As per the March 2010 Technical update

Accounting Standards: For the 2010 SOA, candidates will be provided direction as to which GAAP context to apply for each simulation. E.g.: - Public company that has already adopted IFRS - Public company that is about to adopt IFRS - Private company that applies current Canadian GAAP* - Private company that has chosen to apply IFRS as it plans to go public in near future *Candidates have the option, where told that current Canadian GAAP applies, to apply the new Accounting Standards for Private Enterprise (ASPE) instead. Where applying ASPE GAAP instead of current Canadian GAAP, candidates must indicate that they have made that choice. Assurance Standards: The new Canadian Auditing Standards (CASs) only apply to audits of years ending on or after December 14, 2010. However, candidates have the option on the 2010 SOA of applying them in all applicable circumstances, even outside of the applicable dates, i.e. audit of historical financial statements or other historical financial info. Existing Canadian standards must be applied to all other engagement types on the UFE. Candidates must indicate when they have chosen to apply CASs instead of current Canadian auditing standards. What this means ASPE or CASs are not examinable on the SOA therefore questions on the SOA will not specifically ask you about ASPE or CASs. You can however answer using ASPE or CASs but you must specifically state that you are doing so and you must do so for all accounting and/or assurance issues in the question.

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2010 SOA - 1 EXAMINATIONS WRITTEN INSTRUCTIONS FOR CANDIDATES USING LAPTOP COMPUTERS

At the exam start-up Turn on your computer and make sure the booting process is complete. Make sure your clock is set to the correct date and time. Run Securexam. Select the Language you wish to use and click Ok. Select Login and take an exam. Type in your user name (email address) and click Ok. Run the USB Drive Backup Wizard. (A USB key is not required for SOA-1, however it is recommended to help identify any potential problems with your USB port which may arise in future exams.) Once you get a Passed response, click Continue to Exam. In the Select Exam box, tick the available box: SOA-1. Click Ok. Enter your 4-digit candidate number. Click Ok. Type in the password sums. Type in the word start and begin the exam. You have 4 hours to complete the exam from this time.

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AT THE END OF THE EXAM (AFTER 4 HOURS):

BEFORE EXITING SECUREXAM

Go to the spreadsheet tab and select the Show Printable Area box. (When the Show Printable Area box is selected, all the menu items and buttons are disabled.)

Review your spreadsheet visually and make sure that all text typed appears in the printable area. If not, deselect the Show Printable Area box and manually reformat the cells.

EXITING SECUREXAM

To exit Securexam, make sure that the Show Printable Area box in the spreadsheet is deselected. Select End Exam/Session from the pull-down File menu. Enter the exit password adds. Click Yes to the question Are you finished with this exam? Click Ok to the question Confirm that you wish to end this exam. The program must complete its shutdown sequence. Once the program has shut down, right click on Start at the bottom of your screen and select Explore. Confirm that you can see the Removable Disk E (or it may be a different letter) and that you see one file with todays date ending with .ssi-response and one folder labelled ExamIP.

Check that the .ssi-response file on the USB key is not at zero bytes.

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UPLOADING EXAM You are required to upload your SOA-1 exam files to the Software Secure upload site by Midnight on May 23, 2010. Note: Technical help is not available on weekends. Any exams uploaded after May 23, 2010 will not be marked. Upload instructions 1. Verify that you are connected to the internet. 2. Locate the .ssi-response file named Ontario_ICAO2010_1234_date_xxxxssi.response where instead of 1234 it has your candidate number. ( this file should be on your desktop or on your usb key or both) 3. Go to the Securexam Exam registration site at http://cica.softwaresecure.com and log in to your existing account. If necessary, you may use a different computer but you will need to copy the .ssi-response file to that computers Desktop beforehand. 4. Click the Upload Exam from the left hand column to upload the file. 5. Use the Browse button to select the file from your desktop. (ensure the date of the file is the date you wrote the exam) 6. Click on upload. 7. After the upload has been completed, you will be taken back to your Account Home page where you can verify that the uploaded file appears under your Upload History. If you do not see this item, restart your computer and repeat the previous steps. 8. You will receive an email notification from Software Secure that your file has been received. If you do not receive a notification within 1 hour, contact Securexam at 1-866401-7758. Please note this number will not be monitored on weekends! 9. The copy of your response sent to ICAO contains only your candidate number as a reference. All other personal information provided to Software Secure through the uploading process or email will be kept confidential by them so please ensure your candidate number is correct. 10. If you have any questions or need assistance, please refer back to the email regarding Securexam help or the user guides
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2010 ICAO SCHOOL OF ACCOUNTANCY SOA-1 EXAMINATION

Instructions to Students 1. This examination is 4 hours in length and consists of 3 questions. There are 23 pages including this one. 2. To assist in budgeting time during the examination, a suggested number of minutes for each question is shown at the beginning of the question. The marks available for each question will be based on the relative amount of time suggested. 3. Tables of present values and selected tax information have also been included in this package. These tables may be used in answering any question on the examination. 4. You are not permitted to use the printed version of the CICA Handbooks nor the CCHs Income Tax Act with Regulations nor Carswells Practitioners Income Tax Act. You are required to use a laptop computer to access these reference materials electronically using the approved Securexam (CA) software. No other reference sources are allowed. 5. Answers or parts of answers to examination questions will not be marked if they are recorded on the question paper. 6. Rough notes will not be marked. 7. Questions answered in word or excel rather than Securexam (CA) will not be marked.

*******

KEEP THIS EXAMINATION FOR DEBRIEFING PURPOSES. EXTRA COPIES WILL NOT BE AVAILABLE.

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Question 1 (80 minutes) The Home Company (THC) is a retailer of home maintenance products, including small tools and accessories, home dcor items and small appliances. Although THCs founders, the Madison family, still hold the majority of the shares, 5% of the common shares were offered publicly in 2007. Since that time, the publicly offered shares have been widely held. THC has reported their financial statements for the year ended December 31, 2009 in accordance with Canadian GAAP. However, consistent with CICA requirements, THC intends to adopt IFRS in fiscal 2011. THC has planned the transition carefully, and will be ready to apply IFRS as required to provide 2010 comparative results. THCs former auditors resigned during 2009, as they did not have the adequate level of knowledge required to audit companies reporting using IFRS. On November 1, 2009, the Board of Directors of THC appointed Rashed & MacDougall LLP (R&M) as their financial statement auditors for the year ended December 31, 2009. You, CA, are the senior on the THC engagement. This engagement also includes the review of THCs quarterly financial statements. In November, you completed the interim work and planning for the upcoming audit engagement and at year-end you attended THCs inventory counts. Preliminary materiality was set at $30,000. Today is January 4, 2010. At a meeting with Sarah Brightman-Rashed, the audit engagement partner, you received a draft of the Management Discussion & Analysis (MD&A) (Exhibit I) to be included in THCs annual report. Sarah informed you that she recently met with Brian Madison, the newly appointed CFO, to get an update on activities of THC since the interim field work. Notes from her meeting are included in Exhibit II. Sarah has asked you to review the MD&A and these notes to identify any financial accounting issues that have arisen since the interim work. For each issue identified, she would like you to describe any measurement and presentation differences between Canadian GAAP and IFRS. Further, Sarah requested that you discuss any additional year-end audit procedures that should be added to the audit programs based on the new issues identified. Based on the new information provided, Sarah would also like you to update the documentation of R&Ms understanding of THC and its environment in the audit file by preparing a SWOT (strengths, weaknesses, opportunities and threats) analysis of THCs five-year strategic plan. As he is new to the role of CFO, Brian admitted to Sarah that he does not fully understand what services R&M will provide to THC in addition to the audit. To help Brian, Sarah has asked that you prepare a draft report to him clarifying R&Ms obligations and the procedures involved in regards to the annual report and the first quarter review of THCs financial statements. Sarah would like you to use the draft MD&A to provide a specific example of these procedures.

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EXHIBIT I 2009 MANAGEMENT DISCUSSION & ANALYSIS - EXCERPTS Our Company THC operates 45 retail stores in Ontario, 27 of which can be found in the Greater Toronto Area and 18 stores located in Southwestern Ontario. THC is primarily run as a family business that prides itself on training and promoting from within. Many of the senior management team members have been working with THC since it opened its doors twenty-three years ago. As a result, our senior management team is extremely familiar with the business of home maintenance products. In 2009, the THC family proudly welcomed Brian Madison to the senior management team in the role of Chief Financial Officer. Consumer Preferences In 2009, THC conducted a survey of our customers. The results of the survey include the following: 75% of customers surveyed select stores for convenience of location 65% of customers surveyed prefer mega-store layouts that offer a variety of retail products in one place (i.e., clothing, houseware, etc.) 55% of customers trust the THC brand and describe themselves to be more likely to buy a product endorsed by THC staff 78% of customers describe themselves as loyal to THC

2009 Financial Performance Over the past three years, the retail sector has operated in a challenging economic environment, with economic conditions not expected to improve significantly until at least 2012. Areas of the country most affected by the economic climate are Southwestern Ontario, Northern Alberta and Newfoundland. Despite the poor economic conditions in the market place, THC is pleased to report that it has performed extremely well in 2009. We are thrilled to report that we have earned more revenue this year than in each of the past three years of operations! THC Superstore As a pilot project, THC opened a Superstore in Mississauga, Ontario, a city just west of Toronto in late 2009. The store is roughly three times the size of the traditional THC stores and features many more products and services. The Superstore is housed in our newest acquisition a large retail building located just south of the 401 highway. In December 2009, THC completed negotiations to purchase a plot of land in the east end of Toronto which is ideal for the next THC Superstore. The closing date for this purchase is January 25, 2010.

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EXHIBIT I (continued) 2009 MANAGEMENT DISCUSSION & ANALYSIS EXCERPTS Future Growth Initiatives THCs five-year strategic plan is focused on expansion of the THC retail business. Growth initiatives include the following: Ongoing store expansions and upgrades Diversify existing retail business Continued introduction of the THC Superstore into the retail marketplace Attracting new customers, while maintaining existing ones

In 2010, in addition to the traditional THC products, management has decided to introduce a small grocery section into select locations. The grocery section would include a commercial-size freezer to house frozen food such as prepared meals and a commercial-size fridge to house perishable goods such as milk, eggs, and fruit. The forecasted profitability of the new grocery section is as follows (in 000s): 2010 $1,050 50 31 2011 $1,155 55 33 2012 $1,271 61 37

Grocery sales Operating income Net income Summary of Operating Results

The operating results for the past three years are as follows (in 000s): 2009 $5,669 4,985 684 598 2008 $5,556 4,935 621 576 2007 $5,679 4,992 687 599

Revenue from operations Operating costs Operating income Net income

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EXHIBIT II NOTES FROM MEETING WITH BRIAN MADISON, CFO THC Stores When the THC Superstore opened, THC closed their three existing retail stores in Mississauga. THC continues to own the buildings where the stores were located and has leased all three premises to a local grocery chain for a period of two years. The grocery chain pays quarterly lease payments of $15,000 to THC for each building. THC spends an average of $550 per month to maintain each building and pays monthly property taxes of $2,250 for the buildings combined. Next summer, THC plans to upgrade all three properties in preparation for sale. THC will resurface the parking lots at an expected total cost of $125,100; replace the storefront windows at an expected total cost of $96,325; and resurface the roofs at an expected total cost of $83,670. At the end of the lease contract, THC intends to sell the buildings for $1,250,000 each. At January 2010, the fair market value of the three buildings together was estimated to be $3,300,000. The buildings are currently included in the noncurrent assets section of THCs balance sheet at book value of $3,859,000.

Vacant Land As part of their growth initiative, THC plans on opening a retail store in Barrhaven. In January 2009, at a cost of $275,000, THC acquired a large parcel of land in Barrhaven adjacent to where a highway exit was scheduled to be built. In June 2009, THC incurred costs of $31,000 in architectural fees for store design plans. In December 2009, the government abandoned plans to build the highway exit and THC decided that the location was no longer optimal for their Barrhaven store. Brian believes that THC obtained a fantastic price on the purchase and intends to have the land re-zoned as residential and sold to a developer at a significant profit within the next two to three years. THC has commenced the lengthy re-zoning application and by December 31, 2009 had incurred $18,000 in legal costs. Interest expense for the mortgage on the land was $12,000 in 2009. Similar residential parcels of land in the area have sold for upwards of $500,000 and property values are expected to increase in the next few years.

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EXHIBIT II (continued) NOTES FROM MEETING WITH BRIAN MADISON, CFO

New Supplier of Inventory In December 2009, THC began purchasing some small kitchen appliances from a new supplier. During the month, THC purchased three different appliance lines. The unit costs for the three different products were: Unit Cost in Cdn. $ $10.00 $12.50 $9.75

Product Number 26-5 26-8 26-9

Total Units Purchased 25,000 30,000 20,000

Once the inventory was received from the supplier, THC booked the entire cost of the purchase ($820,000) to the inventory account. All three products are to be sold at a markup of 20% of the above unit cost. For all orders placed in December, THC received a volume discount of 5% off the unit cost. The discount was not recognized by THC at the time of purchase. At year-end, THC had not sold any of the new inventories and all products were included in the year-end inventory count attended by R&M audit staff. THC incurred a number of additional costs associated with this inventory purchase, which were expensed in December. These costs include: $65,000 per appliance line for transport from shipping docks to a Markham warehouse $46,000 for temporary warehouse storage costs (in total) $5,000 per appliance line for transport to retail stores in Ontario Import duties of 6% of the Canadian dollar unit cost Other administrative costs of $24,000

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Question 2 (70 minutes) Melissa Chong is a successful interior designer located in Toronto who has operated her business, Design One, as a sole proprietor for the past four years. After a slow start in the first year where she incurred losses, Melissa received her first big break with a project for a high profile real estate development in Yorkville, a trendy area in downtown Toronto. Since then, she has completed many award-winning design projects which has resulted in the steady growth of her business. Design One operates on a seasonal basis and as a result, Melissa enjoys the less hectic times during the summer months. You, CA, are a senior tax specialist for LAbbe and Associates (LAbbe), a local accounting firm. LAbbe has prepared Melissas personal tax returns since she started Design One. The engagement partner, Andreas LAbbe, met with Melissa recently and excerpts from this meeting (which you also attended) are provided in Exhibit I. Several of Melissa's colleagues have recently incorporated their businesses and have suggested that she do the same. Melissa is receptive to this idea but thinks that the process is complicated, which is why today she has approached LAbbe for advice. She would like LAbbe to provide her with a detailed analysis as to how such a process would occur from a tax perspective. Melissa has provided you with a balance sheet of Design One (Exhibit II), along with the corresponding fair market value information determined by a professional valuator. Being unsure whether she should go through with incorporating her business or if she should remain as a sole proprietor, Melissa has requested that LAbbe provide her with an analysis of the two options from a tax perspective, including any necessary calculations to support its conclusions. You have asked the junior staff accountant to compile some tax information (Exhibit III) to help with the analysis. Her colleagues have also told her that she will need annual financial statements if she plans to seek bank financing for future business expansion. It is now May 17, 2010. Andreas has requested that you prepare a memo to him as a basis for discussion at his next meeting with Melissa. This memo should address the tax issues raised by her as well as the treatment of the accounting issues under current Canadian GAAP in Exhibit I that could arise if she decides to incorporate Design One.
(For ease in performing any necessary calculations, use the relevant rates provided in Exhibit II.)

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EXHIBIT I EXCERPTS FROM PARTNERS MEETING WITH MELISSA CHONG

Melissa began; I look forward to hearing your response to my tax queries because I would like to pay as little tax as possible. Please keep this in mind with regards to any personal and corporate tax planning suggestions that you provide to me. For the past two years, I have earned about $225,000 per year from Design One after deducting all business-related expenses. I think I could expand my business to the point of doubling that amount in a few years. However, given that my husband and I are looking to start a family by then, I dont think I could expand the business any further beyond that point. His income is negligible at this point as he is in the first year of a part-time four year degree program at university. Also, I just started receiving an annual annuity of $130,000 from a trust fund set up by my grandfather. I am not sure if we will need all of my business income to live on each year. I would, however, like the flexibility of being able to pay myself a bit of extra remuneration at the end of the year should I require it. Although I am primarily interested in your numerical analysis of the incorporation decision, feel free to provide me with any other relevant points that I should consider. As you know, when I began Design One four years ago, I borrowed $50,000 from the bank to cover my start-up costs. Since it is a line of credit, I have not paid back any of the loan yet but I have been paying the interest at the rate of 4% per annum. New design projects Because I have a university degree in commerce, I have been doing the bookkeeping for Design One. I have recorded the transactions for the past four years on a cash basis, which you have always adjusted as required for tax purposes. As you know, all of my previous design projects were always completed within the year and never spanned any year-ends. However, I now have several new projects that span two or even three years! Because these projects are so long, I do require an upfront deposit payment of 20% of the contract price and for some clients, I will have to bill and collect funds from them on an interim basis. In the past, I have not been the best at monitoring the progress of my projects because they were quite short so I know I will need to improve in that area. One strength of my design projects is that I plan them out to have very definitive stages.

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EXHIBIT I (continued) EXCERPTS FROM THE PARTNERS MEETING WITH MELISSA CHONG

Leasing new system I think I will eventually need a new computer system to deal with the increasing complexity of my projects. This new system will also help me to monitor the level of completion for each project. One system that I have been considering would cost $60,000 to purchase outright which is too expensive but I could enter into a five-year lease with an option to purchase at fair market value at the end. The system is very specialized so it is not prone to early obsolescence and has an estimated useful life of ten years. Lease payments would be $11,800 (inclusive of all costs) and would be made at the beginning of each year. Lawsuit Unfortunately, one of my projects this year did not go well and although I agreed to waive my design fees and refund the deposit to the client, they are still going to take me to court for $20,000 in estimated damages. My lawyer is very sure that there is no basis for the client to succeed in court but I am still concerned about the matter. Atrium design At the beginning of the year, I did some design work for the atrium of a high profile advertising agency. My design rates vary and so I would have charged them anywhere from $10,000 to $15,000 for my services. However, they were having some cash flow problems due to the slow economy and proposed that we exchange services my design work for half a year of various print and media advertising exposure for Design One. They are a well-known agency so I jumped at the opportunity! The increased exposure has really helped my business grow this past year. For my information, they provided me with a detailed invoice of the services rendered and a bill that would have otherwise been $17,000. I did not bother recording this transaction since there was no cash involved.

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EXHIBIT II BALANCE SHEET Design One As at April 30, 2010 (unaudited) Assets Cash Accounts receivable (note 1) Prepaid expense (note 2) Land (note 3) Building (notes 3 and 4) Furniture and fixtures (note 5) Goodwill Recorded amount $ 27,000 33,000 5,000 215,000 150,000 44,000 0 $474,000 Liabilities Accounts payable Bank loan $ 26,000 50,000 76,000 398,000 $474,000 Notes: 1. 2. 3. 4. 5. $ 26,000 50,000 $ 76,000 Fair market value $ 27,000 28,000 5,000 300,000 220,000 30,000 250,000 $860,000

Equity

Includes an $8,000 allowance for doubtful accounts Prepaid expense represents the unexpired portion of the business insurance policy The land and building are used exclusively for Melissas business operations The building was acquired at a cost of $150,000. UCC is $118,000. The furniture and fixtures were acquired at a cost of $44,000. UCC is $36,000.

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EXHIBIT III 2010 TAX RATES GATHERED BY JUNIOR STAFF ACCOUNTANT

Federal - lowest marginal personal tax rate Federal - highest marginal personal tax rate Ontario - lowest marginal personal tax rate Ontario - highest marginal personal tax rate Combined (federal and Ontario) low corporate tax rate (note 1) Combined high corporate tax rate (note 1) Combined tax rate for eligible dividends Combined tax rate for non-eligible dividends Gross-up for eligible dividends Gross-up for non-eligible dividends Note: 1. Rates as of today (May 17, 2010).

15% 29% 5% 17% 16.5% 33% 31% 23% 45% 25%

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Question 3 (90 minutes) Dr. Mateo Case is an optometrist and the sole shareholder of Quality Contacts Inc. (QCI), an optical company that sells prescription disposable contact lenses and eye glasses out of its location in Cabbagetown, a neighbourhood in Toronto. QCI is managed by Mateo and has a May 31 year end. You, CA, are a manager with Lark & Bell LLP (L&B). Yesterday, you and Tony Bell, the engagement partner, met with Mateo at QCI. Mateo asked for this meeting to discuss the future of QCIs operations. L&B has performed review engagements for QCI for the past three years. Mateo began, I have decided to live year round at my cottage in northern Ontario and have therefore been considering two options regarding the future of QCI. I believe I could sell QCI and live off the proceeds or I could oversee the operations of QCI from my cottage, as a webbased company selling contact lenses only. I would like your help in determining the best alternative for me. I will require an audit of QCI for 2010, as I believe a buyer would require audited statements. I need your assistance in determining a reasonable selling price for the shares of QCI. I have brought you a draft income statement for the 2010 year end. I believe the last three months of sales are the best indicator of future sales potential so I have included information for that period as well (Exhibit I). I have also included some background information on QCI which may be useful to you (Exhibit II). I have notes on how the web-based operations would work (Exhibit III) and would like to know how much cash I would be able to generate if I were to pursue this option. I am only concerned with my cash flows for the next four years, until I am eligible to access my pension income in 2014. I estimate I will need between $300,000 and $400,000 to cover my expenses until 2014. I met with a web consultant who provided me with information on a system that could be used if I were to operate QCI as a web-based company (Exhibit IV). I am concerned about the security with this kind of operation and would like you to identify the significant risks that the web-based company would be exposed to as well as any practical recommendations to mitigate these risks. After the meeting you reviewed some of the accounting records and further discussed the business with Mateo. A summary of some of the issues that you discovered while out at QCI are in Exhibit V. It is now June 4, 2010 and you are meeting with Tony to discuss the QCI engagement. Tony asks that you prepare a memo to him addressing the issues raised by Mateo in the meeting and asks that you discuss the accounting issues you discovered while at QCI and identify the related audit procedures that should be performed. For now, he would like you to ignore the personal income tax implications of the sale of QCI and any first time audit considerations.

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EXHIBIT I QCI EXCERPTS FROM FINANCIAL STATEMENTS* FOR THE PERIODS ENDED

3 months to May 31, 2010 (Draft) Revenues: Contact lenses Glasses and frames Other

12 months to May 31, 2010 (Draft)

12 months to May 31, 2009 (Reviewed)**

$228,764 63,892 10,200 302,856 90,689 212,167

$805,306 356,970 38,000 1,200,276 420,770 779,506

$720,678 365,094 35,100 1,120,872 412,593 708,279

Cost of goods sold Gross profit Operating expenses: Selling General and administration Depreciation Lease Interest

21,479 98,236 3,000 9,000 131,715

99,660 455,055 12,000 36,000 2,000 604,715 174,791 28,841 $ 145,950

97,720 446,024 12,000 36,000 4,000 595,744 112,535 18,568 $ 93,967

Income before taxes Income taxes Net income

80,452 13,275 $ 67,177

* **

Other than inventory, the balance sheet has no significant assets or liabilities. The financial statements of QCI follow CICA HB- Accounting- Part V, XFI, without differential reporting options.

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EXHIBIT II BACKGROUND INFORMATION PROVIDED BY MATEO

QCI has a regular customer base which I anticipate will make it an attractive acquisition for another business in the same industry. I have been in communication with the owners of two other optical stores which operate in similar markets and learned that on average they made about a 10% after tax return on their investments. I believe that any purchaser would have their existing staff place all orders. This would eliminate the salary currently being paid to QCIs order clerk of $60,000. In recent years QCI has not invested much in advertising as its current customer base consists of mostly repeat customers. Other optical stores spend around $85,000 annually to attract new customers. The current store location is leased at a rate of $3,000 per month. It is located within walking distance from several apartments and businesses making it convenient for customers to access. QCI had a bank loan which they entered into in 2008 with a fixed interest rate of 5% that was secured by a personal guarantee I provided. This loan was repaid in full in January 2010.

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EXHIBIT III NOTES ON OPERATING QCI AS A WEB-BASED COMPANY

Ordering The store location is only necessary for the glasses portion of the business as customers typically want to try on frames before committing to a purchase. Since the sale of contact lenses could all be made via internet orders, I could oversee the operations from my cottage. QCI would order the contact lenses from our suppliers as soon as the customer places their order. We would have the contact lenses delivered from our supplier directly to the customer within two days so there is no need to maintain an inventory of contact lenses on hand. QCI would accept credit cards as the only form of payment from customers and would have a no return policy as the lenses are for each customers specific prescription.

Customers To retain existing customers, QCI would send a mass mailing explaining the changes to the business and providing the new contact information, etc. Such a campaign is estimated to cost around $12,000. As a result of the mailing QCI should be able to retain approximately 75% of existing contact lens customers. There are currently approximately 1,000 existing customers who purchase an average of 30 pairs of disposable contact lenses each month. Although it varies by brand, the average retail price per pair of lenses is $2. The remaining contact lens customers may leave either because they do not trust the security behind making online payments or because they would prefer to purchase both contacts and glasses from the same location. I am not interested in spending a great deal of time and effort trying to grow the webbased business as the plan is to ease into semi-retirement. I estimate that sales will increase slowly so I would expect only a 2% increase in annual sales.

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EXHIBIT III (continued) NOTES ON OPERATING QCI AS A WEB-BASED COMPANY

Operating Costs The cost of contact lenses will remain around 38% of their selling price. Selling expenses are expected to be around 9%. This will include payment to advertise on search engine websites. General and administration expenses are expected to be $108,000 in the first year and then increase 2% annually. These costs will now include wages for only one part time staff member to assist me in the business. Currently customers pick up their lenses at QCIs store. However under the web-based option, QCI will pay shipping charges to have the suppliers ship the lenses directly to the customer. The additional shipping charges are expected to be approximately 10% of sales. I anticipate the cost of setting up the web-based internet site will be around $30,000, with annual service and maintenance fees of $3,500.

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EXHIBIT IV NOTES FROM MATEOS DISCUSSIONS WITH WEB CONSULTANT Ordering All customer orders will be placed via the website that will be developed and maintained by the web consultant. As all orders will be placed online, customers must pay using a major credit card. Funds will then be deposited into QCIs bank account directly from the credit card companies. When an order is placed, the customer will be asked to enter the following information onto the web page: o o o o brand and quantity of pairs of contact lenses prescription requirement for each eye personal information including shipping address credit card information

All information will be entered on one page, making the order process quick and easy for the customers. If the customer fails to enter the quantity of lenses, the system will not allow them to hit Submit. The system will prompt them with an error message and require them to enter the quantity of lenses to proceed. This is the only field that when not completed will prevent customers from placing an order. When the customer is done inputting information, they will click on Submit and the information will automatically transfer to QCIs sales tracking sheet and the general ledger will be updated concurrently. Once the transaction is submitted the system will produce a sales receipt which indicates the total cost of the order with details of what was purchased.

Shipping Once the orders are received by the system, QCI will take the information on the sales tracking sheet and contact the suppliers to place the orders and arrange for their shipment to the address input by the customer. The part-time staff member will count the total number of orders on the sales tracking sheet and compare this to the total number of orders recorded in the general ledger for that day. Although counting the orders daily may be time consuming, this will ensure that the system is operating as it should.

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EXHIBIT IV (continued) NOTES FROM MATEOS DISCUSSIONS WITH WEB CONSULTANT Information System The mainframe will be located in the cottage where QCIs operations will be run. The system will be setup to make automatic weekly back-ups of the sales tracking information which will be stored on a separate drive on the mainframe. There will be logins and password setup on the computer for each user. The web consultant can use an internet connection to remotely access the system to install updates and make any necessary changes to the system. The web consultant can even fix a bug or perform an upgrade to the system while it is running so there will be no downtime.

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EXHIBIT V ACCOUNTING AND OTHER ISSUES DISCOVERED WHILE AT QCI In March 2010, as part of a special pay now and get 5% off promotion, sales orders were placed by 140 customers for 30 pairs of contact lenses for each of the remaining nine months of 2010. QCI recorded the full amount of these sales as revenue in March as these orders had been paid for in full. The contacts, however, are typically not ordered from the suppliers until closer to the month for which the orders relate, as customers pick up their orders on a monthly basis. Mateo indicated that a significant number of frame styles are out dated with a book value of $10,000. Mateo is hopeful that the frames will come back in style however there has been no indication of this to date. The frames cannot be returned to the supplier. Mateo is planning to sell these at 50% of cost in order to move them. It is typical in the industry to have to write down a portion of inventory annually as the styles change so frequently. QCIs inventory of frames is currently valued at $50,000. QCI has 60 specialty sunglasses in inventory (separate from the frames) recorded at a cost of $200 per pair. In January, 2010 Mateo decided to reduce the selling price of the sunglasses from $250 to $150 as this is the price he believes will guarantee their sale. QCI has never had to lower the price of sunglasses before as they typically sell quickly and Mateo does not expect to have to lower the price of any other specialty frames in the future. QCI is planning to count the inventory on June 6, 2010. The current store location is leased over a five year term which commenced on June 1, 2008. I requested a copy of the lease agreement and discovered that an obligation to pay for the cost to restore the building to its original condition was built into the lease. The contractors who performed the leasehold improvements at the time estimated that cost to restore the building to its original condition would be $20,000. This obligation has not been recorded in QCIs financial statements.

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Copyright 2010 ICAO School of Accountancy

PRESENT VALUE OF $1 RECEIVED AT THE END OF THE PERIOD 4% 0.96 0.92 0.89 0.85 0.82 0.79 0.76 0.73 0.70 0.68 0.65 0.62 0.60 0.58 0.56 0.53 0.51 0.49 0.47 0.46 0.44 0.42 0.41 0.39 0.38 0.36 0.34 0.33 0.31 0.30 0.29 0.28 0.26 0.25 0.23 0.24 0.23 0.21 0.20 0.18 0.20 0.18 0.17 0.16 0.15 0.16 0.15 0.14 0.13 0.12 0.14 0.12 0.11 0.10 0.09 0.11 0.10 0.09 0.08 0.07 0.09 0.08 0.07 0.07 0.06 0.46 0.44 0.42 0.40 0.38 0.39 0.37 0.35 0.33 0.31 0.34 0.32 0.30 0.28 0.26 0.29 0.27 0.25 0.23 0.21 0.25 0.23 0.21 0.19 0.18 0.22 0.20 0.18 0.16 0.15 0.19 0.17 0.15 0.14 0.12 0.16 0.15 0.13 0.12 0.10 0.14 0.13 0.11 0.10 0.09 0.08 0.07 0.06 0.05 0.05 0.12 0.11 0.09 0.08 0.07 0.06 0.06 0.05 0.04 0.04 0.58 0.56 0.53 0.51 0.48 0.53 0.50 0.47 0.44 0.42 0.48 0.44 0.41 0.39 0.36 0.43 0.40 0.37 0.34 0.32 0.39 0.36 0.33 0.30 0.27 0.35 0.32 0.29 0.26 0.24 0.32 0.29 0.26 0.23 0.21 0.29 0.26 0.23 0.20 0.18 0.26 0.23 0.20 0.18 0.16 0.24 0.21 0.18 0.16 0.14 0.21 0.19 0.16 0.14 0.12 0.11 0.09 0.08 0.07 0.06 0.05 0.05 0.04 0.03 0.03 0.20 0.17 0.15 0.13 0.11 0.09 0.08 0.07 0.06 0.05 0.04 0.04 0.03 0.03 0.02 0.75 0.71 0.68 0.64 0.61 0.70 0.67 0.63 0.59 0.56 0.67 0.62 0.58 0.54 0.51 0.63 0.58 0.54 0.50 0.46 0.60 0.55 0.50 0.46 0.42 0.56 0.51 0.47 0.42 0.39 0.53 0.48 0.43 0.39 0.35 0.51 0.45 0.40 0.36 0.32 0.48 0.43 0.38 0.33 0.29 0.46 0.40 0.35 0.31 0.27 0.43 0.38 0.33 0.28 0.25 0.41 0.35 0.31 0.26 0.23 0.39 0.33 0.28 0.24 0.21 0.18 0.15 0.13 0.11 0.09 0.08 0.07 0.06 0.05 0.04 0.04 0.03 0.03 0.02 0.02 0.37 0.31 0.27 0.23 0.19 0.16 0.14 0.12 0.10 0.08 0.07 0.06 0.05 0.04 0.04 0.03 0.03 0.02 0.02 0.02 0.95 0.91 0.86 0.82 0.78 0.94 0.89 0.84 0.79 0.75 0.93 0.87 0.82 0.76 0.71 0.93 0.86 0.79 0.74 0.68 0.92 0.84 0.77 0.71 0.65 0.91 0.83 0.75 0.68 0.62 0.90 0.81 0.73 0.66 0.59 0.89 0.80 0.71 0.64 0.57 0.88 0.78 0.69 0.61 0.54 0.88 0.77 0.67 0.59 0.52 0.87 0.76 0.66 0.57 0.50 0.86 0.74 0.64 0.55 0.48 0.85 0.73 0.62 0.53 0.46 0.85 0.72 0.61 0.52 0.44 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 0.84 0.71 0.59 0.50 0.42 0.35 0.30 0.25 0.21 0.18 0.15 0.12 0.10 0.09 0.07 0.06 0.05 0.04 0.04 0.03 0.03 0.02 0.02 0.02 0.01 20% 0.83 0.69 0.58 0.48 0.40 0.33 0.28 0.23 0.19 0.16

Periods Hence 2%

3%

1 2 3 4 5

0.98 0.96 0.94 0.92 0.91

0.97 0.94 0.92 0.89 0.86

6 7 8 9 10

0.89 0.87 0.85 0.84 0.82

0.84 0.81 0.79 0.77 0.74

TABLE I

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11 12 13 14 15

0.80 0.79 0.77 0.76 0.74

0.72 0.70 0.68 0.66 0.64

0.13 0.11 0.09 0.08 0.06 0.05 0.05 0.04 0.03 0.03 0.02 0.02 0.02 0.01 0.01

16 17 18 19 20

0.73 0.71 0.70 0.69 0.67

0.62 0.61 0.59 0.57 0.55

Copyright 2010 ICAO School of Accountancy

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0.66 0.65 0.63 0.62 0.61

0.54 0.52 0.51 0.49 0.48

PRESENT VALUE OF AN ANNUITY OF $1 RECEIVED AT THE END OF EACH PERIOD

No. of Periods Received 3% 0.97 1.91 2.83 3.72 4.58 5.42 6.23 7.02 7.79 8.53 7.89 8.38 8.85 9.29 9.71 10.11 9.45 10.48 9.76 10.83 10.06 11.16 10.34 11.47 10.59 11.76 12.04 12.30 12.55 12.78 10.84 11.06 11.27 11.47 11.65 10.02 10.20 10.37 10.53 10.68 9.29 9.44 9.58 9.71 9.82 8.65 8.77 8.88 8.99 9.08 8.85 9.12 9.37 9.60 9.82 8.31 8.54 8.76 8.95 9.13 7.82 8.02 8.20 8.36 8.51 7.38 7.55 7.70 7.84 7.96 8.08 8.18 8.27 8.35 8.42 6.97 7.12 7.25 7.37 7.47 7.56 7.65 7.72 7.78 7.84 7.50 7.94 8.36 8.75 9.11 7.14 7.54 7.90 8.24 8.56 6.81 7.16 7.49 7.79 8.06 6.50 6.81 7.10 7.37 7.61 6.21 6.49 6.75 6.98 7.19 5.94 6.19 6.42 6.63 6.81 5.69 5.92 6.12 6.30 6.46 6.60 6.73 6.84 6.94 7.02 7.10 7.17 7.23 7.28 7.33 5.45 5.66 5.84 6.00 6.14 6.27 6.37 6.47 6.55 6.62 6.69 6.74 6.79 6.84 6.87 5.23 5.42 5.58 5.72 5.85 5.95 6.05 6.13 6.20 6.26 6.31 6.36 6.40 6.43 6.46 5.24 6.00 6.73 7.44 8.11 5.08 5.79 6.46 7.11 7.72 4.92 5.58 6.21 6.80 7.36 4.77 5.39 5.97 6.52 7.02 4.62 5.21 5.75 6.25 6.71 4.49 5.03 5.53 6.00 6.42 4.36 4.87 5.33 5.76 6.14 4.23 4.71 5.15 5.54 5.89 4.11 4.56 4.97 5.33 5.65 4.00 4.42 4.80 5.13 5.43 3.89 4.29 4.64 4.95 5.22 3.78 4.16 4.49 4.77 5.02 3.68 4.04 4.34 4.61 4.83 5.03 5.20 5.34 5.47 5.58 5.67 5.75 5.82 5.88 5.93 5.97 6.01 6.04 6.07 6.10 3.59 3.92 4.21 4.45 4.66 4.84 4.99 5.12 5.23 5.32 5.41 5.47 5.53 5.58 5.63 5.67 5.70 5.72 5.75 5.77 0.96 1.89 2.78 3.63 4.45 0.95 1.86 2.72 3.55 4.33 0.94 1.83 2.67 3.47 4.21 0.93 1.81 2.62 3.39 4.10 0.93 1.78 2.58 3.31 3.99 0.92 1.76 2.53 3.24 3.89 0.91 1.74 2.49 3.17 3.79 0.90 1.71 2.44 3.10 3.70 0.89 1.69 2.40 3.04 3.60 0.88 1.67 2.36 2.97 3.52 0.88 1.65 2.32 2.91 3.43 0.87 1.63 2.28 2.85 3.35 0.86 1.61 2.25 2.80 3.27 0.85 1.59 2.21 2.74 3.20 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 0.85 1.57 2.17 2.69 3.13 3.50 3.81 4.08 4.30 4.49 4.66 4.79 4.91 5.01 5.09 5.16 5.22 5.27 5.32 5.35 5.38 5.41 5.43 5.45 5.47

2%

19% 0.84 1.55 2.14 2.64 3.06 3.41 3.71 3.95 4.16 4.34 4.49 4.61 4.71 4.80 4.88 4.94 4.99 5.03 5.07 5.10 5.13 5.15 5.17 5.18 5.20

20% 0.83 1.53 2.11 2.59 2.99 3.33 3.60 3.84 4.03 4.19 4.33 4.44 4.53 4.61 4.68 4.73 4.77 4.81 4.84 4.87 4.89 4.91 4.93 4.94 4.95

1 2 3 4 5

0.98 1.94 2.88 3.81 4.71

6 7 8 9 10

5.60 6.47 7.33 8.16 8.98

TABLE II

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12.56 13.17 13.75 14.32 14.88 15.42 15.94 16.44 16.94 17.41 14.03 14.45 14.86 15.25 15.62 12.82 13.16 13.49 13.80 14.09 11.65 12.17 12.66 13.13 13.59 10.84 11.27 11.69 12.09 12.46

11 12 13 14 15

9.79 9.25 8.76 8.31 10.58 9.95 9.39 8.86 11.35 10.63 9.99 9.39 12.11 11.30 10.56 9.90 12.85 11.94 11.12 10.38

16 17 18 19 20

13.58 14.29 14.99 15.68 16.35

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17.01 17.66 18.29 18.91 19.52

TABLE III A FORMULA FOR CALCULATING THE PRESENT VALUE OF REDUCTIONS IN TAX PAYABLE DUE TO CAPITAL COST ALLOWANCE Marginal Rate of Income tax Rate of Capital Cost Allowance

Investment Cost

1 + Rate of Return 2

Rate of Return

Rate of Capital Cost Allowance

) (
x

1 + Rate of Return

MAXIMUM CAPITAL COST ALLOWANCE RATES FOR SELECTED CLASSES Class 1 ...................................................... 4% Class 8 ...................................................... 20% Class 10 .................................................... 30% Class 10.1 ................................................. 30% Class 12 .................................................... 100% Class 13 .................................................... original lease period plus one renewal period (Minimum 5 years and Maximum 40 years) Class 14 .................................................... Length of life of property Class 17 .................................................... 8% Class 39 .................................................... 25% Class 43 .................................................... 30% Class 44 .................................................... 25% Class 45.... 45%

SELECTED PRESCRIBED AUTOMOBILE AMOUNTS Maximum depreciable cost - Class 10.1 Maximum monthly deductible lease cost Maximum monthly deductible interest cost $30,000 + GST $800 + GST $300

Operating cost benefit - employee 24 per kilometre of personal use Non-taxable car allowance benefit limits - first 5,000 km 52 per kilometre - balance 46 per kilometre

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TABLE IV INDIVIDUAL FEDERAL INCOME TAX RATES Income Tax Rate Schedule Individuals 2010 Taxation Year Taxable Income $40,970 or less $40,971 to $91,941 $81,942 to $127,021 $127,022 or more Tax 15.0% $ 6,146 + 22% on next $40,971 $15,160 + 26% on next $45,080 $26,881 + 29% on remainder

SELECTED NON-REFUNDABLE TAX CREDITS PERMITTED TO INDIVIDUALS FOR PURPOSES OF COMPUTING INCOME TAX The tax credits are 15% of the following amounts: Basic personal amount Spouse or common-law partner amount Net income threshold for spouse or common-law partner amount Child Age 65 or over in the year Disability amount Infirm dependents who reach 18 in the year Net income threshold for infirm dependents 18 and over Basic amount for: Age credit and GST credit Child tax benefit Childrens fitness credit CORPORATE FEDERAL INCOME TAX RATE The tax payable by a corporation under Part I of the Income Tax Act on is 38% before any additions and/or any deductions. PRESCRIBED INTEREST RATE Year 2010 2009 2008 2007 2006 2005 Jan. 1 - Mar. 31 3 4 6 7 5 5 Apr. 1 - June 30 3 3 6 7 6 5 July 1 - Sept. 30 3 5 7 6 5 Oct. 1 - Dec. 31 3 5 7 7 5 $10,382 10,382 nil 2,101 6,446 7,239 4,223 5,992 32,506 40,970 up to 500

The rate is 2 percentage points higher for late or deficient income tax payments and unremitted withholdings. The rate is 2 percentage points lower for deemed interest on employee and shareholder loans.

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