BD has built a reputation in Spain for its intricately carved furniture and Ricardo recognized that there is a market for this furniture in Canada. During a period of considerable economic uncertainty, Ricardo entered into negotiations with the owner and completed the purchase of BD on January 1, 20X4. BD will maintain its retail customers in Spain and will ship approximately 50% of its production to Swanson.

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The first furniture shipment from BD arrived in late January and has already been delivered to local retailers. Ricardo was initially concerned about the foreign currency implications since there have been significant fluctuations in the past two months. He decided to minimize the risk by importing the furniture from BD at a price slightly below cost, noting that the lower cost would offset any increases in exchange rate. He is not concerned about the impact on profit for BD since he owns both companies. However, corporate taxes are higher in Spain. In previous years, Ricardo engaged a small audit firm to carry out a review engagement, as required by the bank that provides the mortgage and term loans. The acquisition of BD was financed with a long-term loan, which requires audited financial statements as one of the conditions of the loan. Ricardo has contacted the audit and accounting firm, Abbott and Associates, to conduct this audit. Swanson complies with the Accounting Standards for Private Enterprises (ASPE). Aaron Ramsden, CGA, an audit manager with Abbott and Associates, began a preliminary review and analysis of selected statistics and accounts of Swanson Storage Solutions Ltd. Some audit work had been performed on the opening balances to obtain sufficient assurance they were not misstated. Aaron completed a preliminary review and analysis of Swanson’s financial ratios for 20X3 and 20X2. He had obtained some industry data from Swanson to compare to four years of Swanson’s financial ratios (Exhibit 3-1) but did not have time to start this analysis before he became ill and was hospitalized. The Swanson audit was assigned to the audit senior, Dan Doyle, a senior-level CGA student recently hired by the firm from the banking industry. It was expected that Aaron would be in the hospital for at least six weeks and that he would still maintain his role as audit manager on this assignment. Dan completed his work on the preliminary audit plan in late December. He reviewed Aaron’s notes on the analytical review of 20X3 and 20X2 (Exhibit 3-1) and concluded that Dan’s initial analysis provided sufficient audit work. Dan selected two junior staff members of Abbott and Associates to assist him, and began the audit and evidence accumulation for the Swanson file. Within a few days, and with only the two junior staff members to assist him, Dan realized that he would not have sufficient time to complete the audit. He had already conducted preliminary audit procedures on the machine and equipment account balances and decided to restrict subsequent evidence accumulation to Swanson’s accounts receivable and inventory. Dan believed that audit risk was low in the engagement and that, from what he could observe, internal controls were present and appeared to be operating as intended. Dan instructed both assistants to attend the inventory count on December 31. He advised them to ensure that the ending inventory was complete and properly valued. The inventory levels have increased significantly over the past two years, and Swanson has been shipping out the most recently completed product first because of the storage constraints. In auditing Swanson’s accounts receivable, Dan directed one of the assistants to select approximately 10 customer’s names from the hundreds of customers in the accounts receivable subsidiary ledger and send each of them a confirmation request. He instructed the other assistant to ensure that goods shipped in the last few days of the year were recorded in sales. Upon completion of these tests, Dan believed that the identified misstatements were negligible and that the nature, extent, and timing of the testing were sufficient for him to feel comfortable in recommending that an unqualified audit opinion be issued on Swanson’s financial statements. It is February 15, 20X4. You are a CGA and have just been promoted to audit manager with Abbott and Associates. Aaron will not be able to return to work in time to properly supervise Dan or to review the work done on the Swanson audit. He has contacted you and asked you to take over his supervisory duties. As part of his request, he has asked you to review the Swanson file and provide an assessment of the audit work done by Dan. Aaron has also asked whether there is anything else he should know about Dan’s work.


Exhibit 3-1

SWANSON STORAGE SOLUTIONS LIMITED Selected Financial Ratios

Working Paper prepared by Aaron Ramsden

Notes from preliminary analysis of Swanson’s 20X3 and 20X2 financial ratios: The increase in liabilities stems from an increase in short-term loans to finance receivable and inventory increases. There is a decrease in cash and short-term investments from the prior year. Both of these factors have contributed to the deterioration in Swanson’s liquidity ratios. Collection of receivables appears to be taking a longer time than the prior year. Inventory has increased over the prior year, outpacing the growth in sales and could indicate a concern with potential obsolescence. Information provided for prior years and most recent industry ratios:

Industry 20X3 20X2 20X1 20X0 20X2

LiquidityCurrent ratio 1.1 1.2 1.5 1.6 1.8Quick ratio 0.6 0.7 0.8 0.9 0.9

LeverageDebt to equity 0.7 0.7 0.6 0.6 0.5

Activity ratiosAverage collection period (days) 55 50 40 35 42Inventory turnover 2.3 2.4 2.5 2.6 2.5

Profitability ratiosGross margin 12.5% 13.7% 14.5% 14.9% 15.0%Return on total assets 2.4% 3.1% 4.5% 4.7% 5.0%

Required Write a memo (approximately 800 to 1,000 words) to Aaron Ramsden addressing the following items:

a. Analyze and evaluate the work done on the audit by Dan. Inform Aaron whether you agree with Dan’s recommendation regarding the audit report, supporting your response with case facts.

b. Explain any other issues related to Dan’s work and recommend how they should be handled.

c. Provide a preliminary discussion of additional issues that have arisen in 20X3 that have implications for Swanson.

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Part C: Comprehensive case analysis Question 4 (100 minutes)

Small Business Support Centre

It is December 20X9. The Municipality of Markville, Alberta, is undergoing several changes in its operations. As a municipality, it prepares its financial statements in accordance with public sector accounting. Three years ago, the municipality established a department to provide assistance to small businesses in the municipality. This department, officially referred to as the Small Business Department, is staffed with five employees who were hired for their experience in marketing, finance and human resource management. There are many small businesses in the municipality using these services, and the department has struggled to keep up with the demand. In September, the council members voted to spin off this department into a separate not-for-profit legal entity. This entity will be called the Small Business Support Centre (SBSC). The SBSC will be responsible for establishing its own infrastructure, including the implementation of new information technology to track costs and revenues. This system will be used to provide data for the accounting records and to extract information to assist in managing operations effectively and efficiently. Previously, the accounting information was tracked through the municipality accounting system, but it has been determined that the SBSC should be totally independent from the municipal operations. A board of directors has been established, including members of the municipality council, and its first meeting is scheduled for one week from today. The municipality has started preliminary planning for the transfer. All assets currently use by the Small Business Department, including cash on deposit, capital assets such as computers, and any related debt will be transferred from the municipality to the new not-for-profit entity. The municipality has leased a section of vacant land to SBSC and has arranged for a new building to be constructed. The funds for the construction will come from a combination of a grant made by the municipality to SBSC and a mortgage taken out in SBSC’s name. An executive director has been hired and has spent his first month familiarizing himself with the current processes in the Small Business Department. He will be hiring two additional employees to assist with the increase demand, with the expectation that all employees will have a heavy workload in the first year of operations. He does not have any experience in formal planning and will require some assistance in understanding the basic requirements for establishing a budget for the current year. You are Sascha Goolia, a CGA, and you work for a large audit and consulting firm. You have been engaged as an external consultant to oversee the transition of the Small Business Department into a separate not-for-profit entity, and to make recommendations on the format of the financial statements, accounting policies adopted, and information necessary for decision making. You have been advised that SBSC is considered to be a government not-for-profit organization (NFPO). In conjunction with the recommendations you are providing, the chair of the board of directors also would like you to provide a preliminary discussion of the requirements of the information technology system that would support their ongoing needs, along with direction on the physical installation. You have had the opportunity to meet both the chair and the executive director to obtain additional information. In preparation for the construction of the new building, the municipality council has reviewed several proposals for the design of the building. The municipality council could not agree on the concept and changed design firms twice before selecting a final design, incurring costs for each proposal. The final design requires some additional engineering costs to implement two of the design features. The chair noted that all of these costs could all be included in the cost of the construction of the building.

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Current employees of the Small Business Department will become employees of the SBSC. There is some concern on the part of one employee who is nearing retirement, and the executive director has specifically asked you to address the implications of the change in employment. All the employees have been assured that they will retain eligibility for pensions, as well as health and insurance coverage, when they are transferred to SBSC’s payroll. The employees have also been advised that their performance evaluations in their first year with SBSC will be based, in part, on performance measures that are reflective of the mission statement objectives. This will be a change for the employees, since prior performance evaluations have been based on job responsibilities. The performance evaluation templates are still in draft format awaiting your feedback on components that should be considered for inclusion. It is expected that these templates will be used for all annual performance evaluations, and employee ratings on these performance measures will be a factor in determining annual pay increases. The first year of operations will be challenging for employees due to the additional work required to ensure the success of SBSC. Consequently, it has been decided that additional compensation will be paid to employees at the end of the year. This compensation will be based on the number of years of service, including the time they were employed by the municipality. There are several options being considered for this compensation. The choices include a cash bonus, paid days off, or gift certificates which are valid for goods and services at several of the small businesses in the area. The chair has mentioned that these gift certificates are not taxable for the employees so this may be the best choice for the additional compensation. The municipality will provide funding for the memberships which will be provided free of charge to those owners of small business who have recorded a loss on their most recent financial statements. The municipality has provided the criteria for funding, and SBSC will have to provide complete listings of the legal names of the small businesses, copies of the financial statements, which will be reviewed to verify loss position, CRA notice of assessments, and number of memberships provided. The small business owners have given permission for their financial information to be released to the municipality for funding purposes, on the basis that this information is kept confidential. They are concerned that they could lose business if it is known that the business had recorded a net loss. One employee is assigned to review the financial statements and confirm compliance with the criteria for free memberships. The municipality will provide funding for these memberships when it receives the data from SBSC. The chair has indicated that some of the seminar instructors are independent contractors and not employees. The executive director has asked you why this distinction is important for tax purposes (for SBSC and the contractor), and if you could provide a list of factors to consider when making such a distinction. There have been some concerns with a theft of cash involving an employee who was originally scheduled to be transferred to SBSC. Seminar fees are collected as paid, but the deposits are not made until the end of each week. An employee was taking cash out of the collections and then falsifying the records. She entered false names for seminar participants, hiding the missing cash as a discounted fee for members. She also covered up some of the missing cash by noting in the records that the registrant had withdrawn from the seminars. This theft was uncovered when the employee felt guilty and finally admitted to theft. She is no longer employed by the municipality. The chairman is concerned that there could be an opportunity for other employees to take cash. You have obtained some additional notes on revenue and a recent survey of small business owners from your meeting with municipality staff and have been provided with a copy of the draft mission statement for SBSC (Exhibit 4-1).

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Two of the employees who will be transferred to the SBSC have been working on a new project that focuses on the use of social media to promote the services that are available to small businesses. They have arranged to make a presentation to the newly formed board of directors, and you have been asked to provide your comments on this proposal (Exhibit 4-2). The chair has also noted that if the board determines an annual audit is required, it will be asking you to conduct the audit. You will have gained familiarity with SBSC through the consulting work you are currently doing; the board and other stakeholders expects this knowledge will help you conduct an audit at a lower price since there will be less work required. You are aware that there will be additional opportunities for future consulting work with the municipality and with board members’ firms to offset the lower price for future audit work. Exhibit 4-1

Small Business Support Centre — Planning Notes Revenues The membership fees entitle members to unlimited use of the facilities (resource library, support groups, sessions with financial advisors) and a discount rate for seminars. Memberships are provided free of charge to owners of small businesses who have recorded a loss on their most recent financial statements. These members will also receive free access to the seminars. Because these memberships do not result in any revenue, they are not recorded in the accounting records. Non-members can pay the full fee to attend seminars or receive personalized business advice. Seminars are currently offered twice a week and cover a variety of marketing, financial and human resource topics. Seminar fees are set at the beginning of the year based on an estimate of the number of course offerings and the projected enrolment. There is no formal schedule published and the seminar content is dependent on the availability of the instructors. There have been several seminars where there were not enough people registered to cover the cost of the instructor, so the seminar was run at a loss. On occasion, the loss was caused by a higher than anticipated number of members enrolling who were eligible for free seminars. There will be sufficient space in the new location to hold additional seminars subject to the availability of the instructors. Small business survey A survey was recently conducted, asking small business owners what their top priorities are for their business. The results have been ranked in order of importance and the top three priorities relate to financial planning, networking and skills development. The results of the survey will be used as an input in the development of the operating plan for the upcoming year. Draft mission statement A draft mission statement was started by the municipality and has been forwarded to the board for consideration:

We will provide business information, professional guidance and support for small businesses located in the municipality of Markville. We will offer a diverse and affordable range of training and development opportunities in a cost-effective manner to owners and employees of small businesses. We will be known for our professional approach and our friendly service.

The municipality expects SBSC to take these objectives into account when establishing operational procedures and developing training seminars. The original intention behind the spin-off of the Small Business Department was to enable the growth of this service and provide a fully dedicated staff and board of directors to manage the growth. It is expected that SBSC will offer a wide range of seminars, personalized assistance and networking activities on a cost-effective basis so that membership fees could

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be kept low. It was determined that the number of seminars and the type of seminars offered should be expanded to provide more choice for the members. The municipality has recognized that it is important to provide support to the numerous small businesses that exist in the municipality to stimulate the local economy and to assist small businesses in providing a higher level of service to their customers. The new board of directors has been asked to incorporate the objectives in the draft mission statement into the performance measures that will be used for performance evaluations by SBSC. You have been asked to assist in determining the most appropriate performance measures. Exhibit 4-2

Proposal for a Social Media Site Prepared by Jan Lamoureux and Mary Belos

Introduction Many of our members have access to computers or use phones with Internet capability. They use the Internet to gain information and to communicate with other people. A social media site that allows our members to post comments about their experiences and connect with other members would provide us with free publicity and raise our profile in the community. Our members tell us that they are interested in knowing what services we offer small businesses. Objectives • Gain new members through connections with existing members. • Publish schedules of seminars that are updated on a timely basis. • Offer new seminars based on feedback received on the social media site. • Promote the extent of assistance that is offered to small businesses including financial seminars and

personalized business advice. Content We would feature the benefits of being a member and would describe the services that are offered. We would list the criteria for free memberships to encourage qualified small business owners to join. We would post schedules for available times in each of the seminars that are offered. We can advertise special rates, such as discounted prices for select seminars. We would allow members to post comments about their experiences and upload photos. There will be unrestricted access for members to update comments and upload photos whenever they want to. We can also assign someone to take photos of activities that take place at seminars and other events so that these can be uploaded to the site. We would advertise that we are a good corporate citizen and that we support small businesses. It is important to publicize the good work we do for the community, so we should show how many small businesses we help each month. We will publish the lists of all small businesses who have received free memberships during the month on the site at the end of each month. Members fill out satisfaction surveys on a voluntary basis at the centre; we could make this option available online so that they can fill out the surveys when they have time. We would implement a weekly written column (blog) where we feature the seminars offered and the activities taking place in the centre. We would encourage people to post comments on seminars they have taken or seminars they would like to see offered.

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We can encourage people to sign up for seminars if we promote the benefits of gaining more knowledge to help them operate their businesses more effectively. This can be done through the weekly blog to help increase numbers as part of the discussion groups. We can offer registration for seminars through the messaging system that is available through the social media site. Individuals can send a message listing the seminar they want to sign up for, the name of the registrant, and their credit card number. Making it easier for people to sign up should increase the number of registrants in each seminar and decrease the chance of cancelling any seminar offering because of lack of participants. Required Write a letter to the board of directors (approximately 1,800 to 2,000 words) and include the following:

a. Discuss accounting issues related to the creation of the new not-for-profit organization (NFPO), SBSC, address issues related to SBSC’s employees, and any other relevant issues.

b. Discuss the requirements for the new information technology system and explain relevant information

to track in the new system. c. Comment on the proposal for a social media site and provide suggestions.
