EVALUATION GUIDE
GIBSON ENVERS LTD.
Relevant Information
Simulation Submitted by:
Student #:
Graded by:
Student #:
__________________________
__________________________
__________________________
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Summary of Results
Indicator
P1
P2
P3
P4
P5
P6
S1
Result
Evaluator Comments
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PRIMARY INDICATORS OF COMPETENCE
Primary Indicator #1
The candidate recognizes that the financial statements issued had several GAAP departures and
demonstrates an understanding of the significant performance measurement issues by providing
a discussion of the issues. The candidate attempts to quantify the misstatements and their impact
on the financial statements.
The candidate demonstrates competence in Performance Measurement and Reporting.
Candidate’s Analysis:
1.
Recognizes that many of GEL’s accounting treatment do not comply
with GAAP
2.
Addresses the following major performance measurement issues:
YES
NO
(i) Capitalization Costs
a) Recognizes capitalization on $317,200 soft cost for office
building that is already open is inappropriate
i.
Concludes that soft cost expense was understated for
the office building
b) Recognizes capitalization of soft cost until “the project generates
sufficient cash flows to pay all expenses except interest and
amortization” is inappropriate according to ASPE 3061.12 where
“capitalization of carrying costs ceases when an item of property,
plant and equipment is substantially complete and ready for
productive use”
ii.
Concludes that soft cost expense are likely understated
(ii) Land Impairment
a) Recognizes management’s bias to reclassify land from inventory
to held-for-use (development) in order to avoid write down
b) Identifies indicators of impairment:
 Significant decrease in market price
 Finance problems
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c) Identifies steps to test for impairment of land:
Step 1 – Compare carrying value ($1,200,000) with
recoverable amount (sum of undiscounted cash flows – costs
to dispose)
Step 2 – Write down to fair value if carrying value greater
than recoverable amount
d) Concludes that land is likely to be written down and that land
was overstated
(iii) Revenue producing properties
a) Identifies indicators of impairment:
 Significant decrease in market price
 Finance problems
b) Identifies steps to test for impairment of properties:
Step 1 – Compare carrying values with recoverable amounts
(sum of undiscounted cash flows – costs to dispose)
Step 2 – Write down to fair value if carrying value greater than
recoverable amount
c) Concludes that Property 2 and 4 are likely impaired
d) Concludes that additional write-down is required to the income
statement and quantifies the amount
3.
Addresses the following minor performance measurement issues:
(i) Joint venture
a) Recognizes that the withdrawal of the 40% partner is a subsequent
event
b) Identifies that there are two types of subsequent events
c) Classifies the withdrawal of the 40% partner as one type of
subsequent event with justification and concludes on appropriate
treatment
d) Recognizes that additional financing is still outstanding and this
could lead to an impairment in subsequent periods
(ii) Lawsuit
a) Recognizes that the $1M could be classified as a gain
b) Concludes that the $1M likely satisfies the definition of an asset
and should be accrued
c) Concludes that net income and equity are understated
(iii) Inventory Valuation
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a) Recognizes that actual utilization was 100% but standard rate is
based on 50% utilization
b) Recognizes that $488,290 overhead should be removed from
inventory
c) Reasonably attempts to recalculate the amount of ending
inventory that was overstated with the overcharged overhead
d) Concludes that cost of goods sold was understated and
inventory was overstated
(iv) Capital Asset Classification
a) Recognizes that extra display panel used for advertising can be
capitalized and this method is appropriate
(v) Other Issues
a) Recognizes that GEL has significant amount of R&D costs but
no deferred taxes
b) Recognizes that R&D ITCs should have been recorded as
deferred revenue and amortized to income over same period as
related assets
c) Recognizes that GEL had positive net income for years 2002 to
2004 but there was no taxes payable recorded on balance sheet
4.
Concludes that GAAP deviations lead to material misstatement in GEL’s
2004 financial statements
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For Primary Indicator #1, the candidate must be ranked in one of the following
five categories:
Not addressed - Primary indicator not addressed.
Nominal competence - The candidate does not attain the standard of reaching competence.
Reaching competence – Response satisfies all of the following criteria:
(1) Recognizes that many of GEL’s accounting policies do not comply with GAAP
(2) Addresses one major performance measurement issues with reasonable depth or two
minor performance measurement issues
(3) Attempts to quantify adjustments
Competent – Response satisfies all of the following criteria:
(1) Recognizes that many of GEL’s accounting policies do not comply with GAAP
(2) Addresses two major performance measurement issues with reasonable depth
and technical accuracy and one minor performance measurement issue with
reasonable depth and technical accuracy
(3) Attempts to quantify adjustments
(4) Conclude that GAAP deviations lead to material misstatement in GEL’s 2004
financial statements
Highly competent – Response satisfies all of the following criteria:
(1) Recognizes that many of GEL’s accounting policies do not comply with GAAP
(2) Addresses three major performance measurement issues with reasonable depth and
technical accuracy and two minor performance measurement issue with reasonable depth
and technical accuracy
(3) Attempts quantify adjustments
(4) Conclude that GAAP deviations lead to material misstatement in GEL’s 2004
financial statements
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Primary Indicator #2
The candidate recognizes that the financial statements issued had several GAAP departures
related to revenue recognition and demonstrates an understanding of the significant performance
measurement issues by providing a discussion of the issues. The candidate attempts to quantify
the misstatements and their impact on the financial statements.
The candidate demonstrates competence in Performance Measurement and Reporting.
Candidate’s Analysis:
1.
Recognizes that many of GEL’s accounting policies do not comply
with GAAP
2.
Addresses the following major performance measurement issues:
YES
NO
(i) Contract Recognition Policy
a) Recognizes that a change in revenue recognition for construction
contracts from Completed Contract to Percentage of Completion
Method on a prospective is inappropriate with sufficient support
a. 2004 contracts are not longer than pre-2004 contracts
b. 2004 contracts are not materially different in revenue or cost
c. Information is available to recalculate cumulative account
balances (expected revenue and expected costs)
b) Reasonably attempts to recalculate pre-2004 contract revenue earned
but not recorded for retrospective changes
c) Recognizes, but not quantifies, that contracts started before 2004 and
completed during 2004 should not have been fully recognized in
2004 and concludes that revenue would be overstated
d) Expenses the losses contracts for 2B and 3B OR identifies that
ASPE has no explicit guidance
e) Concludes that revenue was understated for 2004 with current
contracts when accounting policy was applied retroactively, not
including contracts started before 2004 and completed in 2004
revenue
(ii) Standard Panel Revenue Recognition
a) Recognizes that revenue for standard panels should be
recognized upon completion of delivery of goods, not upon
receipt of order
b) Recognizes that $250,000 to $500,000 gross profit on the last
two business days should not have been recognized
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c) Concludes that revenue and cost of goods sold were overstated
for standard panels
(iii) Non-monetary transaction
a) Identifies that the exchange of similar properties is a non-monetary
transaction
b) Concludes that only portion of the gain should be recognized
c) Attempts to quantify the portion of the gain that should be
recognized
3.
Addresses the following minor performance measurement issues:
(i) Made-to-Order Panel Revenue Recognition
a) Recognizes that made-to-order revenue is accelerated and
allocation of revenue is inappropriate – Manufacturing of panel
is recognized on completion of production and installation
revenue is recognized using percentage of completion.
b) Concludes that revenue was likely overstated as installation
revenue was allocated to breakeven but the separately
identifiable amount is likely greater than the amount attributed
4.
Concludes that GAAP deviations lead to material misstatement in GEL’s
2004 financial statements
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For Primary Indicator #2, the candidate must be ranked in one of the following
five categories:
Not addressed - Primary indicator not addressed.
Nominal competence - The candidate does not attain the standard of reaching competence.
Reaching competence – Response satisfies all of the following criteria:
(1) Recognizes that many of GEL’s accounting policies do not comply with GAAP
(2) Addresses one major revenue recognition issue with reasonable depth
(3) Attempts to quantify adjustments
Competent – Response satisfies all of the following criteria:
(1) Recognizes that many of GEL’s accounting policies do not comply with GAAP
(2) Addresses two major revenue recognition issues with reasonable depth and
technical accuracy
(3) Attempts to quantify adjustments
(4) Conclude that GAAP deviations lead to material misstatement in GEL’s 2004
financial statements
Highly competent – Response satisfies all of the following criteria:
(1) Recognizes that many of GEL’s accounting policies do not comply with GAAP
(2) Addresses three major revenue recognition issues with reasonable depth and technical
accuracy and one minor revenue recognition issue with reasonable depth and technical
accuracy
(3) Attempts to quantify adjustments
(4) Conclude that GAAP deviations lead to material misstatement in GEL’s 2004
financial statements
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Primary Indicator #3
The candidate recognizes that professional standards were not met in the work performed on the
information package provided, and provides a discussion of how these standards were not met.
The candidate demonstrates competence in Assurance.
1.
2.
3.
4.
5.
Candidate’s Analysis for GAAS issues
YES
Materiality
a) Explains the concept of materiality to the lawyers (based on user’s
technical knowledge)
b) Explains that establishment of materiality requires judgment
c) Recognizes the need to assess materiality because it affects the audit
work’s nature/ extent/ timing and overall tolerable misstatement in
financial statements
d) Draws a conclusion on appropriateness of last year’s materiality and
if conclusion is drawn such that materiality is inappropriate, suggests
a new materiality level
e) Recognizes that there was a new user and materiality should be
lowered from last year
f) Suggests that materiality can be calculated based on net income
based to the new user’s needs
g) Suggests that CB’s materiality assessment is appropriate if business
is asset-driven
Risk Assessment
a) Recognizes that CB’s risk assessment (high risk) is appropriate
b) Recognizes that audit approach/procedures do not reflect this
assessment
Approach
a) Recognizes that CB relied on controls despite indicators that they
may not be operating effectively (test of controls with errors on
March 2004)
b) Suggests that substantive approach should have been used
Summary of Unadjusted Misstatement (SUMs)
a) Recognizes some misstatements were not posted to SUMs
statement (e.g. panel division overstatement)
b) Recognizes that revised SUMs has aggregate misstatement over
stated materiality
c) Concludes that this was a major deficiency in CB’s audit
Specific Audit Procedures By Issue
Capitalization Costs Procedures
NO
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6.
7.
8.
(a) Suggested procedures used to address existence of capitalized
costs
 Inspect contracts that measures the progress of the building
 Inspect when costs were posted and accrued and any costs
capitalized after the building has been ready for productive use
should be expensed
Land Impairment
a) Suggested procedures used to address valuation of capitalized costs
b) Suggests procedures to understand management’s intentions to
reclassify
c) Suggests procedures to assess/discussed indicators of
impairment:
 Significant decrease in market price
 Finance problems
d) Procedures to suggest determining value in use and FMV
through secondary markets and calculation of write down
Revenue producing properties
a) Suggested procedures used to address valuation of revenue
producing properties
b) Recognizes that appraisals relating to revenue-generating assets
compromised by optimistic assumptions
c) Recognizes that CB should have considered whether FMV
assessment was appropriate
d) Suggests procedures to assess/discussed indicators of
impairment:
 Significant decrease in market price
 Finance problems
e) Suggest procedures to determining value in use
 Recalculate undiscounted future cash flows through examining
tenant agreements (rental income, maintenance expenses etc.)
 Determine the disposition costs if any (does the company plan
to dispose of the property upon the end of the tenant
agreements? If so, should consider costs to sell)
f) Suggest procedures to determining FMV
 Through secondary markets
g) Suggest recalculation and write-down analysis is required
h) Recognizes that procedures should have been performed to
verify leasehold improvement payments
Joint venture
a) CB Recognized that the withdrawal of the 40% partner is a
subsequent event – should suggest procedures to quality control and
reviews to ensure completeness of disclosures
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b) Suggests procedures to ensure adherence to environmental
regulations
 I.e. Should obtain copy of environmental regulations & copy of
assessment to ensure that it was properly adhere to
c) Suggests procedures to assess recovery of investment after 40%
partners withdrew funds.
9. Lawsuit
a) Suggests procedures to verify the amount satisfied definition of an
asset
 Consult with lawyers on collectability and entitlement to gain
10. Inventory Valuation
a) Suggests procedures to address the valuation assertion of inventory
b) Suggests procedures to verify inputs required to calculate
overcharged overhead
c) Suggests procedures to recalculate the amount of ending
inventory that was overstated with the overcharged overhead
d) Recognizes that there was no assessment of potential error
regarding valuation of raw material inventory (panel division)
nor did it get posted into SUMs
11. Contract Recognition Policy
a) Suggests procedures to address occurrence (2004) and completeness
(2002, 2003) of revenue
b) Suggests procedures to recalculate allocation of revenue between
periods
 I.e. Obtain contracts with periods relating to periods ending in
2002, 2003 and 2004. Determine the percentage of completion of
these contracts as at year end date based on the amount of work
completed or percentage of total costs
c) Recognized the need to restate revenues based on relevant period
that revenue is stated in
d) Recognizes that procedures lacked those to test approval/
collectability of extra work
e) For determining costs: Recognizes that there was no evidence of CB
testing for costs to complete the contracts
f) For determining costs: Suggests the use of other information to assess
appropriateness of revenue recognized (e.g. estimates of engineers/
management)
g) For determining costs: Recognizes that there was no evidence
regarding WIP additions other than June/04 – suggests that more
work need to be done
12. Standard Panel Revenue Recognition
a) Suggests procedures to test existence and cut-off of procedures
b) Suggests procedures to obtain evidence to determine the period
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that items should be related to:
I.e. obtain all orders close to year end and trace to shipping
documents to ensure revenue recognition criteria met
c) Suggests adjustments needs to be made or taken to Statement of
Unadjusted Misstatements
13. Non-monetary transaction
a) Suggests procedures to determine FMV
 I.e. through the use of appraisals or experts
b) Suggests procedure to verify the receipt of cash exchanged
c) Suggests procedures to perform calculation of gains
14. Made-to-Order Panel Revenue Recognition
a) Suggests procedures to test occurrence of revenue
b) Suggests procedures to understand the nature of the two
components of the contract
c) Suggest procedures to determine revenue allocation between
manufacturing and installation
15. Conclusions on GAAS
a) Recognizes that audit procedure deficiencies are pervasive and
overall conclusion on deficiency is drawn

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For Primary Indicator #3, the candidate must be ranked in one of the following
five categories: Please note that specific procedures suggested by candidates
may be different and they should be assessed on ability to test stated assertion.
Not addressed - Primary indicator not addressed.
Nominal competence - The candidate does not attain the standard of reaching competence.
Reaching competence – Response satisfies all of the following criteria:
(1) Recognizes that there may have been breaches in GAAS
(2) Discusses materiality, risk assessment, approach and at least two specified audit
procedure in reasonable depth
(3) Draws an overall conclusion on CB’s adherence to GAAS
Competent – Response satisfies all of the following criteria:
(1) Recognizes that there may have been breaches in GAAS
(2) Discusses materiality, risk assessment, approach and at least three specified audit
procedure in reasonable depth
(3) Draws an overall conclusion on CB’s adherence to GAAS
Highly competent – Response satisfies all of the following criteria:
(1) Recognizes that there may have been breaches in GAAS
(2) Discusses materiality, risk assessment, approach and at least four specified audit
procedure in reasonable depth (including error made on SUMs statement)
(3) Draws an overall conclusion on CB’s adherence to GAAS
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Primary Indicator #4
The candidate identifies that there is a going concern issue and discusses the associated
implications for the audit.
The candidate is demonstrating competence in Assurance.
1.
2.
3.
Candidate’s Analysis:
YES
Going concern issue must be considered
a) There is a liquidity and profitability problem
b) Financial difficulties (shortly after year-end) suggest that GEL may
not be a going concern at the audit date
Include facts from the case that support the going concern issue
a) Income statement negative after adjustments
b) Cash flow statement negative after adjustments
c) Liquidity problems at year end (supported such as ratio analysis)
d) Bank is assessing GEL as higher risk (less loans)
e) Debenture coming due shortly (2005)
f) Anticipated reduction in demand loan
g) Reasonable attempt at calculation of shortfall
Due in 2004/2005 (Property 2, 3, 4) = 43,225
Refinance: 85% of FMV of $47,000 = 40,460
Shortfall
= 2,765
h) Could take second mortgage on other properties
i) Joint venture requires significant additional financing
j) Property trade is evidence that financing cannot be renewed
- GEL trading short term debt (2004) for long term debt (2009)
- GEL willing to take on higher interest rates 12% vs 10%
- Calculation of economic loss of $1.4 million on the trade
Provides a conclusion on the going concern issue
a) No evidence that CB performed in-depth analysis of the going
concern assessment
b) A note disclosure must be made about the uncertainties that have
led to the going concern issue
c) Required under ASPE 1400 and CAS 570
d) In the absence of the note disclosure, a qualified audit opinion
e) If GEL is not a going concern, beside note disclosure, also restate
balance sheet to liquidation values
f) Indicate that CB would be in significant breach of professional
responsibilities if they knew that GEL was not a going concern but
failed to indicate it
NO
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For Primary Indicator #4 (Assurance), the candidate must be ranked in one of the following
five categories:
Not addressed – The candidate does not address this primary indicator.
Nominal competence – The candidate does not attain the standard of reaching competence.
Reaching competence – Response satisfies all of the following criteria:
(1) The candidate has identified the going concern issue
(2) Has incorporated two of nine case facts under #2 above
(3) Concludes that note disclosure may be required.
(or)
(1) The candidate has identified the going concern issue
(2) Has incorporated four of nine case facts under #2 above
(3) Failed to conclude on the going concern issue.
Competent – Response satisfies all of the following criteria:
(1) The candidate has identified the going concern issue
(2) Has incorporated four of nine case facts under #2 above
(3) Concludes that note disclosure is required because of CB’s role as an auditor of GEL’s
financial statements.
Highly competent – Response satisfies all of the following criteria:
(1) The candidate has identified the going concern issue
(2) Has incorporated six of nine case facts under #2 above,
(3) Concludes that a note disclosure is required because of CB’s role as an auditor of GEL’s
financial statements.
(4) Discusses two other points under #3 above.
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Primary Indicator #5
The candidate performs an analysis of GEL’s cash flow statement included in the information
package in order to determine if the forecast was misleading and not based on reasonable
assumptions.
The candidate is demonstrating competence in Finance.
1.
Candidate’s Analysis
Panel Sales
YES
NO
a) Unfilled orders at lower levels
2.
3.
4.
b) At 100% capacity, unlikely to increase with no further
financing (which is a current difficulty for GEL)
c) Sales increase explained by increasing pricing
d) Rental increase occupancy inconsistent with facts such as a
consistent economic condition
Construction – inappropriate to use historical margins
a) Based on completed contract (more like a pro-forma income
statement), not related to cash flow
b) Margins vary contract to contract and not fixed
c) Interest expense – not logical to remain constant
d) Increase in division revenue inconsistent with economic
conditions remaining constant (case fact assumption)
Recalculation or discussion of the following adjustments
a) Demand loan pay down should be a deduction
b) Mortgage pay down due to drop in property value
c) Cost to complete Joint Venture
d) Lawsuit proceeds
e) Participation payments
f) Mortgage principal repayments
g) Debenture due in 2005 (assuming will be refinanced)
h) Deferred charges (rent/development/advertising)
i) Investments in land inventories
j) Capital asset purchases
k) Holdbacks should be removed
l) Tenant (rent free period) reduction
m) Impact of working capital items
Determines and concludes that CB did not meet its professional
obligation to ensure the forecast was based on reasonable assumptions
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a)
b)
c)
d)
e)
Notice of reader provides no assurance
Should be labelled a projection cause uses hypothesis
Ensuring assumptions are reasonable and logical
A restated cash flow forecast is provided
Concludes cash flow forecast was misleading with reason
For Primary Indicator #5 (Finance), the candidate must be ranked in one of the
following five categories:
Not addressed – The candidate does not address this primary indicator.
Nominal competence – The candidate does not attain the standard of reaching competence.
Reaching competence – Response satisfies all of the following criteria:
(1) Recognizes 2 of 13 adjustments under point #3 above
(2) Concludes that the cash flow statement in the information package was
misleading/not based on reasonable assumptions
(or)
(1) Recognizes 4 of 13 adjustments under point #3 above
Competent – Response satisfies all of the following criteria:
(1) Considers either #1 or #2 above
(2) Recognizes 4 of 13 adjustments under point #3 above
(3) Concludes that the cash flow statement in the information package was
misleading/not based on reasonable assumptions
Highly competent – Response satisfies all of the following criteria:
(1) Considers either #1 or #2 above
(2) Recognizes 6 of 13 adjustments under point #3 above
(3) Concludes that the cash flow statement in the information package was
misleading/not based on reasonable assumptions
(4) Attempts to recalculate the cash flow statement
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Primary Indicator #6
The candidate recognizes that the audience of the report is the legal counsel of the accounting
firm and caters the report accordingly. The candidate assesses all major components of the
information package, and based on the analysis, provides a conclusion regarding the accounting
firm’s liability. Discussion of accounting issues is done in an integrated manner, and the
candidate demonstrates professional writing capabilities.
The candidate is demonstrating competence in Pervasive Qualities and Skills.
1.
2.
3.
4.
5.
Professional Capabilities
YES
Overall Conclusion
a) Suggests that MIC might have some responsibility to protect itself
(through appropriate due diligence before making purchasing
decision), and that proper analysis could have disclosed some of the
problems to MIC
b) States that MIC may have expected too much from package
c) States that MIC may not have purchased GEL if CB met professional
responsibilities
d) Concludes on whether financial statements violated GAAP
e) Concludes on whether CB has exposure/potential liability regarding
professional services to GEL (supported by analysis)
Focus of Report to Legal Counsel
a) Highlighted areas of greatest significance to legal counsel
b) Used analysis of GAAP departures to assess actual overall
financial results of GEL
Professional conduct deficiencies
a) Suggests that CB had professional responsibility not to
associate themselves with false/misleading information
(including Cash flow)
b) Suggests that CB should perform work with due care
Assessment of Info Package and CB’s performance
a) Concludes on GEL’s liquidity/ability to operate as a going
concern
b) Concludes on CB should have signed a clean audit opinion
c) Concludes on whether the 2004 financial statements were
materially misleading
d) Concludes on whether GEL’s cash flow forecast was materially
misleading
Breadth and Communication
a) Included detailed analysis of two main parts of the information
package (audited financials and cash flow forecast)
b) Structured the report in a logical manner (define scope, perform
analysis, and conclude)
c) Presented report in a professional manner (spelling, grammar,
language)
NO
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6.
d) Addressed report to legal counsel and defined technical terms
when necessary
Integration of issues
a) Discussed accounting issues in a well-integrated manner
For Primary Indicator #6 (Pervasive Qualities and Skills), the candidate must be
ranked in one of the following five categories:
Not addressed – The candidate does not address this primary indicator.
Nominal competence – The candidate does not attain the standard of reaching competence.
Reaching competence – Response satisfies all of the following criteria:
(1)
(2)
(3)
(4)
Addresses the report to legal counsel
Provides a conclusion on CB’s liability
Demonstrates professional writing capabilities
Addresses professional conduct deficiencies
Competent – Response satisfies all of the following criteria:
(1)
(2)
(3)
(4)
(5)
Addresses the report to legal counsel
Assesses two of four components of information package in #3 above
Provides a conclusion on CB’s liability
Demonstrates professional writing capabilities
Addresses professional conduct deficiencies
Highly competent – Response satisfies all of the following criteria:
(1)
(2)
(3)
(4)
(5)
(6)
Addresses the report to legal counsel and caters the report accordingly
Assesses two of four components of information package in #3 above
Provides a conclusion on CB’s liability
Demonstrates professional writing capabilities
Discusses accounting issues in an integrated manner
Addresses professional conduct deficiencies
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EVALUATION GUIDE
GIBSON ENVERS LTD.
SECONDARY INDICATORS OF COMPETENCE
Secondary Indicator #1
The candidate evaluates the quality of corporate income tax advice for GEL’s 2004 fiscal year
end and previous years
The candidate demonstrates competence in Taxation.
Candidate’s Analysis:
1.
YES
NO
Discusses items which would increase 2004 taxable income
a) Discussion of whether the land sales-swap should likely be
treated on an account of income or capital
b) Discussion on GEL’s business is buying and selling land
c) Indicates that swap sales should be recorded at fair market value
for income tax purposes
2.
d) Discussion regarding the inclusion of the investment tax credit
received last year in taxable income this year or reduction in
R&D pool
Discusses items which would decrease 2004 taxable income
a) Indicates that the current R&D expenditure is deductible
b) Discussion of the deduction for free rent as a leasehold
inducement
c) Identifies that holdbacks should be deducted in the form of
d) reserve
Identifies that capitalized interest may be deductible for tax
purposes
e) Questions the treatment of the 3 year completed contract method
3.
Cumulative errors made in the past
a) Adds back of the non-taxable portion of the capital gain into
income if the sale of land is concluded as a business income
b) Adds back of total investment tax credits received from all years
4.
Concludes on tax issues and the overall tax advice
a) Could be reassessed for 2004 and prior years
b) Discussions on the change in tax exposure because of in taxable
income or attempts recalculation of 2004 taxable income
c) Quality of tax advice is poor
d)
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For Secondary Indicator #1 (Taxation), the candidate must be ranked in one of the
following three categories:
Not addressed – The candidate does not address this secondary indicator.
Nominal competence – The candidate does not attain the standard of competent.
Competent – The candidate deals with at least three adjustments to the 2004 taxable income (or
cumulative errors) and concludes on the overall tax advice provided.
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Changes to Suggested Approach/Solution
Accounting Issues
Revenue-producing properties:
Under ASPE Section 3063 Impairment of long-lived assets, there is a two-step process to
determine impairment in long-lived assets. We cannot be certain that the carrying amount is
greater than the recoverable amount because we have limited case facts to determine the
recoverable amount. However, if we assume that this is the case, then the write down would be
the same amount as presented in the solution. This change is also applicable in determining the
write-down for land inventory.
Joint Venture:
The solution did not explicitly state that this event is a subsequent event. Under ASPE Section
3820 Subsequent Events, the withdrawal of the 40% partner should be classified as a subsequent
event because it occurred in July 2004, which is after the June 30, 2004 year-end. If the event
was present at the financial statement date, an adjustment would be required; otherwise, note
disclosure would suffice.
Non-Monetary Transaction:
Under ASPE Section 3831 Non-monetary transactions, the full gain of $890,000 should not be
recognized in the financial statements. Only a portion of the gain resulting from the ratio of cash
received to total proceeds may be recognized:
$100,000 (𝑐𝑎𝑠ℎ 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛)
$890,000 (𝑔𝑎𝑖𝑛) ×
= $5,000 (𝑎𝑝𝑝𝑟𝑜𝑥. )
$18,870,000 (𝐹𝑀𝑉 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑔𝑖𝑣𝑒𝑛 𝑢𝑝)
Therefore, only $5,000 of the gain can be recognized. The suggested solution does not quantify
this amount.
Completed Contract Loss:
ASPE does not provide specific guidance on how to account for situations where expected costs
exceed expected revenues for long-term contracts. The suggested approach assumes that under
GAAP GEL would have had to accrue a $260,000 loss, but since ASPE is not specific in this
regard, this loss might not necessarily have been accrued.
GAAS/Professional Standards
Effective for financial statements periods ending or after December 14, 2010, the thirty-six final
International Standards for Auditing (ISAs) adopted as Canadian Auditing Standards (CAS) are
effective and International Standard on Quality Control 1 which is adopted as CSQC1 were
adopted as of December 15, 2009. For purposes of this case, we will be adopting The CICA
Handbook – Assurance, Part I. Part I is made up of all of the Preface to the Handbook, CASs,
CSQC 1, and all other Sections and Guidelines referred to as Other Canadian Standards (OCSs),
which have been retained and carried forward from the existing Handbooki.
The suggested guide referred to general requirements (including examination standards):
 have adequate technical training
 adequately plan and execute audit work,
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

have a sufficient understanding of GEL's internal controls, and
obtain sufficient appropriate audit evidence.
This is replaced by CAS in the various sections:




team collectively have appropriate competence and capabilities to perform the audit
engagement in accordance with professional standards and applicable legal and
regulatory requirements (CAS 220)
The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate audit evidence (CAS
500- audit evidence)
The auditor shall obtain an understanding of the control environment. (CAS 315)
Adequate planning (CAS 300)
Cash Flow Forecast
The suggested approach concludes that CB did not meet its professional standards for Future
Oriented Financial Information (FOFI). However, pursuant to Handbook Section 4250, AcSB
concluded that FOFI is no longer relevant to private enterprises. The purpose of the standard was
developed for public securities market. However, some users in the private enterprises are still
interested in obtaining FOFI when making investment decisions. In this case, CB would not be
held to the standards under HB S. 4250 since it was not specifically required. However, the
conclusion that CB did not meet its professional obligations is still valid. CB understood that
MIC’s owners would have reviewed the forecasted cash flow contained in the information
package to assess the financial condition of GEL. Therefore, CB should have performed its
review of the forecasts with due care and understood that they should not be associated to any
false or misleading information.
When restating the projected cash flow statement, consider presenting the forecast under the
following categories: operating, investing, and financing activities.
Tax Issues
Exhibit III Note 1d – “Taxable capital gain on raw land and building – T2 Sch 6” amount added
back should only be $2,343 (gain on raw land and building on F/S multiplied by 50%). This is
because the taxable capital gain inclusion rate is 50% since 2001 and the case was most likely
not updated in this exhibit since it was written.
Having the above corrected, the suggested approach on page 11 indicated that at least equal to
one quarter of land sales needs to be added back into income. Based on the corrected gain for tax
purposes, half the capital gains will need to be added back instead of a quarter (original case
assumed a 75% inclusion rate) if the gain is determine to be on an account of income.
i
http://www.cica.ca/cas/site-utilities/item28871.pdf
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