ISSUES IN PROFESSIONAL PRACTICE [PA1]

EXAM SIMULATION

PA1
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READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.

To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.
Glossary of Assessment Terms
Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996).
Copyright David Palmer.
Calculate

Compare

Contrast

Criticize

Define

Describe
Design

Determine

Diagram

Discuss

Evaluate

Mathematically determine the amount or

number, showing formulas used and
steps taken. (Also Compute)
Examine qualities or characteristics that
resemble each other. Emphasize
similarities, although differences may be
mentioned.
Compare by observing differences. Stress
the dissimilarities of qualities or
characteristics. (Also Distinguish
between)
Express your own judgment concerning
the topic or viewpoint in question.
Discuss both pros and cons.
Clearly state the meaning of the word or
term. Relate the meaning specifically to
the way it is used in the subject area
under discussion. Perhaps also show how
the item defined differs from items in
other classes.
Provide detail on the relevant
characteristics, qualities, or events.
Create an outcome (e.g., a plan or
program) that incorporates the relevant
issues and information.
Calculate or formulate a response that
considers the relevant qualitative and
quantitative factors.
Give a drawing, chart, plan or graphic
answer. Usually you should label a
diagram. In some cases, add a brief
explanation or description. (Also Draw)
This calls for the most complete and
detailed answer. Examine and analyze
carefully and present both pros and cons.
To discuss briefly requires you to state
in a few sentences the critical factors.
This requires making an informed
judgment. Your judgment must be shown
to be based on knowledge and
information about the subject. (Just
stating your own ideas is not sufficient.)
Cite authorities. Cite advantages and
limitations.

In explanatory answers you must clarify

the cause(s), or reasons(s). State the
how and why of the subject. Give
reasons for differences of opinions or of
results. To explain briefly requires you to
state the reasons simply, in a few words.
Identify
Distinguish and specify the important
issues, factors, or items, usually based on
an evaluation or analysis of a scenario.
Illustrate
Make clear by giving an example, e.g., a
figure, diagram or concrete example.
Interpret
Translate, give examples of, solve, or
comment on a subject, usually making a
judgment on it.
Justify
Prove or give reasons for decisions or
conclusions.
List
Present an itemized series or tabulation.
Be concise. Point form is often
acceptable.
Outline
This is an organized description. Give a
general overview, stating main and
supporting ideas. Use headings and
sub-headings, usually in point form. Omit
minor details.
Prove
Establish that something is true by citing
evidence or giving clear logical reasons.
Recommend Propose an appropriate solution or course
of action based on an evaluation or
analysis of a scenario.
Relate
Show how things are connected with each
other or how one causes another,
correlates with another, or is like another.
Review
Examine a subject critically, analyzing
and commenting on the important
statements to be made about it.
State
Clearly provide a position based on an
evaluation, e.g., Agree/Disagree,
Correct/Incorrect, Yes/No. (Also
Indicate)
Summarize Give the main points or facts in condensed
form, like the summary of a chapter,
omitting details and illustrations.
Trace
In narrative form, describe progress,
development, or historical events from
some point of origin.
Explain

Part A: Multiple-choice questions

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

Question 1
(50 minutes)
a.

John was a self-employed accountant. He died on March 31, 20X8. He has not yet filed returns for 20X6
and 20X7. Which of the following are the due dates for his tax returns for the two years?
1. June 30, 20X8, for year 20X6 and 20X7
2. June 15, 20X7, for year 20X6 and September 30, 20X8, for year 20X7
3. June 15, 20X7, for 20X6 and June 30, 20X8, for 20X7
4. April 30, 20X8, for 20X6 and September 30, 20X8, for 20X7

b. Josh Lucas, the loans director at Eazy Loan Inc., tells his CFO, I have four very effective and motivated
loan managers on my team. My sales numbers have been increasing each quarter and in spite of the
sluggish economy, we are still market leaders in this segment. My concern, however, is the increasing
delinquencies in the loans. Our uncollectible loans have increased from 2.4% five years ago to 6.6% per
the latest report, and most of these are for loans initiated in the last one year. The quality of the loans has
been decreasing. Therefore I would like to include quality as a criterion for the bonus that is part of the
compensation package being offered to the loans managers.
Which of the following criteria would best meet the needs suggested by Josh?
1. Bonus based on total sales for each quarter made by the loans manager with variable percentage bonus
based on the borrowers credit rating less outstanding amounts on delinquent loans
2. Variable rate bonus based on factors such as total loans written, percentage of regular loans,
departmental profits, and collection of delinquent loans with an increased percentage for collection on
loans that were delinquent for more than one quarter
3. Bonus based on a weighted average of factors such as total loans written, percentage of regular loans,
collection costs, and departmental profits
4. Staggered payment of the bonus with 50% paid at the end of the quarter in which the loan is made,
25% at the mid-point of the loan term if the loan is in good standing, and the remaining 25% when the
loan is paid in full

Continued

PA1 Exam Simulation

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c.

It is currently June 2013 and the new CFO of Peninsula Footware (PF) advises you, the Controller, that he
wishes to change a couple of accounting policies. The most recent amendments to IAS 32 Financial
Instruments: Presentation policy are not required to be adopted until January 1, 2014, but the CFO wants
to implement them at this time. In addition, the CFO proposes that the company switch from straight-line
depreciation in accounting for production equipment to a declining balance method, as this better
represents how the value of the equipment is utilized in production, and maintenance costs for the
equipment increase steadily over time. The Accounting Handbook sets out the conditions under which it is
appropriate to change accounting policies. Which of the following describes the most appropriate response
to the CFO?
1. None of the accounting policy changes should be implemented without approval from the
shareholders.
2. The depreciation policy changes should not be implemented, since this will impact the CCA rates.
3. The financial instrument policy changes should not be adopted until they are required.
4. The suggested accounting policy changes are appropriate under the handbook and should be
implemented.

d. Which of the following is acceptable, according to the Code of Ethical Principles and Rules of Conduct
(CEPROC)?
1. A CGA in a public accounting practice also runs an office cleaning business under the name White
Glove Care, CGAs in partnership with two non-CGAs.
2. A CGA operating as a freelancer refers clients to other CGAs and obtains commission on such
referrals.
3. A CGA lodges a written ethics complaint against his fellow CGA co-worker as soon as he becomes
aware of the unethical act.
4. A CGA carries out the compilation agreement of a company where her sister is the accounting
manager.
e.

Jackson earns $245,000 annually from his proprietorship and expects to use all of the after-tax income to
meet personal obligations. Jackson is considering incorporating the business. With respect to the annual
income, which of the following statements is true?
1. Incorporation will create little, if any, tax advantage.
2. Incorporation will create a significant permanent tax advantage because of the small business
deduction.
3. Incorporation will create a significant tax deferral because of the small business deduction.
4. Incorporation will create significant tax savings because of the increased number of available
deductions from income.

f.

Given below is the capital structure and related costs of Avenue Construction Inc.
Ordinary shares
Debt
Debt

Funds
$255,000.00
96,000.00
49,000.00

Cost
15%
6%
11%

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

1.
2.
3.
4.

11.65%
12.15%
12.35%
13.51%

Continued

PA1 Exam Simulation

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g. We Care For Pets is a non-profit animal shelter. The shelters objective is to provide short-term shelter and
veterinary services for stray dogs and to arrange for adoptions of these dogs once they meet basic health
criteria. You, a CGA and external consultant for We Care For Pets, have been asked by the chairperson to
provide information to the board that will be used as a basis for soliciting donations.
Which of the following is the best financial measure to produce information that is relevant to prospective
donors based on past-year statistics?
1.
2.
3.
4.

Report on the number of animals adopted

Analysis of number of surgeries handled in-house
Cost of care per animal for each month over the past year
Listing of number of volunteer hours provided

h. Crunchy Cereals is a medium-sized Canadian food processing company that purchases raw materials from
local suppliers and ships the finished product across Canada. Significant growth coupled with accounting
staff turnover has resulted in delays in paying invoices on a timely basis. A few payments from customers
have not been processed and several sales transactions have not yet been posted to the financial records.
The company is experiencing cash flow issues which have recently become more significant. The new
controller has been asked to recommend actions which should be taken to improve the current situation.
Which of the following actions is the most important to implement immediately?
1. Implement a checklist with deadlines to ensure sales transactions are posted by the deadline.
2. Develop an aging system for the receivables to identify how many are older than 30 days.
3. Determine how many payables have not been paid and ensure they are paid immediately.
4. Record all payments received on a daily basis and ensure they are deposited on a timely basis.
i.

Mason Uniforms Limited (MUL) produces custom uniforms. For the past 10 years, the majority of its
sales revenue comes from a fixed contract with the government. Production is labour intensive and
margins are tight. Workers need specific skills to work on the machinery and it is difficult to find
experienced staff. The machinery is financed by a bank loan and MUL must report its debt to equity ratio
to the bank every quarter. MUL is implementing a balanced scorecard this year and is looking at four
performance measures to use in the scorecard. Which of the following is the best choice for MUL?
1.
2.
3.
4.

j.

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

Claire is a partner in a CGA firm that has been asked to conduct an audit of IRL Inc.s financial
statements. Which of the following is true?
1. Claire should assume that she has independence of IRL unless a threat to her independence arises.
2. Claire must consider whether there are any threats to her independence before accepting the audit
engagement.
3. If Claires firm audited the client last year, this would likely create the appearance of bias and she
would not be seen to be independent by the general public.
4. It would not affect her independence if a family member owned shares in IRL as long as Claire does
not own any shares in the company.

Continued

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k. Premium Health Care is a not-for-profit organization whose mandate is to prevent and reduce workplace
injuries, administer payment of benefits for workplace injuries, and promote workplace health and safety
practices. The corporation faces pressure from the public to be more accountable for the use of public
funds in return-to-work efforts, both from injured workers who want faster claims processing and benefits
payment, and from employers who want to reduce or prevent further increases to the premiums assessed.
Which of the following is the best course of action for Premium Health Cares CEO in assessing
accountability for the use of employer premiums and delivering value for money for public funding?
1.
2.
3.
4.

l.

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

Master Manufacturing (MM) purchased a piece of equipment for clean energy generation worth $500,000.
Because of this purchase, MM will qualify for a $50,000 investment tax credit. The company ordered the
equipment in September 20X6 for delivery by December 15 so that the old equipment could be removed
and the new equipment installed before Christmas. Due to a strike at MMs plant, the equipment was not
delivered until January 5. However, as per the commitment made to the equipment supplier, payment in
full was made on December 15, 20X6. The old equipment, which cost $325,000, was installed on July 1,
20X2. For accounting purposes, the old equipment was depreciated on a straight-line basis with no
expected salvage value at the end of four years. The old equipment is in a separate CCA class; the CCA
rate is 50%. UCC at the beginning of 20X6 was $30,469. The companys fiscal year ends on December
31. Which of the following describes how this purchase will impact MMs CCA and depreciation?
1.
2.
3.
4.

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

m. Distance Support Limited (DSL) is a call centre servicing clients in a variety of industries. Overhead costs
are low since most of the employees work from home. The company has been successful and has strong
cash flow with little indebtedness. Many of the calls are of a confidential nature, and DSL has a privacy
policy published on its website in which the company commits to maintaining the confidentiality of client
information. The new president has recognized the benefit of using a risk management matrix to mitigate
enterprise risk. He has asked the office manager to develop a list of risk factors to be included in the risk
management matrix. Which of the following is the most critical risk for DSL?
1.
2.
3.
4.

Staff claiming ineligible expenses on their work-from-home expense reports

Unauthorized phone calls during work hours have been identified
Customer information has accidentally been disclosed on the company website
Some of the phone lines have not been working properly in the past month

Continued

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n. Distinctive Outerwear Limited (DOL) is a small manufacturing company based in Canada. DOL
manufactures woollen outerwear for a small segment of the Canadian market and imports zippers from a
company in Germany. Workers manually mix the dyes in order to provide the unique combinations of
colors in the wool. This process ensures that no two outerwear pieces look exactly the same. DOL would
like to establish a niche market for its uniquely coloured outerwear but is not well known outside of
Manitoba. DOL has hired a systems technician to develop a specialised technology system to assist the
company in the achievement of its strategic goals.
Which of the following features of the proposed technology system will be the most important for DOL in
the short term?
1.
2.
3.
4.

The system has a foreign exchange risk-management component.

The system provides automated color dye mixing.
The system has an online sales and marketing component.
The system can be expanded since the business may grow in the future

o. During the audit of Games Play the auditor has become concerned about fraud detection. Which of the
following events would most likely cause the auditor to become concerned that fraud may have occurred?
1.
2.
3.
4.

A suggestion from management to rely on its internal control system

The retirement of the chair of the audit committee
The availability of only photocopies of documents where originals should be available
A higher than usual number of errors in the accounts payable procedures

p. Gregory Smith, CGA, is an external auditor who is working on an audit that involves an extensive
recalculation of the value of numerous types of inventory parts for automobiles. He works late at the office
and is forced to take his work home to tie up some loose ends. The audit working papers are due first thing
the next morning to his team manager. Exhausted, he asks his wife, Maria, a business analyst, to complete
the working papers for him that night.
Which of the following best describes your assessment of Gregorys actions?
1.
2.
3.
4.

Gregory has most likely violated CAS only.

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

q. Jasmine is a CGA student, and this is her first job with a public accounting firm. On her first audit, she has
been assigned the examination of the office expense account. Jasmine has noticed that monthly payments
for $10,000 have been coded to this account. The vendors name is Marcy Saunders. Jasmine knows that
the office managers wifes name is also Marcy Saunders. When Jasmine questions the office manager
about the monthly expenses, the manager becomes very angry and refuses to discuss the payments with
Jasmine, telling her that the payments were never questioned in the past and that she should stick to
examining material entries.
Which of the following is the best course of action for Jasmine to take?
1.
2.
3.
4.

Jasmine should consult ethics handbooks to determine what to do next.

Jasmine should rely on her own common sense in dealing with the situation.
Jasmine should ensure that all actions taken are documented in writing.
Jasmine should consult a senior auditor in the firm who has both professional experience and
education.

Continued
PA1 Exam Simulation

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r.

Peter Posten, CGA and auditor for Matheson Inc., has scheduled a meeting with the chief financial officer
(CFO) during the initial stages of the audit engagement. The CFO informs Peter, Im not sure if itll help
you with your audit, but we made no major capital asset acquisitions during the year. Which of the
following is the best course of action?
1. Peter should review the minutes of the directors meetings from the current and previous years.
2. Peter should document his conversation with the CFO to protect the firm against liability in any future
lawsuits.
3. Peter should believe the CFO. As a senior manager, the CFO would know about the clients
significant transactions.
4. Peter should review the previous years audit working papers to determine if capital asset acquisitions
were increasing or decreasing.

s.

Eugene is contemplating establishing a new business. Eugene has a net worth in excess of $2 million
comprised of personal assets owned jointly with his wife, Franca. Eugene recognizes that his new business
entails undertaking significant risk and that there is a relatively high threat of failure. If his concept catches
on, the payoff will be enormous. The maximum that Eugene is prepared to lose is his $100,000 initial
investment. While Eugene and Franca will both work in the business, Eugene will make all of the business
decisions. Because of their diverse and jointly owned investment portfolio, Eugene and Franca want to
structure this business to maximize income-splitting possibilities.
Which of the following forms of business organization is the most appropriate to recommend to Eugene?
1.
2.
3.
4.

t.

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

Super Scissors Ltd. (SSL) is a Canadian-controlled private corporation (CCPC), and management is
planning for future expansion. As part of its long-term planning sessions, management identified the need
for significant capital investment in the fall of 20X8 and is considering obtaining additional investors
through an initial public offering. Assuming that SSLs net income levels do not change, if SSLs plans to
become a public company are successful, which of the following will be the effect on the companys tax
liability?
1. Income taxes will increase because SSL will no longer be allowed to use LIFO for accounting
purposes.
2. Taxable income will decrease because share issue costs are deductible.
3. Net income will increase because SSL will no longer qualify for the small business deduction.
4. Income taxes will increase because the basic federal tax is greater for public companies than for
private.

u. As controller of Cambridge Inc., a privately held Canadian corporation which conducts some of its
business in the U.S., you are considering adopting the International Financial Reporting Standards (IFRS).
Cambridge is contemplating an initial public offering in three years time. As such, you are aware that
Cambridge should adopt a transition plan to adopt IFRS. It is predicted that in the long run IFRS and U.S.
GAAP are likely to converge.
If you decide to begin a transition to IFRS now, which of the following will be the least important
consideration during the transition phase?
1.
2.
3.
4.

Obtain sufficient training and knowledge of IFRS.

Identify the key accounting issues.
Develop a convergence strategy.
Ensure compliance with U.S. GAAP.

Continued
PA1 Exam Simulation

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v. It is January 5, 20X8, and you, a recently designated CGA working as the chief accountant at a small
publicly traded music system company, have just started work on year-end duties for 20X7. This morning
you received an e-mail from the president of the firm, also a CGA, informing you that the company
received a purchase order for installation of a music system and two years of after-sales services worth a
total of $150,000. Since the purchase order was dated December 21, he requested that you enter it into the
books for 20X7. He said he would follow up with hard copies of the invoices.
Which of the following is the best course of action for you to take?
1. Process the journal entries for the current fiscal year (20X8) because the past fiscal year cannot be
changed.
2. Process the journal entries for the last fiscal year (20X7) because the president is an experienced
accountant.
3. Send an e-mail to the president and request further details of the purchase order, including the split
between the music system revenue and after-sales services revenue.
4. Find out whether the music system was delivered prior to year end and the amount of after-sales
service revenue included in the purchase order.
w. Valley View Seniors Lodge (VVSL) implemented a new system to provide authorized family members
with online access to residents billing information, medical data, and activity files. Family members are
able to view monthly invoices and medical information online, as well as schedule family visits. VVSL
uses the new system to electronically generate invoices for medications and monthly expenses, instead of
manual paper-based billing. Which of the following is of greatest concern to VVSLs auditors?
1.
2.
3.
4.

Privacy issues regarding patient medical data

Inadequate control and security over the new system database
Transition from the paper system to the online billing system
Inadequate staff training on the new system

x. In-Home Mobility Care (INHC) sells and rents furniture, fixtures, and supplies to people with mobility
issues or other medical needs. Sales are made in person at the companys store, online, and by telephone.
Many customers peruse the companys catalogue on its website prior to visiting the store or phoning in
their order. Online sales were introduced five years ago; they represented 5% in the first year, 10% in the
second year, 15% in year three, 25% in year four, and 50% in the current year, the fifth year of online
sales. Payments for online purchases are made with credit cards or by using an online payment service
(PAY-ALL). Goods are shipped from the company-owned warehouse nearest the customer within three
business days. For hard goods (such as canes, walkers, and lift chairs), customers have 10 days to return
the product for a full refund. Soft goods (such as foot cushions, insoles, and personal care products) are
non-returnable. Approximately 1% of hard goods are returned for a full refund, although the customers
generally order an alternative product. At year-end, the accounts receivable balance is 130% of the balance
at the previous year-end.
Which of the following risks should the auditor be alert to the possibility of?
1. Inadequate allowance for sales returns
2. Early revenue recognition
3. The fraudulent reporting of sales
4. Inadequate allowance for doubtful accounts

Continued

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y. On September 3, 20X7, Sebastian received a Notice of Assessment, dated August 28, 20X7, regarding his
20X6 income tax return. Which of the following dates is the latest for Sebastian to file a notice of
objection?
1.
2.
3.
4.

November 26, 20X7

April 30, 20X8
December 2, 20X7
August 28, 20X8

Part B: Short case analyses

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

Continued

PA1 Exam Simulation

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

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Exhibit 2-1
Tender requirements for NW Energy Pipeline Project #S15687
Extract from delivery schedule
Reference
Stage 1
Stage 2
Stage 3
Stage 4

Pipeline length
12,000 meters
35,510 meters
24,200 meters
5,880 meters

Site
NW Saskatchewan area 1A
NW Saskatchewan area 1B
NE Alberta
NW Alberta

Completion Date
March, 20X2
October, 20X2
April, 20X3
June, 20X3

Extract from terms and conditions

Payment: Upon completion of each stage, the applicable segment of the contract payment due will be paid
within 15 days.
Penalties: If the completion date is not met for any of the 4 stages, there will be a 10% penalty levied for
each day of the delay, to a maximum of 50% of the payment for that stage.
Restoration work: The restoration of each site is to be completed within 1 month of each stage.
Working conditions: All work sites must be in compliance with the Worker Safety Standards Act.

Required
Prepare a report for Sam Pierce (approximately 1,000 to 1,100 words) that addresses various aspects of the
proposal to engage in a joint venture (JV) with two other joint venturers and the impact on the upcoming
PPL audit. Note: use the accounting standards effective in 2013.
Question 3
(50 minutes)
Swanson Storage Solutions Ltd.
Swanson Storage Solutions Ltd. (Swanson) is a private Canadian corporation based in Woodstock,
Ontario, that manufactures bookcases and storage cabinets. Swanson sells most of its product to retailers
across Canada and also operates a small outlet store in Woodstock where it sells leftover stock that has not
been sold to the retailers. During its 10-year history, the company has grown substantially, gaining many
new customers each year as well as maintaining a base of existing customers. The company has provided a
high standard of living for its owner, Ricardo Sequeira. Ricardo believes it is important to also reward his
employees who have contributed to the success of his company, and he pays them a generous bonus based
on gross margin on all products sold.
Ricardo has a longstanding friendship with the owner of Barcelona Disenos S.A. (BD), a Spanish furniture
design and manufacturing company based in Barcelona, Spain. BD has built a reputation in Spain for its
intricately carved furniture and Ricardo recognized that there is a market for this furniture in Canada.
During a period of considerable economic uncertainty, Ricardo entered into negotiations with the owner
and completed the purchase of BD on January 1, 20X4. BD will maintain its retail customers in Spain and
will ship approximately 50% of its production to Swanson.

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

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Exhibit 3-1
SWANSON STORAGE SOLUTIONS LIMITED
Selected Financial Ratios
Working Paper prepared by Aaron Ramsden
Notes from preliminary analysis of Swansons 20X3 and 20X2 financial ratios:
The increase in liabilities stems from an increase in short-term loans to finance receivable and inventory
increases. There is a decrease in cash and short-term investments from the prior year. Both of these factors
have contributed to the deterioration in Swansons liquidity ratios. Collection of receivables appears to be
taking a longer time than the prior year. Inventory has increased over the prior year, outpacing the growth
in sales and could indicate a concern with potential obsolescence.
Information provided for prior years and most recent industry ratios:
20X3
Liquidity
Current ratio
Quick ratio
Leverage
Debt to equity
Activity ratios
Average collection period (days)
Inventory turnover
Profitability ratios
Gross margin
Return on total assets

20X2

20X1

Industry
20X0
20X2

1.1
0.6

1.2
0.7

1.5
0.8

1.6
0.9

1.8
0.9

0.7

0.7

0.6

0.6

0.5

55
2.3

50
2.4

40
2.5

35
2.6

42
2.5

12.5%
2.4%

13.7%
3.1%

14.5% 14.9%
4.5% 4.7%

15.0%
5.0%

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

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

b. Explain any other issues related to Dans work and recommend how they should be handled.
c.

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

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Part C: Comprehensive case analysis

Question 4
(100 minutes)
Small Business Support Centre
It is December 20X9. The Municipality of Markville, Alberta, is undergoing several changes in its
operations.
As a municipality, it prepares its financial statements in accordance with public sector accounting. Three
years ago, the municipality established a department to provide assistance to small businesses in the
municipality. This department, officially referred to as the Small Business Department, is staffed with five
employees who were hired for their experience in marketing, finance and human resource management.
There are many small businesses in the municipality using these services, and the department has
struggled to keep up with the demand. In September, the council members voted to spin off this
department into a separate not-for-profit legal entity.
This entity will be called the Small Business Support Centre (SBSC). The SBSC will be responsible for
establishing its own infrastructure, including the implementation of new information technology to track
costs and revenues. This system will be used to provide data for the accounting records and to extract
information to assist in managing operations effectively and efficiently. Previously, the accounting
information was tracked through the municipality accounting system, but it has been determined that the
SBSC should be totally independent from the municipal operations. A board of directors has been
established, including members of the municipality council, and its first meeting is scheduled for one week
from today.
The municipality has started preliminary planning for the transfer. All assets currently use by the Small
Business Department, including cash on deposit, capital assets such as computers, and any related debt
will be transferred from the municipality to the new not-for-profit entity. The municipality has leased a
section of vacant land to SBSC and has arranged for a new building to be constructed. The funds for the
construction will come from a combination of a grant made by the municipality to SBSC and a mortgage
taken out in SBSCs name. An executive director has been hired and has spent his first month
familiarizing himself with the current processes in the Small Business Department. He will be hiring two
additional employees to assist with the increase demand, with the expectation that all employees will have
a heavy workload in the first year of operations. He does not have any experience in formal planning and
will require some assistance in understanding the basic requirements for establishing a budget for the
current year.
You are Sascha Goolia, a CGA, and you work for a large audit and consulting firm. You have been
engaged as an external consultant to oversee the transition of the Small Business Department into a
separate not-for-profit entity, and to make recommendations on the format of the financial statements,
accounting policies adopted, and information necessary for decision making. You have been advised that
SBSC is considered to be a government not-for-profit organization (NFPO). In conjunction with the
recommendations you are providing, the chair of the board of directors also would like you to provide a
preliminary discussion of the requirements of the information technology system that would support their
ongoing needs, along with direction on the physical installation. You have had the opportunity to meet
both the chair and the executive director to obtain additional information.
In preparation for the construction of the new building, the municipality council has reviewed several
proposals for the design of the building. The municipality council could not agree on the concept and
changed design firms twice before selecting a final design, incurring costs for each proposal. The final
design requires some additional engineering costs to implement two of the design features. The chair noted
that all of these costs could all be included in the cost of the construction of the building.

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

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

Exhibit 4-1
Small Business Support Centre Planning Notes
Revenues
The membership fees entitle members to unlimited use of the facilities (resource library, support groups,
sessions with financial advisors) and a discount rate for seminars. Memberships are provided free of
charge to owners of small businesses who have recorded a loss on their most recent financial statements.
These members will also receive free access to the seminars. Because these memberships do not result in
any revenue, they are not recorded in the accounting records. Non-members can pay the full fee to attend
seminars or receive personalized business advice.
Seminars are currently offered twice a week and cover a variety of marketing, financial and human
resource topics. Seminar fees are set at the beginning of the year based on an estimate of the number of
course offerings and the projected enrolment. There is no formal schedule published and the seminar
content is dependent on the availability of the instructors. There have been several seminars where there
were not enough people registered to cover the cost of the instructor, so the seminar was run at a loss. On
occasion, the loss was caused by a higher than anticipated number of members enrolling who were eligible
for free seminars. There will be sufficient space in the new location to hold additional seminars subject to
the availability of the instructors.
Small business survey
A survey was recently conducted, asking small business owners what their top priorities are for their
business. The results have been ranked in order of importance and the top three priorities relate to financial
planning, networking and skills development. The results of the survey will be used as an input in the
development of the operating plan for the upcoming year.
Draft mission statement
A draft mission statement was started by the municipality and has been forwarded to the board for
consideration:
We will provide business information, professional guidance and support for small
businesses located in the municipality of Markville. We will offer a diverse and
affordable range of training and development opportunities in a cost-effective manner to
owners and employees of small businesses. We will be known for our professional
approach and our friendly service.
The municipality expects SBSC to take these objectives into account when establishing operational
procedures and developing training seminars. The original intention behind the spin-off of the Small
Business Department was to enable the growth of this service and provide a fully dedicated staff and board
of directors to manage the growth. It is expected that SBSC will offer a wide range of seminars,
personalized assistance and networking activities on a cost-effective basis so that membership fees could
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be kept low. It was determined that the number of seminars and the type of seminars offered should be
expanded to provide more choice for the members. The municipality has recognized that it is important to
provide support to the numerous small businesses that exist in the municipality to stimulate the local
economy and to assist small businesses in providing a higher level of service to their customers.
The new board of directors has been asked to incorporate the objectives in the draft mission statement into
the performance measures that will be used for performance evaluations by SBSC. You have been asked to
assist in determining the most appropriate performance measures.

Exhibit 4-2
Proposal for a Social Media Site
Prepared by Jan Lamoureux and Mary Belos
Introduction
Many of our members have access to computers or use phones with Internet capability. They use the
Internet to gain information and to communicate with other people. A social media site that allows our
members to post comments about their experiences and connect with other members would provide us
with free publicity and raise our profile in the community. Our members tell us that they are interested in
knowing what services we offer small businesses.
Objectives

Gain new members through connections with existing members.

Publish schedules of seminars that are updated on a timely basis.
Offer new seminars based on feedback received on the social media site.
Promote the extent of assistance that is offered to small businesses including financial seminars and
personalized business advice.

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

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We can encourage people to sign up for seminars if we promote the benefits of gaining more knowledge to
help them operate their businesses more effectively. This can be done through the weekly blog to help
increase numbers as part of the discussion groups. We can offer registration for seminars through the
messaging system that is available through the social media site. Individuals can send a message listing the
seminar they want to sign up for, the name of the registrant, and their credit card number. Making it easier
for people to sign up should increase the number of registrants in each seminar and decrease the chance of
cancelling any seminar offering because of lack of participants.
Required
Write a letter to the board of directors (approximately 1,800 to 2,000 words) and include the following:
a. Discuss accounting issues related to the creation of the new not-for-profit organization (NFPO),
SBSC, address issues related to SBSCs employees, and any other relevant issues.
b. Discuss the requirements for the new information technology system and explain relevant information
to track in the new system.
c. Comment on the proposal for a social media site and provide suggestions.

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