Beruflich Dokumente
Kultur Dokumente
1. Lease
(operating/Financin
g) vs Buy
2. Joint Ventures
3. Financial Instruments
4. Financing
Alternatives
5. Consolidated
Financial
Statements
9. Financial Ratios
6. Goodwill
7. Purchase of shares
8. Purchase of assets
10.Depreciation
12.Contingent Liability
13.AR
17.Receivables
collections
21.Absorption costing
(variable costing)
14.AP
18.Revenue
recognition
22.Pension Plan
(defined benefit
pension plan &
Defined
contribution
pension plan)
26.Capital Dividend
27.Key Performance
Measures
31.Outsourcing/Expendin
g to out-country
35.Budget
28.Balanced Scorecard
Approach
32.Dividend Tax Credit
39.Audited Financial
Statements
43.Salary vs Dividends
40.Pro forma
statements
44.Capital gains
deduction
47.Independence
issue/conflict of
interest
51.Lawsuit
55.Audit report
48.Segregation of
duties
59.Small business
deductions (SBD)
60.Manufacturing &
Processing Profits
Deduction (MPPD)
64.Layoff issue
68.ERP (Enterprise
resource planning
system)
72.Barter (nonmonetary
25.Research &
Development Costs
29.Investment analysis
33.SWOT analysis
30.Investment income
57.Audit risk
34.Employee vs
Independent
Contractor
38.NFPO-Accounting
Method
42.Cash flow and
working capital
management
46.Tax
planning/avoidance/
evasion
50.CRM system
54.Repair or replacing
of equipment
58.Audit committee
62.Fraud issue
66.Off-the-shelf
accounting software
63.Confidentiality issue
67.Custom-built software
69.Continuity
plan/recovery plan
70.Organizations
Responsibility
71.C corporate
Governance
37.NFPO-Accounting
Standards
41.Initial Public
Offering (IPO)
45.Non-residence
49.End-user system
53.Enterprise risks
16.Inventory
20.Retrospective
restatement
24.Bonus plan
36.Foreign currency
transactions
52.Investment Project
56.Review engagement
73.Cumulative Eligible
Capital
(CEC(/Eligible
Capital Expenditure
(ECE)
74.Conversion
Approach
(Parallel/Pilot/Phase
d/Cut-over)
75.IFRS vs ASPE
transactions)
76.Strategy
if all of the benefits and risks of ownership have been transferred from the lessor to the lessee at the end of the lease, orif the title is
transferred at the end of the lease
One of the terms of the agreements is the availability of a bargain purchase option.
The IFRS criteria: apply on a more judgmental basis.
whether the risks and rewards of ownership pass to the lessee;
whether ownership has been transferred through contract or through the presence of a bargain purchase option;
whether all the economic benefits have been transferred through a long lease term.
If the criteria will be met, the lease term covers the major economic life of the asset;
the PV of the minimum lease payments is substantially all the fair value of the leased asset; we will say this lease is a financing lease.
Accounting:
If there is bargain purchase option it is assumed that the asset will last longer than the lease term
the depreciation must match the life of the asset, rather than the lease term
the payments are treated as payments on an instalment loan
the amount paid within the next year will be recorded in current liability;
the difference between the year 1 outstanding balance and the current liability will be recorded as long-term liability in the balance
sheet
interest of payments will be included in long-term financing costs on the income statement
interest and the depreciation on the equipment are the interest expense and depreciation expense related to the leased equipment.
Tax: For tax purposes:
the lease payment would be claimed as a deduction in determining the taxable income
Any lease that is capitalized for accounting purposes because of the length of contract or PV of minimum lease payments will be
considered to be an operating lease for tax purposes even though it is a finance lease for accounting purposes
CRA considers leases to be finance only if title passes.
Disclosure:
an investor or lender would know about the cash flow commitment, which is material
we should provide adequate note disclosure of the lease commitment before we sent it to the bank
my professional obligations require that I should not associate myself with any information that I know to be misleading, either directly
or by omission
to facilitate the determination of the nature of the lease, it would be valuable for me to fully review the contract of the new accounting
software/IT system
2. Joint Ventures
The client (JV) is established separately from the venturers. It will maintain its own accounting records and will need to conform to IFRS
provisions.
jointly controlled entity
proportionate consolidation method,
o both assets and liabilities are put onto the balance sheet in direct proportion to the amount of the investment;
o they're also added to the income statement in the same way.
o This method provides more detailed information, since it breaks out the performance of the joint venture interest into its
component parts.
The equity method
o is a one line account on the balance sheet for reporting the investment in the JV activity.
o Any initial investments by the company are posted to this account.
o At year end, the investors share of revenues is posted to this account less any return of investment received such as dividends
or return of capital investment.
The equity method is a simpler and more straightforward approach of accounting. The client can use either of these two methods. Since only
equity method will be the method acceptable by the new standards IFRS starting from Jan 2013. The JV can early adoption of the equity
method to avoid the transferring in the next year.
Taxation: One of the venturers can be the joint venture operator. it can add JVs GST/HST and payroll accounts to its BN if it wants to
account for the JV activities separate from other activities. The income earned from each participant is taxed on the basis of their own at the
fiscal year end. Income from JV is to be calculated for each participant taxpayer based on the participant taxpayers tax year.
Assets transferred:
o All participants of the joint venture contribute assets, share risks and have mutual liability.
o A joint venture agreement is not a continuing relationship between participants; once the project is completed, the joint venture ceases
to exist.
o JV doesn't own capital assets.
o The venturers retain these assets in their books and claim the CCA on their books. Those contributions are included in the accounting
records of the venturer and recognized in the venturer's financial statements as an investment in the jointly controlled entity.
o The venturers retain the ownership of the assets contributed to JV. They have full control over the contributed assets and
o an interest in JV is not considered as capital property and is taxed on the same basis as the sale of an interest in each of the assets of
the venture.
JVs accounting software:
o As it is a 22-month project, the JV operator can use current accounting system and set up a separate entity in the accounting system
for JV.
o
o
o
o
o
o
o
o
o
JV should have own financial statements and all the revenue, expense, FTE, balance sheet accounts should be set up under its own
entity title.
New entity books of JV should be kept separate in the existing software.
to restrict access so that JV employees can only have accesses to its own books. Operator already has all the information about the IT
vendors and the employees are already trained. It could save costs and implementation time compared to seeking another new vendor
and go through the whole process again.
JV also can have its own accounting system.
The joint venture should adopt a completely different system tailored to the project.
SaaS (Software as a service) could provide limited time subscription to ERP systems over the internet.
JV can purchase a license and end the subscription once the joint venture is done.
We can prepare a cost-benefit analysis to see whether using the same system is more benefit compared to buying a new one.
The security, reliability and how much training involved need to be concerned. IT expert could be recommended to ensure the security.
3. Financial instruments
Held to maturity (HTM):
o this classification is used for an investment with fixed or determinable payments and a fixed maturity date (i.e bond)
o measured at fair value initially and thena at amortized cost
o
If there are any impairment losses, the bonds will have to be written down in income statement.
Held for trading (HFT):
o This Classification is used for financial assets that are purchased to be sold in the near future (less than one year).
o These investments are meant to be traded frequently.
o They are acquired for the purpose of selling or repurchasing in the near term.
o HFT investments are adjusted to fair value at each reporting date-measurement
o Any difference between the book value and fair value is considered a holding gain or loss, and is reported in net income.
o This classification could be used for the speculative stocks and possibly for the blue-chip stocks for less than one year.
Available for sale (AFS):
o This is a catch-all classification.
o If an investment does not fit the HTM or the HFT, then it will fall into the AFS classification.
o AFS investments are measured at fair value at each reporting date-measurement
o Unrealized holding gains and losses are recognized in other comprehensive income (OCI)
o When investment is sold, accumulated OCI balance shall be transferred to income statement
o The classification could be used for the blue-chip stocks, especially if they plan to hold them for longer than one year.
Management intention:
o The key to investment classification is managements intention, whether to hold or to trade the investments.
o Once that is determined, the investments can be classified accordingly.
o Although these are the basic considerations for classifying passive/non-equity investments, there are additional rules after the
investment is set up that need to be considered, such as holding gains and losses, impairment tests, and so forth. We need to
understand managements intention on these investments before reaching a conclusion.
Share
o
o
o
issue costs:
Transactions costs of an equity transaction shall be accounted for as a deduction from equity
Cost of obtaining long term financing and equity financing: legal, accounting, filing fee are set up at financing costs under ITA;
they are deductible as an expense but limited to 1/5 per year.
4. Financing alternatives
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12
o
Interest payments reduce reported earnings;
o the bank will want annual financial statements reviewed by a public accountant.
o The company will be required to use accounting standards ASPE or IFRS;
o Failure to renew could limit future financing options since capital at time of urgent need is usually more expensive;
o
the load will be a current liability, and therefore reduce working capital and current ratio.
Disclosure:
o company should present the liability and equity components separately in its statement of financial position
o
clearly disclose the existence of the financial instrument issued by it, in accordance with ASPE or IFRS.
o Preferred and common shares are disclosed to equity options.
o all legal rights and entitlements of all authorized share classes, any legal limitation on distribution of invested capital or earnings,
o the rights of all shareholders on dissolution or redemption and
o a continuity schedule which shows the opening balances of every account in the equity section of the statement of financial position
with detailed entries that reconcile the changes to each account to balance to the closing balance.
o The debenture and short-term loan are disclosed as liability options.
o
the fair value of each financial liability and the method used to establish fair value;
o description of credit risk liquidity risk, and interest rate risk, as appropriate,
o Objectives, policies, and processes for managing risk and managing capital, including both qualitative and quantitative
elements.
Bank
o
o
o
requirement:
Bank will require current financial statements;
Bank may have minimum requirements for accounting ratios (Such as current ratio, DE ratio, TIE and net income levels).
If the sales reduce and cause lower profits, the debt covenants will be close to being breached. As a result, there are potential cash flow
issues arising from any additional financial decisions.
o The viability of the company depends on adequate cash flow to continue operations. Lower sales and profits may make it necessary to
take steps to increase cash flows. For example by speeding up the pace of payments, however, this strategy introduces a risk of
making us uncompetitive if other competitor firms do not require more or faster payments from customers.
Dividend Policy:
o After the company is listed on the exchange, it will need to pay more attention to dividend policy as such policies may impact share
price.
o Dividend payout ratio and dividends paid per share are valid information to the issue of dividend policy.
o There is solid information on fluctuating dividend payment patterns and fluctuating net income patterns.
o Information on dividends is very relevant to the case as it clearly demonstrates that the residual policy is very stable with no expected
surprises.
o
Further, sudden changes in dividend payment changes may result in markets interpreting these signals in a negative way.
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Tax implications:
o Although consolidated financial statements will be prepared, both companies should continue to file separate entity tax returns for tax
purposes.
o Under IFRS, the companys have to change to the deferred tax method from the taxes payable method, which will give rise to a deferred
tax assets or liability on the statement of financial position.
o The price paid to acquire the shares of Subsidiary would be considered an outlay on account of capital and is not deductible in
computing income for tax purposes.
o The consolidated financial statements need to be adjusted to the cost basis for both companies, for the purposes of preparing the tax
returns and calculating tax payable.
o Parent can claim foreign tax credit. Subsidiary will no longer be eligible for SBD due to control by a public company.
o A review of subsidiarys tax liability accounts would be necessary.
o Subsidiary owner will have a capital gain. It will be included in income as a taxable capital gain at a 50% inclusion rate and the owner
will most likely be considered a qualified small business corporation (QSBC) and eligible for a maximum of 800k capital gains deduction
(400k at 50%) depending on his cumulative net investment loss (CNIL) to date and past claims on the lifetime capital gains deduction.
o Capital gains are taxed only when realized.
o The ITA allows taxpayers to spread the taxation of gains realized on the disposition of property when the proceeds are not received in
whole in the year of the disposition.
o A maximum deferral of the gain can be spread over a five-year period to minimize immediate tax impacts.
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Intercompany transaction:
o The inter-corporate loan and the intercompany transaction should be eliminated.
o Interest expenses paid to bank by Parent is recorded in accounting and deductible for tax purposes.
o Transaction between Parent and Subsidiary needs to be carried out at arms length, in order to comply with the transfer pricing rules
set out by both the Canadian and Foreign country tax authorities.
o The details of the inter-corporate loan need to be disclosed.
o Unrealized profits in ending inventory should be removed in consolidation.
PPE (property, plant and equipment) revaluation:
o Revaluation increase should be recorded as Other Comprehensive Income.
o The Parent should have a separate account for the land and the building. Land is not depreciated.
o The standard permits property to be held at fair value at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses (under the Revaluation Model).
o Revaluations will be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would
be determined using fair value at the end of the reporting period.
o The revaluation gains can be reported in either of the following two ways:
o For the elimination method, accumulated depreciation is eliminated first, then the balance in the Property accounting would
be adjusted upward if required; the amount of the revaluation is recorded in Other Comprehensive Income (OCI) in a Revaluation
Surplus account.
o The proportional method: Allocates the revaluation adjustment between the asset account and the accumulated depreciation
account; The revaluation amount would be recorded in OCI; The increase revaluation amount will reduce the taxes payable due
to the increase in available CCA deductions.
Impairment of assets (replacement):
o An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.
o The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use.
Useful life is either:
o The period of time over which an asset is expected to be used by the entity, or
o the number of production or similar units expected to be obtained from the asset by the entity.
Value in use is
o the PV of the future cash flows expected to be derived from an asset or cash-generating unit.
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The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the
carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for
the asset in prior years.
Solution:
o The loss should be recorded separately for the appropriate amount at carrying value.
o No loss related to the land should be recorded (it will be reused to build the new building);
o The amount received as compensation from the insurance company could only be recorded when the amount was measurable and the
funds would be received;
o This amount should not be used to offset the cost of the new building; It should be recognized in the income statement for the current
year.
o The cost of replacement should be capitalized and amortized as a separate asset: the amount should be recorded as the cost of the
new building and should be amortized over its estimated useful life according the amortization policies of the company.
o Netting of the transaction is not allowed for accounting purposes.
o A note to the financial statement should have been made to describe the loss and the potential amount to be recovered from the
insurance company.
o The loss and the replacement will be seen as two different transactions under the income tax act:
o there are capital gains (adjusted cost base of the asset: rebuilding cost) and Recapture.
o The new building will be placed in a separate class by itself and CCA will be deducted.
o File elections to reduce the amount of the recapture to reduce the amount of the taxable capital gains.
o In that situation, the cost of the new property will be reduced by the amount of CCA already claimed.
Reversal:
o ASPE does not allow for a reversal of an impairment loss if the fair value subsequently increases;
o however IFRS allows the reversal of the original impairment if a change in the external conditions that determined the original
impairment arises.
o Increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying
amount that would have been determined (net of amortization or depreciation) had not impairment loss been recognized for the asset
in prior years.
Cost of replacement of roof:
o would be capitalized under Land and Building.
o IFRS requires that each significant component of an asset be depreciated separately.
o The roof may be considered a s significant component because it needs to be replaced more frequently than the building itself (it has a
different useful life than the building as a whole).
o Its dollar value is significant when compared to the total value of the building.
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So, we should ascertain the useful life of the new roof and depreciate the cost over such useful life.
6. Goodwill
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7. Purchase of shares
Business combination:
o can result from a purchase of the assets of a business entity or a purchase of a majority of the voting shares of another corporation.
o There is no impact on the asset and equity structure of the Parent.
o The acquired company continues to carry its assets and liabilities on its own books.
o The purchaser has acquired control over the assets, but has not acquired the assets themselves.
o IFRS requires the acquisition method to report business combinations.
o An acquirer can obtain controlling share interest by entering into private sale agreements with major shareholders.
Purchase alternatives:
Asset
o
o
o
o
o
o
o
o
purchase alternative:
the financial reporting is simpler. The acquisition method should be used.
Fair values should be used to account for net identifiable assets being acquired.
Excess is reported as goodwill.
Depreciation is recorded on tangible capital assets.
Annual impairment test will be processed for goodwill.
Debt and/or equity are recorded accordingly.
The acquisition requires note disclosure.
Capital asset additions are recorded on tax returno CCA claimed.
o Goodwill is eligible capital property on tax returno 3/4 added to CEC account and 7% of CEC deductible annually.
o Taxation: Subsidiary reports taxable capital gains/losses; terminal losses and/or recapture of CCA;
o
subsidiary is no longer qualifies to claim capital gains deduction.
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8. Purchase of assets
Share
o
o
o
o
o
purchase alternative:
subsidiarys investment is recorded on separate entity financial statements by cost or equity method.
Allocation of purchase price to net assets;
Purchase discrepancy; the investment in private company is eliminated on consolidated statements.
Goodwill is tested annually for impairment.
Tax:
o Two company each files separate corporate income tax return.
o Acquirer is not allowed to deduct price paid for subsidiary shares.
o Due diligence is to search for unrecorded liabilities.
o Subsidiary will realize a capital gain and able to utilize capital gains deduction.
o Tax minimization: Pay dividend from capital dividend account (CDA).
o Defer payment to subsidiary, so he is able to spread capital gain recognition over a 5-year period.
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9. Financial Ratios
Financial ratio: The evaluation of the financial ratios and balance sheet could have included the following points:
Liquidity ratio:
Current ratio, quick ratio [Current ratio=current assets/current liabilities; Quick ratio (Acid test)=(cash + marketable securities + net
receivable)/current liabilities]
Liquidity ratios are used to evaluate the companys ability to meet its short-term obligations.
If liquidity ratios are below the industry average, (Inventory growth has been high, resulting in a lower quick ratio; or the related
balance sheet accounts show that accounts receivable have also grown substantially), the current assets will not be able to cover its
current liabilities and there will be a going concern issue.
If AR increase but sales decrease, it may indicate that it may have a collection problem.
The increase current liabilities is meaning that it is covering some of its expenses using current liabilities such as short-term bank loans
or line of credits and AP.
Leverage and coverage ratio:
Current liabilities / total assets; long-term liabilities/total assets; total liabilities/total assets; total assets/total equity. [Debt-to-equity =
total debt/shareholders equity; Debt-to-assets=total liabilities/total assets; Times-interest-earned = earnings before interest and
income tax / interest charges]
Leverage and coverage ratios are used to analyze the extent to which the company is financed through debt, as well as its ability to
make interest payments and meet debt obligations as they mature.
Total liabilities have been consistently in tandem with increases in the total assets. If they are higher than the industry average, this
means that the company is fairly highly leveraged and that this is something they have to consider when looking for further funding
from banks or loan institutions.
Activity ratio (productivity ratio):
Receivables turnover; average collection period; inventory turnover; sales/total assets[Days sales outstanding = average AR / net credit
sales *365; Inventory turnover = COGS/average inventory; Days sales in inventory = ending inventory/COGS*365; Asset turnover = net
sales/average total assets]
Increase in inventory levels and the low inventory turnover may mean that it is unable to sell its products.
Activity ratios are used to assess the companys ability to efficiently manage its assets to generate sales and collect funds.
Activity ratios show that inventory turnover has been pretty healthy.
However accounts receivable are not being collected per the industry average and, in fact, are taking much longer than the average
collection period. This could account for the increase in the accounts receivable balance.
The sales-to-total asset ratio is healthy compared to the industry average.
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10.
Depreciation
ASPE: taxes payable method may be selected; IFRS: deferred tax method.
Depreciation policy:
(1) Straight-line:
Straight-line depreciation may be a more appropriate choice for several reasons:
o First, it is simple, meeting the benefit/cost constraint;
o Second, it is widely used, and therefore will provide financial statement numbers that are comparable to other wineries.
o You will have additional CCA available for deduction against earnings in calculating your taxable income after the purchase of
the new equipment.
o Leased equipment can deduct the lease payments but not CCA, even if the lease is capitalized.
(2) Double declining balance:
o The profitability will increase each year as the depreciation expense gets smaller.
o I suggest we change our amortization policy moving forward, and starting using the declining balance method of amortization
immediately, which takes a higher amount of amortization in the early years of an asset and less in later years.
o This may increase profits. An analysis using an amortization schedule to look at the current book values would provide more
information to determine how effective this would be.
(3) Units-of-production
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11.
12.
Contingent Liability
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Under IAS 37, a contingent liability is recognized as a provision when the outflow of economic benefits is probable, which is interpreted
as being more likely than not to be required to settle the obligation. This is considered to be a somewhat lower hurdle than likely
under HB 3290.
Reserves No deduction for a reserve, contingent liability or a sinking fund is allowed, except as permitted by the Act
13.Contingent Liability
14.Contingent Liability
Probable and reasonably estimable; the contingent liability is recorded in balance sheet as a liability, otherwise, it should be disclosed in the notes.
Lawsuits:
o if the loss is probable and estimable, contingent liability will be recorded for possible legal dispute and lawsuits that would occur.
o It will increase the DE ratio.
o The contingencies need to be disclosed in the notes to the financial statements.
o Notes that IFRS permits reduced disclosure if it would be severely prejudicial to an entitys position in a dispute with the other party to a
contingent liability.
Subsequent events: from date of balance sheet to date of auditors report; direct impact on FS ->require adjustment (condition present at YE); no direct
impact on FS->note disclosure requires.
Events after the reporting period (subsequent events) events that occur between the end of the reporting period and the date when
the F/S are authorized for issue
Comparison to ASPE
HB 3820, Subsequent Events, is converged with IAS 10 except that IAS 10 requires reporting of subsequent events to the date of
authorization for issue of F/S; whereas HB 3820 goes to date of completion of F/S.
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16.Inventory
Inventory:
if the client switch from LIFO to FIFO inventory methods of cost formulas by IFRS requirement.
If the product prices are increasing, the inventory balance on the balance sheet should increase, as current prices will be used to value inventory.
Cost of goods sold would then decrease, and cause income increase.
Since LIFO is not acceptable for Canadian income tax purposes, this change to FIFO for accounting purposes would have no effect on taxable income
or tax liability.
Since income taxes payable are already calculated based on FIFO as required by the income tax act.
The change in inventory method and its effects should be disclosed in the notes to the financial statements.
Auditors must be reasonably satisfied as to the physical existence and condition of the inventory (sufficient appropriate evidence of the physical
existence and condition of inventory is a GAAS requirement.)
Inventory valuation:
inventories are measured at the lower of cost and net realizable value.
the valuation method used (FIFO) is acceptable by IFRS, but it should match the inventory remaining.
the other method that may be appropriate is weighted average, but appropriateness will depend on the pattern of use of inventory.
IFRS also allows any previous inventory write-downs to be subsequently written up if the value recovers.
Write-off:
Reporting frequency:
Recommend increasing the frequency of financial reporting to semi-annual or quarterly to provide more timely information.
A management discussion and analysis (MD & A) report should be included since some shareholders are not part of management.
These interim financial statements must include: balance sheet; statements of income (with prior periods comparatives and a set of notes);
statement of cash flows (showing operating, financing and investing activities) and the notes should be focuses on significant transactions and
events since the last annual financial statements.
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12.
Receivables Collections
Receivables collections:
As the receivable balance grows, the increases the risk of bad debts occurring. If customers paid in 30 days, more cash would be available.
This change would speed up the timing of the incoming cash flows and reduce the pressure on the operating loan.
I suggest that a review of the credit-granting process needs to be undertaken. A process of standardizing credit granting plus a discount to encourage
early payment by our customers should improve our cash flow and internal control over receivables.
An AR aging analysis has not been completed yet. This means that we cannot be completely certain that the balance in the account is correct and
complete.
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13.
Revenue recognition
Revenue recognition
Timing: Key criteria for providing guidance in determining the timing of revenue recognition are as follow:
When significant risks and reward of ownership have been transferred from the seller to the buyer;
When the seller no longer exercises managerial involvement in or control over the goods sold, as will be the case if the goods were still owned.
The criteria under IFRS:
Collectability: Should recognize the revenue to the extent the contract is complete, as long as collectability is reasonably certain;
Measurability: Should set up an allowance for doubtful accounts for amounts that may not be collectible; This should be based on the best estimate;
And should look to prior years for a percentage that might be appropriate; This practice will increase the earnings and will properly match the revenue
and expenses as per the Matching Principle in accounting.
Delivery and performance: This creates information that is more reliable and relevant to the stakeholders.
Two policy:
Percentage-of-completion for long term contracts
Reserve recognition accounting (RRA) oil and gas reserves/ Inventory valuation
Taxation: should be reported according to the deferred tax method. Disclosure: This is required as part of the required supplemental disclosure of the
estimated present value of future receipts from a companys proved oil reserves
Responsibility accounting: for management accounting purposes, the expenses incurred were assigned to the responsibility centre.
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allowance
Bad debts and warranty allowance:
Bad debts allowance has increased compared to last year. A large warranty accrual was also made. The reason given for both is tough economic
times. We will need to conduct further testing and review of the allowance for a bad debt account and for warranties to assess that the increase is
reasonable and justified.
From a tax perspective, the warranty accrual is not deductible. Only actual expenditures pursuant to the warranty are tax deductible. The bad debts
allowance increase would likely be deductible from a tax perspective provided there are sound business reasons supporting the increase. The
implementation of a credit approval system should reduce this.
Wage and equity:
In order to identify the problem with the equity account, we should ensure that financial statements are produced on a timely basis with all accounting
information recorded and reported accurately.
Additional sales staff doesnt make the additional sales. It may be in our best interests to let one salesperson go.
Perhaps the compensation structure can be changed to motivate the sales staff.
Insurance: If there are any comparable packages on the market for a better price. I will review the current package but dont recommend a reduction in
coverage unless we are over-insured.
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14.
Retrospective restatement
Retrospective restatement
Accounting changes
Change in accounting estimate:
Retrospective applications prohibited: Accounting for prospectively, no restatement. i.e. change in depreciation method; asset useful
life
Change in accounting policy:
Retrospective restatement required: Accounted for retrospectively, require restatement of prior period R/E
Such as a new IFRS is issued; the new policy would result in more relevant information; the new policy would result in more reliable
financial statements.
Change in accounting error:
Retrospective restatement required: Accounted for retrospectively, require restatement
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15.
The unusual variances are due to increased levels of unsold inventory, and should reverse next year if we cut production to match
sales. This could have a considerable negative impact on next years net income.
This is a timing difference only; as long as we properly manage inventory control
if inventory increase:
o Plant overhead is charged to cost of goods sold based on the level of unit production. during the period, the overhead
expenditure is capitalized into the inventory balance at period end instead of being expensed in the period.
o part of the fixed manufacturing overhead cost of the current period is deferred in inventory to the next period. Lead to a
temporary increase in profits for the period.
GAAP requires the use of full-costing methods, and absorption costing is more in line with this.
Mining (public company)
Disclosure in financial statement:
Handbook guidance.
Royalty revenue from leasing mining rights. Entity-wide disclosures re: major customers. 10% or more of revenue derived.
Operational changes: Non-adjusting event; Disclosure required if event material
Full disclosure provided in financial statements: Shareholders and investors would have full information to make decisions
Expectations of future earnings should be more in line with actual results
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16.
Pension plan
DB plans offer employees a monthly retirement income based on a formula set out in the plan which typically involves years of service
and income.
The company needs to contribute enough to the plan to ensure that sufficient funds are available in the future.
DB plans require the employer to top up any pension losses if the fund has lost money or not performed to the ongoing obligations
determined by an appropriate valuation.
There is also a requirement to retain an outside actuarial firm to do actuarial reports and an actuarial information summary every three
years.
DB plans are extremely expensive for employers and the investment risk is held completely by the company.
The funds for all pension plan members are pooled into one investment plan and controlled by a plan administrator.
The company can change the terms of a pension plan or type of plan offered (DC plan). For affected employees, any benefits accrued in
the DB plan when it was frozen remain in that plan until the employee retires. Any future contributions would be made to the DC plan
only. If the company goes bankrupt and the plan is underfunded, employees will receive less than the promised amount.
A DC pension is funded by company contributions based on each employee's salary, possibly with employee contributions matched.
Investment of the funds is generally directed by the employees from a selection of investment options available within the plan.
The amount a retiree receives will vary based on the amount contributed and the performance of the invested funds over time.
DC plans are more popular with employers as they are much less expensive.
A DC Plan offers employees more choice and flexibility in their investment than a DB Plan but puts all the investment risk on the
employee.
Tax implications:
o Employee contributions are tax-deductible and reduce the employees taxable income.
o Plan earnings are not taxed to the employee until withdrawn.
o Company contributions are deductible for tax purposes as an eligible business expense.
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17.
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If DOP>FMV at grant date when employee sales the shares, capital gain is calculated which only 50% is taxable.
Public:
employee are not able to defer tax for employment income (exercise price < FMV at grant date) until they file the election to do so.
If employee wish to exchange stock option for cash with employer, the employee has to include the amount received in employee
income and employer is allowed to deduct the amount paid.
It has to be disclosed in the note to FS.
TAX-Addition-2
Stock Options Summary
Cdn Public:
Granted date and price: no tax consequence
exercise date and price: treat as TB/employment income for (Mkt
value-granted price). EE can claim tax deduction = 1/2 of "option
benefits" if shares are CS, & exercise price, at the time the options
were granted = FMV
Bonus Plan
Improved bonus plan:
The problem of Bonus plan:
the current bonus plan focuses on profitability.
This annual bonus plan may encourage top managers to focus on short-term annual results rather than on the long term of the
company.
It lacks long-term focus and provides an incentive to increase the earnings before taxes, resulting in short-sighted and
counterproductive.
It is a rapid payment of bonus (unaudited figure; no holdback) and use of only one financial metric (short-term focus).
New incentive:
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We should use a mix of metrics which includes long-term incentives, such as share price or average earning over multiple years (based
on weighted average of factors: such as total sales/% of regular loans/collection costs/departmental profits).
Increase base salary and decrease bonus may minimize unethical or counterproductive actions.
The new plan should align with strategic goals.
Management needs to be compensated and rewarded fairly for results and outcomes achieved.
I recommend a bonus plan that uses an average net income over several years as the basis with a well-spread payout period to provide
incentives for maintaining prolonged and sustained profitability.
50% will be paid 1-month and 50% will be paid 6-months after year-end (adjust for audited figures).
This will benefit both the individual and the company as a performance-evaluation tool.
Tax perspective:
bonuses should be paid within 180 days of year end to be included as taxable benefit to the employee and deductible by the company
in the current year.
If the bonus will be paid in the next year, an accrual should be recorded.
The bonus plan is part of the employment contract. Current-year bonus should be paid as agreed. The employment contract can be
renegotiated to incorporate the above recommendations for future periods
Absorption and variable costing for Bonus Scheme:
When we calculate the bonus, for internal use, we can introduce other metrics to minimize impact of absorption costing (switch to variable
costing). The absorption costing is required under IFRS for audited financial statements, it may encourage earnings management even if other
metrics introduced. For internal calculation, the variable costing is acceptable for management accounting purpose. For internal purposes, it
may provide more meaningful and useful information, take away earning management temptation and may lead to lower production (hurting
sales).
Incorporate non-financial performance measures: Customer satisfaction surveys
Other incentives and tax implications:
Cash bonus: it is a taxable benefit to the employee. 100% deductible by the company; with the cash bonus, employees can spend it the
way they wish to, but the actual benefit would be net of the taxes payable on such bonus.
Fruit basket: Non-taxable benefit to the employee; CRA allows a single $500 exemption that is applied against the total value of all the
non-cash awards given to an employee, as long as all employees are eligible; 100% deductible by the company.
Dinner with the president: Non-taxable to the employee; CRA does not consider this to be a taxable benefit to the employee because
there is no element of choice; 50% deductible by the company; The perceived value of the dinner could be higher than actual cost due
to the prestige factor of spending time with the President;
The choice of incentive to be awarded should be based on a trade-off between the incentive most highly valued by the employee and the
lowest cost to the company.
Unpaid bonuses
If the bonus payout is later than 180 days following the end of the taxation year in which the expense was incurred, these bonuses will
not be deductible in that taxation year.
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The 20X0 bonuses should be paid within 180 days of year end to be included as taxable benefit to the employee and deductible by the
company in the current year. If the bonus will be paid in the next year, an accrual should be recorded.
The bonus plan is part of the employment contract.
The company couldnt use revised bonus plan to measure employees performances in last year. We need ensure that all employees
are treated fairly and in a consistent manner.
Bonuses are typically paid to employees in order to motivate them to act in the best interests of the long-term profitability of the business.
Sometimes bonuses do not properly align the interests of staff with the interest of management.
As professionals, CGAs are not permitted to accept bonuses for achieving a certain level of tax payable, but rather should be compensated in terms of
time/effort spent on an engagement.
Any other means could tempt a CGA to employ unethical means to earn remuneration.
In addition, according to the CEPROC, CGAs shall not be associated with any information that the member knows to be false or misleading, whether by
statement or omission. It is the duty to ensure that the information contained in the financial statements is as complete and reliable as possible.
We need to let the client know that we will not accept a bonus for reducing the amount of tax payable and that our remuneration will be based strictly
on billable time.
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18.
Primary Audit Objectives Existence, Rights, Completeness, Valuation & Presentation / Disclosure
Substantive audit procedures:
o Continuity schedule for development costs verify additions, disposals and amortization calculations
o Obtain evidence, using case facts, to assess whether development criteria have been met (may need to link back to users
needs and biases)
o Obtain evidence to assess appropriateness of costs capitalized
o Ensure amortization method, rate and commencement of recording is appropriate Valuation impairment?
Taxation:
Any allowable expenditure that is not deducted in a year is placed in a pool and may be deducted in any future year
SRED expenditures are eligible for investment tax credits (ITCs)
o general rate of 20%
o 35% for qualifying CCPCs in respect of up to $3 million of SRED expenditures
o ITCs can be carried back three years and forward 20 years
Qualifying CCPCs are generally those with taxable income for the preceding year of not more than the prescribed limit for the SBD
(shared among associated corporations)
For qualifying CCPCs, ITCs are fully refundable for current expenditures up to $3 million
For current expenditures over $3 million and capital expenditures (and for individuals and other non-qualifying corporations), 40% of
ITCs earned are refundable- the remainder can only be offset against taxes otherwise payable
Taxpayers can elect to claim ITCs on proxy amount (i.e., 65% of direct SRED salaries) instead of actual overhead expenditures
Must claim ITCs no later than 18 months after the year-end
Temporary differences (e.g., depreciation versus CCA, development costs amortization vs. immediate write-off for tax, warranty
expense vs. warranty costs paid, pension expense vs. pension contributions)
Expenditures which are incurred to provide future economic benefits, but for which no intangible asset or other asset is acquired,
should be expensed- if company has chosen to expense them (rather than capitalize them)
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Capital Dividend
Capital Dividend account:
the CDA allows private corporations to distribute the non-taxable portion of capital gains and other non-taxable earnings, such as life
insurance proceeds, to shareholders as a tax-free dividend;
the intent of the CDA is to preserve the concept of integration, ensuring the tax result to the shareholder is the same as if the
shareholder has earned or received the income directly;
whether a dividend is paid in cash, in kind or in the form of shares, or is a deemed dividend, it may be issued form the CDA if a balance
existed within the account;
it will therefore be non-taxable to the shareholder if it is paid by a private corporation and an election is made.
On the disposition of assets, business income, capital gains and/or losses, refundable dividend tax on hand (RDTOH), and an
increase in the capital dividend account (CDA) may result
A portion of the deemed dividend may be paid tax-free from the CDA
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19.
Management accountants aid in the companys planning and control functions by providing information on the effectiveness of the strategy
implementation.
Managers have traditionally relied on financial feedback such as return on investment, a lag indicator that can be manipulated through accounting
policy choices, as a basis for control.
This limited view of the corporation did not take into consideration the other factors that contribute to a corporations successful implementation of
strategy.
Currently, the company has no KPIs to measure the success of the organization.
KPIs are an indicator of the success of an organization, or of how successful a particular activity is. By not measuring our successes, we are missing
out on learning what we do well, and what we need to improve upon.
KPIs are also a good way to improve our reputation with stakeholders. The KPIs will enable us to show our stakeholders that we are successful year
over year by showing growth in number of new clients.
I recommend a combination of the following performance measures to be used as a base for the bonus program:
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20.
BSC is a tool that allows management to view key perspectives that contribute to corporate profitability utilizing both financial and non-financial
performance indicators.
Customer satisfaction: Number of new sales annually/How do customers see us? How can we better target our market/ /Customer satisfaction ratio
Internal business processes: Identified key business process, improved value added/What must we excel at to be effective an efficient in our
business?/ Cycle time/rework rate
Learning and growth: Focuses on the area of intellectual capital, comprised of human, structural, and relational capital/Innovation in technology
(green materials); availability of carry-forward inventory; availability of inventory from new communities/Are our employees happy and productive?
Are we retaining employees? Are employees getting the training they need?/Employee satisfaction ratio
Financial: Annual cost and contribution margin targets, annual revenue/What do we look like to shareholders? Are we achieving our strategic financial
goals?
Different requirement
Quality: Completing work on time/Being conscious of the environment (green and environmental awareness)
Safety: Whether safety standards have been meeting - by measuring and tracking the number of accidents
Sales team: % of sales that meet gross profit targets/%of new customers/% of sales that end up in bad debt expense/Sales budget to actual/Budget is
drawn up for each staff member, it is easy to see whether each member of the sales team is meeting expectation
NFPO-KPIs:
It is necessary to look at key performance indicators (KPIs) from the perspective of the key users, which would include funding agencies and donors.
Most stakeholders will have an interest in the number of low income family who has been able to attend the programs offered. Consequently, the
number of participants will be a basic KPI to track and report on.
Donors are particularly interested in the effective use of donations made. They are interested in how many donations have been made of cash and
other items.
It is important to track monetary and non-monetary donations as well as tracking of volunteer hours. The number of volunteer hours provided an
indication of the commitment of volunteers and information about the time invested by the volunteers. The amount of monetary/non-monetary
donations received is indicative of organizations ability to actively solicit donations and the interest of the donors in the projects undertaken by
organization.
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Customer satisfaction: How do our members perceive us? What has brought our institutional members to us? What do they expect from us? How does that
translate into everyday programs; Internal business processes: What must we excel at? How can we improve the quality and delivery of our programs and
materials?; Learning and growth: How can we continue to add value? Are the key financial performance indicators healthy? And Financial.
Call centre-KPIs: Calls resolved successfully on first call-in; Overall time to complete a call (set a threshold expectation for each major type of call); Surveys
sent to store staff to assess customer satisfaction with the call centre.
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21.
Investment analysis
Based on 4 inputs:
A one-time net investment (CF0)/
Benefits realized in the form of future operating income or cash flows. After-tax earning serves as a good proxy for cash flows in
investment analysis [E(CFi)]/
Estimated time period between year of investment and year of benefits (n)/
Firms cost of capital (ki)
Methods:
Net present value (NPV):
Only consider NPV, because this is the only method that takes into account the time value of money and all relevant cash flows.
Take into account the benefits from the tax shield. (the calculation of the present value of tax savings from depreciation (CCA) tax
shelters over the (perpetual) life of an asset).
In order to determine the NPV of the improvement for decision-making purposes, other elements should be considered. The benefit
derived from the CCA tax shield and probably an increase in working capital. The information should be obtained for accurate
comparison purposes.
The discount rate used for the calculation of the NPV should also be supported.Weighted average cost of capital could probably to be
used.
If the NPV is less than zero, therefore, the new machine to expand your business capacity is not a good investment. I recommend
considering a different alternative to invest your inheritance(CCA: capital assets are usually pooled into the prescribed class for tax
purposes)
Internal rate of return (IRR):
IRR used when decision is required based on rate of returns and not in dollar value.
it is the only method listed that incorporates a threshold level of return which incorporates the opportunity cost of capital.
If there are alternating negative and positive cash flows in the analysis of a project, then the IRR calculation will result in multiple
solutions.
When using IRR, we should accept projects that have an IRR that is greater than the Hurdle rate.
Payback period
Return on investment approach (ROI):
ROI can lead managers to take actions inconsistent with overall strategy when attempting to increase ROI.
Profitable investments may cause ROI to decline and hence cause managers to reject such investments.
Residual income approach (RI):
The RI approach encourages managers to undertake investments that are profitable for the entire company.
RI is a poor measure for company divisions given its sensitivity to the size of the division.
Residual income =income capital charge = income (cost of capital *investment)
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Market value method : share price in the market for public limited and lst sales price for pvt limited
Cash flow method:
Net income average method:
Risk and diversification
Risk tolerance:
Risk appetite is low: Adopt a conservative strategy and choose secure income investments [GICs (for interest) or defensive common
stock (for dividends)];
Risk tolerance is higher: May be willing to invest in more speculative growth shares, which may not pay dividends and will not be taxed
until the investment is sold.
Diversify the investments: Diversification refers to negatively correlated investments, which means that not all stocks decline in value
simultaneously. Exchange traded funds are a low-cost method of diversification.
Tax:
Investment income earned inside a corporation can be withdrawn as either dividend or salary or as part of an optimum mix to minimize
personal income taxation.
Investment income earned inside a corporation can be subject to double taxation: Once when the corporation earns; Once when you
withdraw assets from the corporation;
There may not be significant advantages for holding the investments inside the corporation if you are planning to earn passive
investment income.
Passive income: Interest, dividend rental income, RRSPSs, Royalties, management and admin fees (not in the nature of business); To be
taxed as income from property. It is a 25% tax, withheld by the payer.
Active income: To be taxed as income from business.
The tax treatment of each of these types of investment income can be complex depending on the specific circumstances of the
investment
Specialist: An investment specialist will be able to give expert advice on how to set up a portfolio. He will provide services to maintain the
portfolio going forward, such as recommending when to purchase or sell investments.
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22.
Investment Income
Interest income
Individual:
Interest income from guaranteed investment certificates, bonds, or real estate investment trusts (REITs) is treated as ordinary income.
The amount is added to ordinary income from other sources, and will be taxed at your marginal tax rate.
There are low-risk investments that generally have a guaranteed yield.
If you invest the money as a shareholders loan, you can receive interest on the loan and withdraw some of the loan principal when you
need it.
Corporation: Be calculated on an accrual basis; Debt repayment is a good investment, interest income will be recorded as revenue within the
corporation
Dividend income
Individual:
Entitles to a dividend tax credit; Treatment of dividend income depends on the type of company from which the dividend is received.
Only individual received dividend from a public Canadian corporation can qualify for a dividend tax credit. Dividends are taxed at a
lower effective tax rate than ordinary or interest income./
Dividends from a foreign corporation are treated similar to interest income. /
Dividends from Canadian-controlled private corporations have a different, generally lower, gross-up dividend tax credit rate than those
received from a public corporation.
The onus is on the corporation paying the dividends to clearly identify if the dividends were paid out of the low rate income (ineligible)
or the general rate income pool (eligible).
Corporation:
Corporations can deduct the full amount of dividends received in calculating taxable income and tax payable (under Part I).
Dividends must be included in net income for tax purposes.
Taxable dividends received will in general be taxed under Part IV.
Under the system of integration, a corporation may be eligible for a dividend refund if it pays out dividends. For accounting purposes,
dividends are recorded the same as interest income. Dividend income will be recorded as revenue within the corporation.
Capital gains
Individual:
Capital gains arise when you sell an investment property for higher than its cost of acquisition;
50% of a capital gain is added to income and will be taxable at the marginal tax rate;
50% of capital losses is deductible, but may only be deducted from taxable capital gains, to the extent to bring those gains to zero. Any
excess losses, referred to as net capital losses, can be carried back three years or forward indefinitely to reduce taxable capital gains
in the applicable taxation years. The capital gains are taxed upon realization.
Corporation: Capital gains arise and are calculated in the same manner for businesses as for individuals
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23.
Expending to out-country
Strengths:
Establishing a plant will allow the company to promote its products to attract more consumers in that country;
The market appears to have considerable revenue potential, resulting in increased revenue;
The consumer base is substantially larger than the Canadian consumer base; Strategically, the company needs to explore new markets,
since sales in Canada are plateauing;
By having a plant in that country, shortages to consumers in that country should be reduced or eliminated.
Weaknesses:
Focusing on that market may take time and energy away from the Canadian market, and potentially harm Canadian performance.
Canadian consumers may suffer in the long term.
Consumers in that country may still be reluctant to purchase the products if these consumers find out that the company is owned by a
Canadian parent.
Create a foreign exchange currency fluctuation risk involves a significant amount of risk.
need to ensure it becomes familiar with and abides by all the local manufacturing, tax, and business regulations.
If the lay off in Canadian plant due to the expending, it will hurt the companys image in the long term. There are issues that need to be
discussed and examined before a final decision is made.
Pro forma statements:
Pro forma statements can provide new information and support or not support the expansion decision.
One of the most useful aspects of a pro forma is that it allows one to question the assumptions made towards the business expansion
forecasts.
Conclusion: Based on the analysis, this expansion would offer many opportunities. However, the company
needs to carefully consider all the risks of expansion and consider ways to mitigate these risks.
In this regard, I would recommend that
o the company perform a sensitivity analysis considering the worst-case scenario if sales did not match our expectation, but
stayed at current levels.
o A back-up or contingency plan should be prepared.
If these additional steps are taken and all the risks are mitigated to an acceptable level, then I would recommend that the expansion should
proceed.
Accounting:
If the company forms wholly-owned subsidiary, it would need to prepare consolidated financial statements that include the operations
of its subsidiary. As the company would have over 50% voting control, we would treat both companies as one economic unit.
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Under IFRS, the company would be required to use the current-rate method for translating the financial statements into Canadian
dollars.
Any of these translation foreign exchange gains or losses would be reported on the statement of comprehensive income as other
comprehensive income.
We should advise our auditors of this expansion if we proceed so that they are aware of this significant change before they start their
audit planning for the next audit
Tax implication:
U.S. subsidiary would be required to file U.S. corporate tax returns as well as any applicable U.S. state tax returns.
Transactions between the parent and subsidiary would need to be carried out at arms length, in order to comply with the transfer
pricing rules set out by both the Canadian and U.S. tax authorities. Since U.S. corporate and state tax issues as well as transfer pricing
issues are areas beyond my knowledge base, I would recommend that we confer with a cross-border tax specialist to address these
issues.
This U.S. subsidiary would be considered a controlled foreign affiliate of the Parent; thus, the parent would be required to file an annual
information return to CRA, disclosing various pieces of information about the U.S. subsidiary, include details of any inter-corporate
loans.
Whether to drop a product line: we need to consider the factors (relevant information):
differential revenue;
marginal cost/all variable production costs;
contribution margin on lost subs;
site clean-up costs;
qualitative factors; (ignore allocated fixed costs);
the cons are:
loss of revenue;
employees will be laid off;
loss of market share.
Outsource: If the internal control in payroll process is very weak due to lack of segregation of duties,
outsourcing can help the company saving the cost and avoid deduction errors.
All payroll statements will be delivered on time.
But the company may be hard to control.
Current payroll clerk needs to provide the information and keep in constant touch with the provider to ensure that payroll-related is
accounted accurately.
In-house: If keeping the payroll process in-house,
an additional employee needs to be hired to ensure that duties are segregated.
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If considering long-term business development, purchasing a new payroll system and keeping payroll in-house may be a better
decision.
Use of spreadsheets for processing payroll could have several limitations, such as being end-user oriented, error-prone, inaccurate, and
untimely.
A software package that includes payroll accounting will simplify the payroll processes. And help to ensure deductions and remittances
are correct.
Accurate payroll deductions should be made at the time the employees are paid, and the employees should receive a proper record of
their wages and deductions.
It will also improve the accuracy of financial statements by ensuring that all payroll transactions are recorded correctly.
Make the payroll processing automated, more accurate, less error-prone, and timely and facilitate accurate processing of statutory
remittances and securing employee records and personnel information.
All systems being put in place must have appropriate backup procedures including cross-trained personnel. There must be off-site backup, which may be used to restore the original in the event of a data loss.
The plan should include a manual documenting policies and procedures of all the critical functions of the business. Such policies should
include cross-training of employees so that a job will continue to be done even if staff leave. All data, including the policy manual,
should be stored offsite.
The manual should contain the key contact information for crisis management staff, general staff, customers, and vendors, and the
location of the offsite data backup storage. It may also contain critical documents such as insurance policies.
The payroll in-house not only can verify and modify any errors, but also the company can have more control on the payroll processing.
24.
individuals
o eligible dividends grossed-up to 138% of actual amount-dividend tax credit of 15.02% of the grossed-up dividend
o ineligible dividends grossed-up to 125% of actual amount- dividend tax credit of 13 1/3% of the grossed-up dividend
eligible dividends are paid by corporations that paid tax at the higher, non-SBD tax rate (e.g., by non-CCPCs or from GRIP of
CCPCs)
ineligible dividends are paid by corporations that paid tax at the lower, SBD tax rate (e.g., CCPCs, for ABI up to SBD threshold)
corporations
o actual (not grossed up) dividend income included in net income for tax purposes
o dividends from Canadian corporations deducted to arrive at taxable income
o consider Part IV tax implications
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SWOT Analysis
You need to assess the risks and opportunities associated with the proposed acquisition or new venture. Consider doing SWOT
(strengths / weaknesses / opportunities / threats) analysis.
Risk Identification Tools/Methodologies-Internal interviewing and discussion: interviews, questionnaires, brainstorming, self
assessment& other facilitated workshops, Strengths, weaknesses, opportunities and threats
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Sales commission employees eligible to deduct work-space-in-home expenses including a reasonable portion of property taxes and
home insurance as well.
These expenses can only be used to reduce employment income. They cannot be used to create or increase a loss from employment
income. Any expenses in excess of employment income can be carried forward to be used in the next tax year.
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25.
Budget
Budget
Cash
Cash
budget analysis:
Net surplus (deficit): Variance analysis: Donations shortfall (possibilities: timing, levels, loss of corporate donors);
Salary and benefits variance; Switch to volunteers to maintain equipment: safety concerns.
flow analysis:
Review the list of donations received and the list of monthly recurring expenses. From a preliminary review, the monthly inflow of cash
will not be enough to pay all the expenses for the month, without cashing in the government bonds.
Given that the annual donors pay at the end of the year, it may be difficult to predict the availability of funds during the year.
Need to recommend the use of cash flow forecasts to determine if there are any going concern issues:
o (1) A cash flow forecast prepared on a monthly basis would report receipts and disbursements of cash (rather than revenue and
expenses);
o (2) It would help determine if there are any concerns about the organizations ability to meet obligations;
o (3) Information about a current periods cash flows provides a basis for predicting the amount, timing, and certainty of future
cash flows.
o (4) The cash flow forecast will also bring out the minimum amount of cash that you would need to retain before making
investments
o (5) Or to arrange a temporary overdraft facility or a line of credit with the bankers, to meet short-term obligations that need to
be met, before the next scheduled inflow of funds.
o (6)The cash situation would improve with the inflow of donation. They need to look at becoming a registered charitable
organization.
Budget procedures: The budget process for NFPOs provides benefits both internally and externally.
As a management tool, a budget assists in planning how resources can be used efficiently and effectively.
For contributors and donors, it demonstrates both a need for future resources and accountability for expenditures.
Budget help communicate organizational goals;
reflect the forecast results of strategic choices made by top management.
Budget requires actual results to be assessed against the budget, to act as a basic internal control.
It will help us with resource reallocation, and with deciding to offer more programs or to discontinue a program.
The historical information from monthly financial statements may be used to assess the entitys ability to generate cash and cash
equivalents, control of economic resources, performance, and change in financial position (balance sheet).
Sales team budget: Indicate where spending is more or less than anticipated, and give sales staff a goal to work towards; Allow us to
monitor our expenses, and make everyone more aware of costs when they are making purchases.
Budget system problem:
Unrealistic expectations,
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26.
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The foreign subsidiary would file its tax return in the foreign country and the Canadian parent would file its tax return in Canada.
The operations of the foreign sub do not show up on the tax returns of the Canadian parent, unless they receive a dividend.
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27.
NFPO-Accounting Standards
Accounting standards:
Have a choice of following IFRS or the Part III accounting standards for NFPO. The choice must be made based on what is most relevant
for the primary users of the financial statements.
The key difference in these standards is the use of fund accounting, which focuses more on accountability than profitability.
Users of the organization statements will primarily be organizations that are providing grants, and donors or potential donors. There
users would be expecting to see financial statements prepared following the accounting standards for NFPO, which focus on the
appropriate use of the funds received based on the stated mission.
The compliance cost would be much higher if the statements were prepared using IFRS.
The contribution revenue received is restricted for a specific purpose and under IFRS there are no standards to address the unique
nature of these contributions. Thus, the organization should use the accounting standards for NFPO because of comparison to other
charities and the lower cost.
The organization should adopt either the deferral fund or restricted fund method with appropriate support.
Non-profits must track and report on segregated accounts in the form of funds as they navigate their various projects and programs.
Funds must be treated as separate entities with their own general ledger and must provide individual income statements and balance
sheet reports.
GNFPO:
Public Sector Accounting Handbook.
a GNFPO has the choice of adhering to the standards for a NFPO in the CICA Public Sector Accounting (PSA) Handbook or
the standards in the CICA PSA Handbook without sections PS 4200 - PS 4270.
Tax:
No tax is payable on the income of an NPO;
May require the organization to file a NPO information return if certain conditions are met.
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28.
NFPO-Accounting Method
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Should be done based on the information needs of stakeholders including members, donors, the government, and the general
public.
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29.
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Since the organization is already set up as a non-for-profit organization and meets the other important requirement of the public
benefit test, the final report needs to be added to complete the required formalities with the Canada Revenue Agency regarding
registering as a charity. It can secure much needed individual donations.
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30.
Perform required procedures re pro forma F/S (historical F/S adjusted to show the effect of an event, transaction or proposed transaction as if it
had occurred previously)
Verify the historical figures used in the pro forma F/S
Make enquiries about the basis for determination of the pro forma adjustments
Make enquiries about whether the pro forma statements comply with format required by applicable regulatory requirements
Recalculate pro forma adjustments
Issue a compilation report on pro forma F/S if required by securities legislation
Generally not feasible to audit, or provide any other form of assurance, on pro forma F/S
If the auditor becomes aware that the pro forma F/S are not properly compiled or do not comply as to form with the requirements of
securities legislation, the auditor is required to withhold consent to the use of his/her audit report.
Given that there could be undue reliance placed on pro format F/S with an attached compilation report, Canadian securities legislation does
not require a compilation report on pro-form F/S
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ASPE IFRS:
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31.
Cash flow management is the lifeline of a business. Long-term strategic financial management & Short-term day-to-day cash flow
policies are interlinked and should be planned carefully.
Long-term bank loan is the best long-term financing alternative.
The company must consider how it will be able to cover loan payments year to year through working capital cash management. Critical
to maintaining cash flow for operations.
Accounts receivable collection and credit-granting policies and Accounts payable payment policies, and timing of other expense
payments (payroll).
Instituting a monthly aging schedule for both A/P and A/R will allow you to better track the outstanding balances. From this information
you can determine the steps necessary to improve A/R, A/P, and cash management.
Accounts Receivable:
Needs to improve the collection of accounts receivable and institute sound collection practices and procedures.
The AR department must work with the sales representatives in informing them of customers payment status. If the sales
representatives do not wish AR to contact a customer, they should contact the customer and collect the account.
The AR personnel should be made aware of procedures to follow prior to any accounts being written off. The credit manager or
controller should sign off on all writeoffs.
A quick method of checking credit needs to be implemented. A decision on whether to grant credit or get payment upfront is made
early in the process.
I recommend being more aggressive in obtaining credit-checking information, by both calling references and faxing credit check forms
to them.
Following up each day should produce quicker turnaround times.
Purchasing a credit-reference service subscription and validate the results of the credit check.
The implementation of a credit approval system should reduce bad debt expense in both the short and long term. There must be
adequate segregation of duties and proper authorization and approval.
Accounts Payable:
the client should take advantage of vendor discounts where offered, and pay invoices within the payment terms.
High collection days and a low accounts payable balance will negatively affect the companys liquidity and activity ratios.
Staff time is not being used efficiently and effectively.
It is important that the company pays vender only when payment is due. Terms of payment of the vendors should be reviewed and set
up as automated payments accounting software. No vendors should be paid prior to 30 days, unless they offer a fast payment discount.
Cheques should not be issued daily. It is suggested that a weekly payment schedule be implemented, which will also allow us to benefit
from 10-day discounts.
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I recommend that a review of the AR and AP processes be done to rectify the above noted issues. This is especially important given the
upcoming audit as there will normally be an internal control assessment as part of the audit procedures.
Manage change
Why people resist change:
Fear/Lack of top management support
Lack of communication
Disruptive nature of change
Methods of instituting change
Biases and emotions Personal characteristics and background.
How you can overcome change:
Education and communication
Participation
Facilitation and support
Negotiation
Manipulation
coercion
Net working capital (NWC) management:
Minimize the investment;
inventory sufficient to not exceed a maximum allowable probability of stocking out;
trade terms competitive with the firms industry rivals;
sufficient cash to facilitate trade with customers and suppliers;
sufficient cash to meet unexpected cash fluctuation.
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32.
Salary vs Dividends
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33.
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34.
Non-Residence
Payment to non-resident
Require tax to be withheld and remitted to CRA depending on the status of the non resident;
Employee: withholding tax on employment income will be required and the employee will need to pay Canadian tax on the employment
income earned.
provide a service for a fee: a 15% withholding tax on such fees will be required under the ITA;
need to consult a Canada-U.S tax treaty to confirm that this requirement applies or if we can apply to CRA to waive the withholding tax
or reduce the percent withheld
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35.
Tax Planning/avoidance/evasion
Tax evasion:
o Avoid taxes by failing to disclose compete and accurate information; Illegal; criminal offence; civil wrongdoing;
o Penalty: Fine, possible imprisonment, arrears, interest plus taxes, and civil penalties; Result in a lower amount of tax being paid
than should be;
o High wage expenses: Tax evasion appears to be a possibility with the employees personal taxes since the T4s contain a lower
level of wages than was actually paid;
o Advise the client to resubmit accurate T4 slips for the employees of the company. Personal expenses. Unwillingness to declare
some of the revenues.
o The client should be advised that tax evasion is a criminal offence with serious consequences and that the auditor will not have
anything to do with such schemes.
o This fraudulent behavior is punishable by law and could involve fines and jail time.
o It will be necessary to revisit past financial statements and tax returns to determine the accurate opening balances since those
figures will affect the accuracy of this years information.
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36.
Specific threats to independences: self interest; self review; advocacy; familiarity; intimidation;
Safeguards can be created by the profession, legislation, or regulation (i.e. by securities regulators):
o These include standards, training, and practice reviews.
o Safeguards within the client firm include those directed at ensuring that all decisions are made by the clients management and not the public
accountant.
o The firm can create internal safeguards such as second partner and technical reviews and separation of responsibility for assurance and nonassurance services.
We cannot become your auditors due to CEPROC:
The current auditors may not have the resources you need as you grow and venture into IPO.
I recommend a larger firm with more expertise and resources.
Auditors will test your internal controls so they should be very strong. If not, it could raise your audit costs, as they will do a substantive audit.
it is important that a member be free of any interest, influence, or relationship in respect of the clients affairs that impair the members professional
judgment or objectivity.
The provision of non-assurance services my firm has been providing may create a threat or perceived threat to independence of the firm.
It will be necessary to evaluate the significance of any threat created by the provision of the consulting services.
Our firm will ensure that any staff members involved in this engagement do not participate in any future assurance engagement, as we already taking
this acquisition consulting engagement
Prepare the FS and audit.
Given that I would be preparing the financial statements, there would be a conflict of interest if I were to provide assurance on the same financial
statements.
It would be unethical for me to perform the audit of the financial statements as well.
Therefore, please note that although I would be able to compile the financial statements, we would need to appoint an independent public accountant
to perform the audit and issue an Independent Auditors Report.
I have been the auditor of XX for the past X years.
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Although I dont think this will impact my independence for this year audit, however, as I do not want my independence to be questioned during the
conduct of audit, I do not mind that the audit be conducted by another independent auditor if needed.
In order to exhibit well-rounded professional competence, a CGA must illustrate a strong sense of ethics, integrity, and honesty and independence
both in fact and appearance.
Independence standard:
Ensure reporting issuer prohibitions and requirements are communicated and dealt with adequately.
CGA firm does not lose revenue. Acquirer does not have to find another public practice firm
Conflict of interest
Should be a separate consulting engagement; as we are on assurance engagement; we should not include this consulting on the same audit
engagement;
I will suggest he contacts another tax advisor in our firm to get the information he needs in order to avoiding any conflict of interest.
At arms length: An accountant that does not remain at arms length is less likely to ask the tough questions of management or stand up for
shareholders when something is not right. This has been cited as a key reason in certain high profile corporate collapses.
A member may issue a compilation engagement report as long as appropriate disclosure of any interest, influence, or relationship between the
member and the client is made in the compilation engagement report.
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37.
Segregation of duties
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38.
End-user system
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39.
CRM system
CRM system: CRM reporting would be most effective for the company; Sales trend analysis will help the company to identify the following;
Identification of competitors highest sales areas to improve its own strategy; Identify potential customers and provide insights into
opportunities; Reports should include: Sales information by product line(to monitor customer preferences; will assist to better plan production);
Sales information by geographic location (To understand the market: allow us to assess potential opportunities/gaps and see which product is
selling at a particular location. It will help us to accurately maintain the product inventory level for each store location.)
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40.
Lawsuit
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41.
Investment Project
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Assume all assets and liabilities of the acquired entity of which the accumulated debt would be the most problematic. Difficulty dealing with its management
(family business). Financial situation may be influenced after acquiring.
42.
Enterprise risks
Economic risk: The depressed economic conditions are now recovering in an improving business cycle. The expected outlook on the economy
is cautiously optimistic; hence, sales will continue to improve. However the current lower sales is affecting cash flows and endangering debt
covenants with the bank. Therefore, we assess the economic conditions to pose a moderate enterprise risk.
Market environment risk: Remains competitive to retain their clients. Technological environment: Is showing viability of green materials; If it
is not prepared technologically to meet this demand, and in the long run, this would negatively impact its learning and growth and customer
satisfaction success factors. The company still has a positive reputation for quality and integrity. However whether this would be enough in the
future is the question. Therefore, the market conditions pose a moderate enterprise risk to the company. Risk of loss of reputation with
customers: The decrease in quality could damage the companys reputation when customers find out about the accidents or if more lawsuits
are initiated. We should be aware that the risk of significant lawsuits is a possibility. By shifting to a lower quality product in exchange for
higher margins, the company may end up spending all the savings defending itself in lawsuits. It might also be necessary to develop vendor
standards to be used when selecting a new vendor or continuing business with an existing vendor.
Operational risk: Lack of profitability analysis (NPV analysis); Lack of adequate costing procedures; Quality control due to outsource the
materials: Ensure that the materials are of the high quality to alleviate product quality risk; insurance could be used; more preventative steps
should be taken: examining reputation of any potential suppliers; researching potential material suppliers and seeing if they have a good
reputation by contacting other companies that use them
Internal control risk: Information breach or information theft: There is the potential danger of theft of personal information and personal
identities by hackers, thus undermining our privacy. Data theft, such as credit card and bank account information, is an ongoing concern for
businesses. At a national level, government systems are an attractive target for foreign military and intelligence services, criminals, and
terrorist networks. There is a risk that these groups may steal industrial and national security secrets, and personal identities framework.
Internal controls (such as access controls) have become important: a structured risk assessment followed by internal controls to manage those
risks is important. Access controls help to prevent and limit access to software, hardware, and data all of the components in an information
system. As an auditor, a review of business risks faced by a client is needed to question how the client assesses and mitigates technology
threats. Many companies have designed procedures, and specialized hardware and software, such as encryption devices, can be used to
encode data and information to help prevent unauthorized use of corporate data and systems. Installing firewalls and antivirus software are
other commonly used methods to protect corporate computer from criminal hackers. Some companies will conduct IS security audits on a
regular basis.
Foreign exchange risk: As exchange rate fluctuations can hurt profits earned. when the CAD weakens against the USD, it becomes more
expensive to buy in USD. So the gross margin is impacted if the exchange rate fluctuates. If all purchases from supplier are denominated in
CAD, the foreign currency risk can be placed on the supplier. In order to mitigate this risk, a foreign currency hedge will be recommended to
use. The exchange rate risk also can be smoothened by several ways. The hedging will be recommended to minimize or eliminate the foreign
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exchange risk faced by the company. Two common hedges are forwards and options. A forward contract will lock in an exchange rate when the
transaction occurs in the future. An option sets a rate when the company may choose to exchange currencies. The hedging has its own risk. If
and when the CAD strengthens in the future, our company will sustain a FX loss. I recommend that you contact a financial advisor for more
information.
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Risk management matrix: A risk management matrix should include all the risk factors the organization face on policy, operational, human
resources, financial, legal, health and safety, environment, reputation, etc. This risk management can indicate organizational as well as
industry specific standard. If helps organization to reduce, retain, avoid or transfer of risks where appropriate. The company should identify
strong product market, strong revenue, quality of products, operational efficiency, competitor etc. It can help to ensure the major risks in the
company. According to the analysis, the company will be able to consider what the company could do to manage the risk and bring it to a
reasonable level. The management needs to review the matrix activities periodically and determine the risk level to ensure that all the
important issues are included in the matrix. Current risk management matrix requires more work in order to be effective at mitigating risks.
Illustrations of the risks facing the company could be used to highlight the importance of this matrix and why the company should invest
additional time to prepare a more compex matrix. A specialist in enterprise risk management can be hired to assist with this process.
Risk of Credit sales: In conclusion, I recommend that we implement the following new policies for approving credit sales: require credit
applications from all new customers, including bank references and recent financial statements; cash sales only to new customers until credit
application is processed and approved by the credit department; and establish limits for each account and program; the POS system to flag
sales exceeding this amount. These policies, in combination with improved training of staff in the collections department, should reduce our
bad debt losses to industry levels.
Risk of strike: Risk of loss of sales due to delay in receiving raw materials. The strike caused a delay and could negatively impact sales since
the inventory is not available for sale. We should look at alternative approaches to obtaining product if the strike continues. Some of the
sourcing should be switched to other reputable suppliers who ship products by rail or truck.
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43.
In light of the current economic turndown, I recommend that we consider the most affordable alternative in the short-term.
Repair:
Plan: Getting the equipment repaired would require a one-week plant shut-down. We could easily get this work done during our annual plant
shut down in December. Since sales are soft, and technology changes are anticipated, I believe it would be best to continue to use our current
equipment, and begin to plan for a major investment in updated equipment once the new technology is available.
Keep repairing, will continue to incur maintenance costs. The impact on net income will depend on whether the repairs are considered to be
part of normal maintenance, or whether they are considered to extend the life of the equipment; Normal repairs are expensed as incurred: The
repairs will not increase the useful life beyond the original expectation, so they should be expensed: Will lower net income for the current year;
In evaluating net income, it would be prudent to consider net income earned from operations versus net income after unusual items. repairs
that extend the life of equipment are capitalized and expensed over the useful life of the repairs.
Since repairing the equipment will cost much less than replacing, it will be easier to obtain the smaller amount required. We could consider
issuing bonds or issuing shares to raise the required money. Bonds would require regular interest payments; and a stated future repayment
date of the principal amount; Shares would not require regular payments, and would not even require repayment; but shareholders would
expect to earn a share of profits; third alternative is to maximize internal cash management in order to avoid the need for additional financing:
if we can collect our ageing accounts receivable, we should be able to handle the cost of repairs; this might involve factoring our receivables
by selling them to another company at a discount. I recommend that we use this alternative so that we can cover the cost of these repairs
with short-term methods and avoid long-term debt or shareholder obligations
Replace: lower maintenance bill in the short term; increase depreciation expense; May be difficult as banks are hesitant to lend money to
small businesses due to the current economic slow down
Non-financial implications of the sales: The current proposal may have a long-term negative effect on the companys reputation and
profitability; there are potential market reputation issues, since there may be a potential impact on the relationship with developer, the value
of which cannot easily be quantified; Future customers may be multiple customers over their lifetimes. This opportunity is lost on this
proposal.
The conclusion from both financial and non-financial considerations is that the company should proceed with a reduction in the sales price.
Repair and maintenance: Replace the equipment when costs start going up, although this creates more capital expenditures. Gross margin:
Once we determine the extent of the improvements in gross margin from the use of the new monitoring system. We will be able to determine
if there is a further need to reduce costs and/or increase selling prices in order to reach the industry average. Cost allocation methods:
Allocate each joint cost based on usage; Building amortization: should be allocated based on square footage used by each division; Office
equipment and computer system: should be allocated based on volume of transaction; Bad debts are not experienced equally because each
division has a different customer base and credit terms; Arbitrary cost allocation methods could mask the profitability levels and therefore are
an inaccurate basis for deciding whether or not to sell a division.
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44.
Audit report
Informs the reader that the audit has been performed and identifies the financial statements and time period audited
Managements responsibility paragraph
Informs the reader that management is responsible for preparing the financial statements in conformance with Canadian GAAP.
This responsibility includes designing, implementing, and maintaining internet control; selecting and applying appropriate
accounting policies; and making accounting estimates that are reasonable in the circumstances. Management also has primary
responsibility for avoiding fraudulent financial reporting
Auditors responsibility paragraphs
Inform the reader that the auditor will provide an opinion on the financial statements and that the audit was conducted in
accordance with generally accepted auditing standards
Auditors opinion
Expresses an opinion as to whether the financial statements present fairly. In all material respects, the financial position of the company. Its
financial performance, and its cash flows for the year then ended in accordance with IFRS or Canadian Accounting Standards for Private
Enterprises (or some other disclosed basis of accounting)
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45.
Review engagement
Audit engagement
Engagement letter: Purpose: (engagement letter for an audit engagement). An engagement letter defines the terms of the audit engagement
that have been agreed to, in principle, during meetings and conversations with the client. Engagement letters are essential to minimize the
risk of misunderstanding between the auditor and the client. They should be obtained for any new client and also for existing clients if the
nature of the engagement changes over time
Engagement letters usually refer to: The nature and objectives of the audit; Managements responsibility for the financial statements; The risk
that the audit will not identify all material misstatements; The fee structure; A list of working papers for the client to prepare; A confirmation of
the terms of engagement by the client.
Audit fee: Fees should not be based on the outcome of the work performed
Review engagement report
Engagement Fee: our firm bills on an hourly basis or on a negotiated flat rate; contingent fee is not allowed per CEPROC and the CGA
independence Standard (i.e.5% of net income of a clean audit opinion): impairment of objective, independence; independence is necessary in
order to provide a reasonable level of assurance that any engagement conducted and subsequent report issued is grounded on professional
judgment this is free of conflict of interest or bias; we should not accept the proposed fee structure as this is a violation of CEPROC which
requires that a member be free of any interest, influence or relationship in respect of the clients affairs which impairs the members
professional judgment or objectivity
The purpose of the review: we must comply with general review standards outlined in the CICA Assurance Handbook; The review will require a
significant collection of evidence to support our conclusions; We will need to gain a certain level of assurance regarding the financial
statements; Evidence gathering will consist of obtaining knowledge of your business; enquiry of your personnel; performing analytical
procedures; and discussions with you and the management team.
Completion of work: We will provide with a review engagement report that will indicate the scope of our review; If applicable, any information
that may not be in compliance with appropriate standards. An explanation will be provided of areas where we have reservations and their
effect. Since this is the first year that the financial statements are being reviewed, we wil alos need to inform users of this fact.
Engagement letter (will include the following terms): The services we will provide: Your responsibility to provide accurate and complete
information; No opinion will be expressed since we are not providing an audit; Notice: This engagement cannot be relied on to detect errors or
fraud or other irregularities; We will be happy to discuss the review engagement fee with you at your earliest convenience;
In addition to the review engagement, I can also assist in other matters: I can also review your internal controls surrounding inventory and
purchasing; Could utilize pre-numbered purchase orders or establish a tracking procedure with Excel; It is important when implementing
internal control procedures that all affected parties (the purchaser, shipper, and AP clerk) are all aware of the change in procedure and all
agree it will make the operations run smoother. I may need to do some substantive testing to ensure that the FS based on these internal
controls are sound. However, it is important to make it clear that a review engagement is not designed to detect fraud.
I can also review your data on the useful life of the depreciable assets and advise whether your financial reporting should be based on CCA
rates or different rates: This may have an impact on your reported income; The CICA handbook states that the depreciable amount of an asset
shall be allocated on a systematic basis over its useful life. CCA rates are generally higher than economic or accounting depreciating rates.
Many businesses do not take the maximum CCA amounts for various tax planning objectives (i.e. they are already reporting a taxable loss)
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If you change the depreciation policy this year, you will also have to change the previous years depreciation expense to make the financial
statements comparable over time.
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46.
Audit risk
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considers additional layers of security and internal controls. Unauthorized access for data: Lead to unauthorized transactions and destruction
of data.
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Lack of management action & concern: Methodology for systems development improves internal controls and meets decision criteria;
Management philosophy and style strengthens the internal control environment
Weak exception reporting system: Develop formal system for exception reporting improves internal control and meets decision criteria.
Misleading financial information due to inappropriate expenses being claimed; Many personal expenses are being paid by the business; Tax
minimization is corporate goal; owners pressure/bribe to lower taxes.
Cash sales (high inherent risk): Due to the cash sales, determining an accurate level of revenues will require additional testing; The
presence of many cash transactions signifies high risk in an audit. It is easier for a company to hide income when there are many cash sales.
This may be a particular concern with this company since the owners corporate goal is tax minimization. Extensive testing will need to be
conducted to ensure completeness since the record keeping will not be helpful in this regard. Particular attention will need to be paid to bank
deposits to determine the appropriate level of revenues that should be recorded. This cash forms part of the revenues that should be reported
on the companys income statements and upon which the corporate tax payable will be based.
First time audit: Opening balances and previous figures to be audited. Materiality: should be lower. Engagement letter. Predecessor audit:
courtesy letter, takeover letter, and communication engagement letter. engagement risk should be assessed higher due to the lack of
segregation of duties as well as the high inherent risk of a predominantly cash-based business
IPO: The IPO process may lead to greater pressure on management to make up the stronger results. This financial result may mislead the
shareholders and investors. Addition audit procedures should be carried out to reduce the audit risk to an acceptable level. due to the IPO
process, many changes will be modified. Three years of IFRS compliant and audited financial statements must be included in an IPO
prospectus. The company should present the liability and equity components separately in its statement of financial position and clearly
disclose the existence of the financial instrument, in accordance with IFRS.
Bank statement review: Review bank statements and bank reconciliations. Unable to provide an explanation for this unusual activity. My
strong initial suspicion is that the vendor is improperly depositing refund cheques resulting in misappropriation of cash; if confirmed, these
activities may be fraudulent. If fraud is confirmed, I recommend that we take these precautions. Increase the review and testing of the bank
reconciliation, the bank account, and the loans receivable account. Audit confirmations should be sent to loan applicants regarding the receipt
of refund cheques and the amount of loan application fee charged. Confirmation should also be sent to verify the balances outstanding in the
loan receivable accounts. Obtain reasonable assurance that the statements are free from material misstatement: with a higher than normal
level of judgment and professional skepticism; need to assess the effect of fraud risk on the audit and the financial statements. the audit risk
be kept low, given that this is s first time audit and we have uncovered unusual transactions that could indicate there is a risk of fraud.
Detective controls be instituted: Because internal controls appear to be weak or non-existent relating to the loan administration process; There
should be a segregation of the legal and the financial duties for the auto financing process.
Handle a clients money in trust: keep the money held in trust in a separate trust account; at all times, be ready to account for those assets,
and any income, dividends or gains generated, to any persons entitled to such accounting; comply with all relevant laws and regulations
relevant to the holding and accounting for such assets.
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The detection risk must be set low: Audit risk model: DR = AR/RMM=AR/(IR*CR) [High RMM high->DR low-> high quantity and amount of evidence
collected]. To ensure audit risk is at an acceptable level. Identify issues and items relevant to the planning of the audit approach and audit procedures. More
substantive procedures will be suggested during the audit and the policies and procedures must be drafted to control the risk. Including an account analysis
with detailed tests of account balances, to reduce detection risk.
NFPOs: Given the high control risk, we will have to do additional substantive tests to achieve an acceptable level of audit risk. Suggest additional testing
around AP and any cash handling; Additional vouching and validation of the completeness of AP will be required; Suggest that we do thorough bank
reconciliations for the entire year and match deposits to the known receivable; Should also validate the timing of the cash receipts; Validate the balances in
contributions receivable; A full assessment of the control environment, focusing on the lack of division of responsibilities in the accounting department, will be
an important part of this auditing cycle.
For all of the above items, we should maintain professional skepticism. During the audit, we should be aware of possible management bias to reduce the net
income figure, which will ultimately be used in the calculation of the bonus for union members. Yearend audit of inventory: Stock taking, Physical inspection
Audit risk assessment and audit procedures: The assessment of the engagement risk for this engagement should initially be assessed as high; Both the
control and inherent risk are greater than desired; Substantive testing should be conducted to reduce the total audit risk and to ensure that the financial
information contained in the financial statements is reliable; Attention should be placed on ensuring revenue are complete and expenses can be verified;
Materiality in this audit should be set at a low level
New generalized auditing software
One choice available to the auditor is to audit through the computer, using computer-assisted audit techniques (CAAT). When using CAATs, the auditor must
examine the controls related to the creation and storage of data to ensure that the data has not been manipulated. Such controls include restricting access to
the data and logging any access by those who have access to change the data. Where such controls are weak or non-existent, the auditor will have to extend
the tests used to verify the datas completeness and reliability. An IT trend that is impacting the auditors work is cloud computing: A new form of data
retention that is gaining popularity with companies that want to decrease their IT costs; Cloud computing refers to the outsourcing of IT infrastructure and/or
services over the internet; Cloud computing is internet-based computing, whereby shared resources, software, and information are provided to computers and
other devices on-demand ; This provides companies using cloud computing with access to a wide range of technical expertise and resources on demand;
Cloud computing presents many challenges to the auditor as the product being tested is an external product. Like any other engagement, auditors need to
ensure they understand the new technology, can evaluate the risks, and assess the controls. The key risks include security and privacy issues relating to
sensitive data and over-reliance on the outsourcer. Because of the potential risks and concerns, most companies will likely not outsource applications or
infrastructure components that are strategically important for maintaining a competitive advantage, or are critical to business operations.
suggest implementing the substantially updated generalized auditing software. This new user-friendly software from a reputable vendor is more efficient and
easier to use. It will identify problems more easily. Although it is new and not previously installed or used within the firm, I think this is a good chance to
implement: especially in a short time frame with performing extensive testing on the major areas which is completed. The new software will be expected to
help us reduce the time to perform test of controls. I will operate the new software in parallel considering the time constraints and possible risks.
Auditors opinion:
Unqualified: FS fairly presented (no material departure from IFRS/ASPE); If we cannot validate the opening balances we will not be able to provide an
unqualified opinion.
Qualified: scope restriction or IFRS/ASPE non-compliance
Adverse or disclaimer (no opinion): scope limitation so significant; departure from IFRS/ASPE so significant.
Client representation letter: confirms information provided by management; management responsibility to adequately disclose
Internal control letter: significant internal control weaknesses; auditor required to report to audit committee (or equivalent); not to provide assurance;
Management letter: recommendations to improve business; less significant control weaknesses; operation improvements.
There are many issues with this audit that we need to resolve before we would be able to give an unqualified opinion. First and foremost we
will need to evaluate all the issues at hand to determine the appropriate procedures for this audit.
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Requirements: Auditor need to exercise professional judgment in deciding what to cover and what not to cover in their examination because a
very small fraction of their clients transactions may have a significant impact on the financial statements; Scarce resources must be allocated
in a way to maximize shareholder and investor protection. Discussion with management. Analytical procedure and inquiry;
Private company using ASPE or IFRS: Private corporation needs to follow ASPE in the preparation of financial statements; Alternatively, it may
opt to follow IFRS; Since an audit will be needed, I recommend that the financial statements be prepared to conform to the required
accounting standards. The CICA handbook-accounting contains guidance for publicly accountable and private enterprises
new client:
Engagement acceptance: client acceptance and possible implications on the audit work. this is the first-time that our firm audit. We should
proceed with caution. given the several factors that lead to a high audit risk, including a weak internal control environment. We need to
address these issues with the client before we accept the engagement. I would recommend that we only accept this engagement on the
condition that we obtain support from the client regarding the approach that we will follow: We need to inform that all transactions need to be
disclosed and that the audited financial statements will reflect the actual financial situation as accurately as possible; In addition, the client
should be informed that the improper record keeping will result in more time and money being spent on the audit; The client should be
encouraged to maintain more detailed records in the future to ensure that organizations financial statements accurate and complete, and can
be attested to in an efficient manner. Lastly we will need to prepare an engagement letter that clearly identifies our duties as auditors, our
roles and responsibilities, and the scope of the work to be undertaken.
predecessor auditor: possible reasons for dissatisfaction of audit committee: is it related to the quality of the predecessor auditors work;
what prompted the change; if we determine that there was negligence on the part of the predecessor audit firm, we should discuss these
findings with the predecessor audit firm. We should then obtain legal advice before reporting this to the CGA association. The information
obtained through our assessment may have caused us to decline the assurance engagement if we were privy to this before. We should
reconsider our association with the client and seek legal advice on the possible actions to take. Communicate with the predecessor auditor: A
takeover letter should be sent to the prior auditor before we accept engagement. If there is no issue raised in the response assessment, we
can accept as our client and get the engagement letter signed. Since the company has previously been audit, we should be sure to
communicate with the previous auditor by way of a courtesy letter.
Change the audit firm
There is a potential ethical concern as no explanation was provided by the company for the change of audit firm. A takeover letter must be sent to the
predecessor auditors prior to accepting the audit engagement as this will be our first audit. The response of predecessor auditors should be assessed to
determine whether to accept the engagement
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47.
Audit committee
The members of an effective audit committee must be independent and financially literate:
To be independent, a committee member cannot be a majority shareholder, manager or employee; To be financially literate, a committee
member must be able to understand financial statements and have experience in financial matters or hold an accounting designation.
It will be responsible for the oversight of financial reporting and disclosure: an audit committee would provide the company with the ability to
review the issues in a timely manner; the audit committee would also have the responsibility to oversee the reliability of the entire financial
reporting process. It will be beneficial in light of the upcoming audit. any audit issues will be examined more quickly and independently. the
audit committees communication with management and will be seen as a positive change by external auditors. engage an external auditor to
perform the audits. monitoring the performance and independence of the external auditors. oversee and guide the financial reporting. review
the company fraud policy and introduce a zero-tolerance policy
Working with the external auditors and management team to oversee the review of internal controls. The audit committee should have been
given some direction when it was first formed. Some training in this area should be done. Review the audited financial statement and liaise
with the external auditors.
Duty of care:
It is important that you let our client know that our duty is to ensure that the financial statements are prepare in accordance with GAAP and
are presented fairly and free of material misstatement. Exercising this duty of care will ensure that the best interests of society are achieved.
This is especially important when stakeholders need to depend on the financial information to which you are attesting
Communication with audit committee: Report fraud event to audit committee; Meets auditing standards; Must follow standards in Handbook
Ethics and trust competencies
a. Loss of trust from clients and shareholders: reputational damage
i. Communicate and disclose the fraud
ii. Seems ethically correct; creates trust
Financial risk management (finance competency): financial affects and impacts
iii. Seek legal avenues to recover losses
iv. Cost minimization
v. Should have no impact on clients and shareholders
Financial accounting competencies
b. Accounting standards: explain accounting treatment for investments
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Insider trading is illegal: inform the appropriate level of management and the audit committee or equivalent; contact corporate legal counsel to determine
the CGAs duties and obligations.
Insider information be used for personal gain
The issue is in regards to my duties as a CGA. I got carried away speaking with my father about the business. It is unethical according to CEPROC that insider
information be used for personal gain. I must speak with my father immediately and let him know that I cannot introduce him to the client. If he does initiate a
meeting with the client, I must give the client full disclosure that it is my father he is dealing with, and that he should speak with an impartial third party
regarding business valuation.
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Fraud Issue
Fraud: Fraud triangle: (1) incentives pressures (2) opportunities (accessible cash/inventory; lack of segregation of duties) (3) attitudes/rationalization
(unethical behavior by management; disregard for internal control). Recommend: (1) responsibility when fraud suspected: additional procedures; consider
implication (material/who); discuss with appropriate level of management; reporting outside organization; (2) advises on the design and implementation of
new or enhanced internal controls: to strengthen systems and operational control, to reduce exposure to business risks, to enhance operating effectiveness,;
to comply with rules and regulations. internal controls are commonly assessed; typical small business controls: daily backups of data (kept offsite); owner
required to sign cheques; password changes authorized by owner; spot check employee activities. (3) analyzes and documents the evidence and results of the
engagement or management audit to develop conclusions (prepares working paper with sufficient details and clarity to support the conclusions) ;
persuasiveness of evidence: sufficiency (quantity of evidence); appropriateness(quality of evidence; relevance & reliability); timeliness(closer to balance sheet
date) (4) develops and advises on a framework for detection of fraud (payroll fraud, billing fraud, computer fraud, forensic investigation procedures); effective
fraud management framework include: strong corporate governance; assessing fraud risk exposures; establishing preventive controls (cost-benefit) ;
establishing detection controls and monitoring.
Stealing from the company
I will attempt to contact the employee (CGA) to discuss this issue. If I am unsuccessful, then I will contact the CGA association for the next steps. The
unethical nature of his activities has an impact on the organization, its customers and the public at large in a way that raises questions as to the credibility of
the profession. Prior to this, however, legal advice should be sought as the controller appears to be acting in a criminal capacity. If he is in fact stealing, it
would be serious enough to contact the association directly without speaking to him first. A vendor approval process will need to be developed and
implemented that will include documentation that they meet our criteria, and approval by two officers. At least one of the approving signatures should be
independent of the purchasing department. The approval process should include an initial inspection of the vendor facilities. Accusation of theft: It is unethical
to jump to conclusions regarding theft. We must have proof before we accuse anyone of stealing. I recommend installing surveillance cameras so that if theft
is occurring we can confront the individuals.
Money laundering
CGAs are considered to be financial intermediaries when they are involved in receiving or paying funds; purchasing or selling securities, real property, or other
business assets; transferring funds or securities on behalf of another person or entity; issuing instructions to accomplish any of these activities; or receiving
professional fess in respect to any such activity. CGAs who act as financial intermediaries must report all cross-border transactions in cash or securities in
excess of $10,000. In addition, they are required to report any transactions (regardless of the dollar amount) that might reasonably be considered to relate to
money laundering. They are also required to establish appropriate policies and procedures to ensure that they are able to comply with the legislation.
A CGA in a public accounting practice also runs a trucking business under the name CGAs in partnership with two non-CGAs
A CGA operating as a freelancer refers clients to other CGAs and obtain commission on such referrals
A CGA lodges a written ethics complaint against his fellow CGA co-worker as soon as he becomes aware of the unethical act: A member shall not criticize
another professional colleague without first submitting this criticism to that colleague for explanation. A written submission of the criticism must be made to
the colleague before submitting it to the Association
Suspect fellow-CGA unethical: submit criticism in writing; however, if not appropriate, contact association; Complex transactions: ensure due diligence is
exercised by researching and analyzing relevant options
Protects the public interest: balance corporate success with fairness to public
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Confidentiality issue
Confidentiality
CGA asks her husband to complete the working papers: violated both CEPROC and CAS: require absolute confidentiality of client working
papers.
Before taking any other action: required to submit my criticism of the CGAs professional conduct in writing to this CGA; this allows this
CGA to address my concerns and clear up any misunderstandings; if there is still a probability of unethical behavior other avenues may be
pursued.
Other actions: contact the CGA associations ethics committee and describe my concerns; submit my completed report ot the chair of the
audit committee; meet with legal counsel.
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53.
Layoff issue
Tax free shelter through direct transfer to an RRSP within certain limits.
The amount which may be transferred to an RRSP ($2000 for each calendar year (or part year) before 1996;
Plus $1500 for each year (or part year) before 1989 for which employer contributions to the employees pension plan have not vested).
Impact:
The layoffs could have a severe impact on the local community. It will add to an already high unemployment rate.
It may negatively impact companys public image, especially the long-term employee.
For NFP:
It can result in lower morale for remaining employees, resulting in higher employee turnover.
Remaining employee may think they will be laid off next; will look for alternative work
Severance pay:
The severance pay included in the retiring allowance under the ITA that the laid off employees will receive;
Part of the retiring allowance could be transferred to an RRSP, thus, be sheltered from immediate tax:
The amount which may be transferred to an RRSP is 2,000 for each calendar year before 1996, plus 1,500 before 1989.
For which employer contributions to the employees pension plan have not vested, this tax-free transfer will likely be applicable for those long-term
employees, especially the ones that have been with the company since inception.
Employee turnover:
Recruitment and retention:
Develop and implement a clear policy to ensure that all employees are treated fairly and in a consistent manner according to these guidelines.
Recommend implementing a policy of having an exit interview:
So that a determination can be made as to why staff are leaving; This will give us information to assist with recruiting in the future.
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The auditor should take some time to understand and become more familiar with the clients industry and type of business.
It is a GAAS requirement to fully understand as much as about the company he/she is auditing as possible as it will enable him/her to provide an
objective opinion.
Providing inaccurate advice: We should contact this CGA to express our concerns about the quality of the report and ask for clarification about the
inaccuracies in the report.
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Custom-built software
Custom-built software
Internal control systems:
That ensure all transactions are recognized, that all judgments made are based on complete information, and that raw data are summarized
and presented fairly
Inventory management system:
Provides timely and relevant information on inventory and purchase orders, and helps purchasers benefit from suppliers terms.
The updated system should be able to assist in determining optimal production and inventory levels for the various lines and at the
same time minimize stockout, carrying and obsolescence costs.
The determination of optimal production and inventory levels will depend on a number of factors that need to be continuously
monitored and evaluated.
These factors include the following:
Sales forecasts, Daily sales data,
Purchase orders from distributors and retail stores,
Current inventory levels at each plant, and retail store,
Production capacity of each plant and Storage capacity.
EXtensible Business Reporting Language(XBRL):
Publishing financial information electronically;
It is an open standard that defines the content of specific types of financial reports (such as financial statements and tax returns) using
XML;
Web-based reporting;
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Up/Recovery plan:
A full backup weekly with nightly incremental backups;
All copies of critical software are stored offsite;
There is also a hot site available;
Additional disaster recovery procedure;
One fully-trained backup person should be knowledgeable on the entire restore system.
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Organizations Responsibilities
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Maintain a strong competitive position; maintain high level of operating efficiency; that a successful firm be defined as one that is
consistently profitable.
SWOT
It is another good tool and can be used for this purpose.
[Strengths (The business executives are involved in either marketing or general operations for their respective companies they will be
able to provide valuable advice on marketing and operations)
Weaknesses (The board does not have any local business executives who are involved in finance. So currently there is no expertise in
finance; This could negatively impact their ability to effectively analyze the results of operations and the implications for the future)
Opportunities/Threats (The company should be developing an alternative plan in advance to prepare for this potential event).
Suggestion: I would suggest that it allocate time for a formal meeting and assess those SWOT factors in light of their vision and mission
statement.
The discussion could generate additional SWOT factors that are relevant for the company which should be considered as part of their overall
strategy.
Legal responsibilities:
It is important to perform in a manner consistent with expectations of government and law; comply with various federal, state, and local
regulations;
Be a law-abiding corporate citizen; that a successful firm be defined as one that fulfills its legal obligations;
Provide goods and services that at least meet minimal legal requirements.
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Corporate Governance
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Determine whether the entity has a risk assessment plan as part of its IT governance framework. Such a plan should include regular IS
risk assessments of controls and proper functioning of controls and data integrity.
Incorporate reasons:
There would be limited liability to the owners assets from lawsuits result from injury of staff. (limited liability; decision making; income
splitting; tax benefits)
Tax perspective: Have little or no tax advantage by incorporating (because he will use all of the after-tax income to meet personal
obligations at the same rate before he incorporated; number of available deductions will remain the same.)
CFO:
Accurate and timely reporting of historical information (knowledge of standards);
Treasury duties;
Economic forecasting; Responsible for developing external financing plans.
Financial controller:
Prepare financial & cost reports,
Budgets & forecasts;
Analyze and interpret financial data;
Improve systems and financial performance.
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Cash management:
Bartering is resulting in too many prizes and not enough cash. The bank loan will provide cash in the short run. Expenses will reduce cash flow
from operations.
The loan will improve the cash position, but not working capital or short-term liquidity.
Decision: How to calculate positive contribution after costs and that the results should also be compared to budgets and past performance.
Both quantitative and qualitative should be evaluated to joining the barter group.
Prizes distributed to employee:
It is classed as non-trivial gifts by CRA. With a fair value in excess of $ 500, the amount should have been treated as taxable income to
the employees.
The company needs to record the liability in the financial statements.
The appropriate payroll taxes and deductions should have been remitted to CRA.
Employees could also be reassessed for failure to report prizes in excess of $500 as income and suffer penalties and interest.
The employee should be advised of their personal situations promptly.
The company needs to get professional advice from tax specialists.
The board may also have a moral obligation to provide some legal assistance to the affected employees.
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Conversion approach
Parallel conversion approach to implementation of the new software: most secure method.
It relies on operating the existing system in parallel with the new system.
In a parallel conversion, the old system continues to be used at the same time as the new system is introduced.
Both systems run in parallel for a predetermined amount of time. People use both systems but increase the amount of item that they use the
new system until it is in use the majority of the item. Then the old system is discontinued.
A parallel conversion allows for a comparison of the new system to the old so that you can benchmark and quantify its effectiveness.
A parallel conversion also minimizes the risks of operational and data-processing failures because the old system continues to function
with the new system.
The challenges of a parallel conversion revolve around the management and costs of running two separate systems.
The duplication of effect associated with running two systems can be costly with large, complex systems, this would be prohibitive.
If the old system is an option, some users will not use the new system and continue to access the old system.
The benefits of the new system will be delayed as long as the old system continues to be used.
The parallel approach is considered the least risky conversion approach. Nevertheless, the cost and potential confusion of running two systems
at once makes it a poor choice for large, complex systems. It is a good choice for smaller systems that use the existing infrastructure.
Pilot conversion approach (many branch): enables experience and live testing in one location, along with changes to reflect unique needs,
before rolling out to other branch locations.
Phased installation approach (modules): makes the planning and implementation more critical since certain modules rely on one another.
Direct cut-over conversion approach: has the highest risk since ther is no other system to fall back on if difficulties arise.
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IFRS vs ASPE
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Strategy
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Other concerns:
Accounting-IFRS:
Because our company is a public corporation, it will have to follow IFRS for fiscal years. At the acquisition date, the fair market value of all its assets and
liabilities should be determined and used for consolidation purposes.
After the acquisition, the technology company will not be able to use the same policy for the recognition of the intangible assets. Specifically, it should
recognize intangible assets only if it has the adequate technical, financial and other resources to complete the development and to use or sell the intangible
assets.
Identifying the acquirer
Determining the acquisition date
Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity
Recognizing and measuring goodwill or a gain from a bargain purchase
Tax implications:
SBD will be lost after the acquisition.
Our company will not be able to take advantage of the some tax incentives related to research and development (SR&ED tax credit rates). The rate
used for public companies would be 20% compared to a rate of 35% for CCPCs.
Recommendation: Consider alternatives:
Providing the financing or Contract manufacturing with it. Any decision in this regard needs further investigation and requires careful planning.
Our company should use the services of an accounting firm that specializes in acquisitions. And we should carefully negotiate the terms and conditions
with the technology company shareholders. The final determination should be made by the management.
Merger
Fixed costs:
Some of the fixed costs will be eliminated upon merging. (Considering the excess space at the location, rented office space, utilities, and telephone.
Gaining efficiencies and freeing up cash flow.
There is also a chance that we may be able to get out of some of the long-term leases. Once merged, the remaining fixed costs will need to be
systematically allocated between the two entities. There are two basic allocations that may be used are the amount of staff per organization or the
amount of space used in the facility per organization
Accounting system:
To gain efficiencies, one system will need to be used by the merged entity. Tracking costs in one system will be easier than tracking them in two
separate systems.
Since an ERP is much more robust, we may also find that it has features we are not using, that may be beneficial to the new, merged organization.
We need to lock the file cabinets and have separate cabinets for each organization, to safeguard the confidentiality of the client.
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I recommend moving away from a paper-based system to an electronic system. our ERP may be able to do this, and ERPs can be set up to give individuals
access only to the areas they need. We should also explore the use of proprietary online application system. This is an opportunity to move to paperless client
files, and the software may end up integrating with our ERP. This would mean streamlining processes as there would be no manual entry of data, which in turn
would significantly reduce data-entry errors. We should consult an IT specialist to determine the feasibility of this move from a paper system to an online
application system. (as this knowledge is beyond the scope of my abilities).
Merger risk:
Both organizations have different mandates. Although both are good causes, this merger of two seemingly different organizations may be seen negatively in
the community because of the radically different needs of the user groups.
Donations may fall even further if the community doesnt understand the reasons for the merger. Not enough efficiencies will be found to make the merged
entity viable.
The organization may face a major decrease in the donations, and potentially not being viable.
There is a real risk that both organizations may end up failing because of the fiscal instability.
The financial projections under various scenarios should be done to ensure that this will not happen.
We may have key employees leave since they dont know what the future holds.
There will be fear of job loss, especially because this merger is about gaining efficiencies.
We have an opportunity to use this merger to streamline processes, and at the same time we may need to use it to eliminate redundancies and lay off staff.
Cultures: We also have to be aware of the cultures of the two organizations. We fact the risk of the two cultures clashing. We should constantly be managing
the change and alleviating fear amongst both employee groups.
I recommend that all risks be identified and that a mitigation plan be put into place prior to proceeding with the merger.
As I am not an expert in mergers, I recommend that we retain a lawyer who specializes in this to assist us with the implications of the merger. This
professional may also identify further risk that I have overlooked.
The merger may only work in the short term. Long-term implications will need to be considered as well in determining the feasibility of the merger.
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There are some good attributes to this merger and some that require further exploring I recommend that we continue exploring the different aspects of this
merger, as overall I think it would be beneficial to both organizations. [Tax
Filing
implication]
Moving expenses:
The actual moving expenses can be claimed as a deduction from net income, if they do not exceed the income earned subsequent to
the move (any unclaimed/excess being carried forward to the next year).
Each employee who moved will be eligible to claim moving expenses if the new home is at least 40KM closer to the new head office.
Eligible moving expenses include
Transportation and storage costs,
Travel expenses (including vehicle expense, meals and accommodation), costs for up to 15 days for meals and temporary
accommodation near either residence for employees and the member of the employees household, and the cost of cancelling a lease
for the employees old residence (except any rental payment for the period during which the employee occupied the residence.)
Another eligible moving expense would be the cost for interest, property taxes, insurance premiums, and heat and utilities expenses
paid to maintain the old residence when it was vacant after the move, and during the period when reasonable efforts were made to sell
the home, to a maximum of 5K.
When an employees old residence is sold as a result of the move, eligible moving expenses also include legal fees for the purchase of
the new residence, and certain costs of selling the old residence.
Moving expenses which cannot be deducted for tax purposes include expenses for work done to make the home more saleable, any
loss from the sale of the home, expenses to clean or repair a rented residence to meet the landlords standards.
Employees must keep all the receipts and supporting documentation, and will need to use the CRA form to claim the moving expenses.
as well, employees will need to enter the allowance received fif it is not included in their income.
Automobile allowances
The automobile allowances have been paid to employees based on a flat rate that is not related to the number of kilometres driven. It is a
taxable benefit and has to be included in the employees income.
The company should ensure that the yearly total is included in the employees T4.
The employee can keep the travel log to track of kilometers driven and fill in Form T2200 to claim the expenses and deduct income. And the
costs are deductible for tax purposes by the company as an eligible business expense.
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Business vehicle
When the regional supervisor uses a company-owned vehicle for personal reasons, this is considered a taxable benefit and is added to their
income.
The standby charge for owned vehicles is based on:
2% of the vehicles cost to company (including taxes);
The number of 30-day periods in the tax year the vehicle was available to the supervisor;
The percentage of personal vs. business driving;
Any reimbursements from the supervisor for the standby charge.
The operating expense portion of the benefit includes things like gas, oil, maintenance, repairs, and license and insurance costs paid by
company.
It must be calculated using either the optional or fixed-rate method.
The entire taxable benefit is subject to CPP, but not EI.
If it is possible to estimate its value, company can prorate it over the supervisors pay periods for the rest of year.
The supervisor should be made aware of these tax consequences and is required to keep a detailed log of all vehicle usage and operating
expenses.
Company will be able to deduct CCA for the vehicle at a rate of 30%.
The total cost of the car is limited to $30,000 (plus taxes), and deductible interest/financing charges are limited to $300 per month.
Employee gift certificates:
The first $500 worth is not considered taxable income
Notice of Assessment and Notice of Objection
If a taxpayer disagrees with their assessment, a notice of objection can be filed.
A taxpayer has the right to object to an assessment made by the CRA.
The notice of objection must set out the reasons for the objection and all relevant facts related to the issue that gave rise to the assessment.
Notice of Objection should be filed by the
later of:
Within one year after the filing due date for the taxation year (April 30, next year i.e. 2007 income tax return-> April 30,2008+ one
year-> April 30, 2009);
Within 90 days after the day of mailing of the notice of assessment.
Income from property:
Individuals use normal method;
Corporations use either Accrual: receivable method: include in income when legally due; or Cash method: include in income when received;
Receivable method or cash method: contract less than 12 month period or interest paid more often than every 12 months.
Accrual method: use for all long-term contracts.
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Freelance services
From a non-resident for taxation purposes, would be considered income. 15% tax required is withheld from fees, commissions, and other
similar amounts paid to a non-resident for services rendered in Canada.
Whether or not the non-resident carries on business in Canada. Any payments made for his freelance services would be subject to a 15%
withholding tax.
May recover the withholding tax if he proves that he has not carried on business in Canada by filing an income tax and benefit return detailing
that he has no taxable income in Canada; or he can apply in writing to CRA to have a 15% tax reduced at source.
Transaction between two related parties
Mom and son: the transaction must occur at fair market value; mom has capital gain = FMV-cost; son s adjusted cost base=cost amount.
[asymmetrical and punitive result]
Tax consequence of donating building and land
A donor can claim a tax credit based on the eligible amount of gift since LES is registered charity.
This donation is considered as a gift in kind since a capital property is donated.
There will be a deemed disposition at fair market value.
Tax receipts for donation in kind need to be issued at the fair market value.
LES needs to obtain the services of an independent real estate appraiser to determine the FMV of the building and land.
Per CRA, the appraiser should not be associated with the donor, the qualified donee, or another party associated with the donation of property.
The donor can avoid or reduce any taxable capital gains by designating a transfer price as the proceeds of disposition that is between the FMV
and the adjusted cost base of the building and land.
This will lower the value of the gift and the resulting tax credit. The Division C deduction related to charitable donations is limited to 75 percent
of net income (Division B income).
The annual Division B income limitation of 75 percent gift of depreciable capital property; and taxable capital gains arising on the donation of a
capital property.
The donors net income for the year is increased by 25 percent of recapture of CCA arising.
Cash donation
Dr Asset
Cr Donation revenue (if a pledge, then Cr Contribution Receivable)
Depreciable property donation
Dr Asset (FMV)
Cr Deferred Contribution
Tax receipt for FMV
Land donation
Dr Asset (at cost)
Cr Donation Revenue
Tax receipt for FMV
Restricted donations
Dr Asset (cost for land, FMV for depreciable assets)
Cr Deferred Contribution (if not use for stated purpose)
Cr Donation Revenue (if used for stated purpose)
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Onsite Cafeteria meals - if employee pays reasonable cost for the meal this is not a taxable benefit. Reasonable costs include basic food
cost and preparation.
Group life insurance, Health and medical - Life insurance is taxable benefit and Health and Medical insurance is not a taxable benefits.
Employer provide Health and Medical benefits to employees are tax deductible
Company social events this is not a taxable benefit as long as it provided to all employees and are limited to 6 events during the year with
a cost of $100 per person
Parking Parking paid for employees are taxable benefit, it should include in employees T4 income
Golf Club Corporate Membership This is not a Taxable Benefit only if for business income generating purpose.
Season ticket - treated as annual gift to employee which is tax deductible for company and non-taxable benefit. Non-taxable benefits is only
allowed for non-cash gifts and awards within $500 per year for each employee
Cottage maintenance fee this is a taxable benefit because it is not for business income generating purpose
Free cottage rental fee Taxable benefits because it is not for business income generating purpose
M & E - not taxable benefits if employees submit receipts for reimbursement but 50% of tax deductible for employer side. only claim 50% HST
for individual employees, 100% HST claim for all employees meas
Cottage amortization expenses - not tax deductible because it is non-business income generating related and it should be taxable benefits
for employees.
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[Ethical]
(Code of Ethical Principles and Rules of Conduct) CEPROC
Fiduciary duty: A CGA is required under the law to act in the best interest of the client: the duty:
to advise in the best interest of the client, carefully, honestly, and in good faith;
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[IT]
Cash register (UPC bar codes):
Would significantly improve both inventory control and sales tracking.
The system could be linked between stores to determine inventory needs and minimize obsolete inventory.
An electronic point-of-sale machine would validate credit card purchases.
Special construction accounting software:
Features progress billing which recognizes revenue based on project completion progress I recommend the company needs to ensure whether
the new package has all the essential features needed to perform the desired tasks; ensure it has the appropriated control;
Have appropriate safeguards in place to ensure assets are not misappropriated;
IT governance controls must be established to prevent unauthorized access;
Critical application functions are restricted to technical staff only;
Ensure it can be tailored to meet the specific needs of the organization;
The policies and procedures must be drafted to control the risk.
Training in the implementation of the system will be necessary. Use RFP to vendors.
Implementation plan;
As information technology isnt my expertise, I recommend the company to get the opinion from an IT expert to help decide
Cloud computing:
A new form of data retention called cloud computing is gaining popularity with company looking to decrease the IT costs.
Cloud computing is internet-based computing, whereby shared resources, software, and information are provided to computers and other
devices on-demand.
Support systems software:
Drill-down analysis (Determine total costs)
Sensitivity analysis (Determine an appropriate selling price)
Six activities in the acquisition of information technology:
Research technical criteria and options;
Solicit quotations or proposals from vendors;
Validate vendor claims and performance;
Evaluate and rank vendor proposals;
Award contracts and debrief losing venders;
Establish integration requirements.
Before the final recommendation; steps must be done for new IS:
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[Analysis method]
SCM (strategic cost management):
External focus;
Broad, value creation perspective;
Focuses on pre-and post-production activities;
Supports a variety of strategies;
Relies on value chain analysis, strategic positioning analysis, and cost driver analysis.
Management accounting;
Internal focus;
Narrow, value-added perspective;
Focuses on production activities;
Generally supports a cost leadership strategy
CVP (cost-volume-profit analysis):
Three elements:
The cost of making the product or delivering the service that a firm provides;
The volume or number of products made or services delivered;
The profit made per unit.
CVP and strategic planning:
Evaluates the contribution margin and profitability of existing products or services;
Can be used with pro-forma information and estimates to assess potential future product and services;
Usually used in conjunction with break-even analysis.
Can be useful to perform what-if analysis to test out different strategies and assess potential
SPA(Strategic positioning analysis):
Focus on the role of cost information and its dependency on the firms strategies;
Uses Porters external environmental analysis as the key to developing a business strategy;
Three basic choices in terms of strategies to compete: Cost leadership/Differentiation/Focus on a market niche.
Used to match the strategy to the type of management control systems needed.
VCA (value chain analysis):
Provide a systematic method for examining the development of competitive advantage within an organization.
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It is a network of value-creating activities [Primary activities --- value is added directly to the product/Support activities --- they support
primary activities].
The sequence of all the activities that a firm undertakes in order to offer its product or service to the market.
Activities are broken out in sequence, then analyzed to align them with the competitive strategy to gain a competitive advantage.
Keep in-house or outsourced.
Keep in-house: organization can do them better than anyone else: cheaper faster with better quality, better design
CDA (cost driver analysis):
It is where a company investigates the cost drivers or variables that regulates their activities so that they can be controlled and/or
reconfigured in the firms value chain in order to build sustainable competitive advantage.
Used in both management accounting and strategic cost management.
Focus on understanding costs and cost behavior.
Use a hierarchy: [Unit-level activities/Batch-level activities/Product-sustaining-level activities/Facility-sustaining activities].
It helps make better predictions about cost behavior to support strategic analysis and decision-making
SVA (shareholder value analysis):
it is a calculation of the value of a company made by looking at the returns it gives to its stockholders.
Focuses on determining the value of the firm to its shareholders.
Relates shareholder value to the companys expected future cash flows.
Uses net cash flows (inflows less outflows).
There are 5 key factors:
Sales growth,
Operating growth,
Incremental fixed capital investment,
Incremental working capital investment, and Cash flow effects of income taxes.
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[Format]
Report
Memorandum
Memorandum
To:
From:
Date:
Subject:
The purpose of this memo
Address the issues raised
during our recent discussion
about
Have included my analysis
and recommendations
where applicable
Please let me know if you have any
questions or concerns about my
comments and recommendations. I
would be pleased to provide additional
information during the meeting/I
would be glad to discuss these items
further.
Letter
Report to
Title
Prepared by
Submitted Nov 26, 2012
XXX CGA
XXX Street
Kingston, Ontario K0H 1G0
Nov 26,2012
Introduction:
The following report is designed to
help you present your ideas to the
management team next week.
Mr. XXX
123 XXX Street
Kingston, Ontario
K0H 1G0
Conclusion:
I advise that additional work be
done on this subject.
125