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Case Writing and Issues.docx

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York University
ACTG 2011
Alla Volodina

CASE WRITING AND ISSUES CASE WRITING Introduction: 1. Underline your role (what you are required) a. Assurer – you act as a "third party" and are independent of all parties in the case b. Advisor – you act as an advocate and have an interest in a party involved in the case 2. Underling your required tasks 3. Understand exhibits (get a bigger picture) 4. Identify and state users and their needs a. What are their objectives 5. Identify conflict between users’ needs 6. Identify bias 7. Rank the users 8. Link your role to the need from most important users(s) 9. Identify constraints a. Legal b. Contractual (covenants) c. Professional/ethical (code of ethics) d. Financial (ratios) Issues: 1. Recognize the issues and rank them based on your required tasks 2. Review and determine what analysis to use a. Qualitative – subjective b. Quantitative – dollar amount 3. Each issue write alternatives for solving it 4. Assess pros & cons of each alternative 5. Tie the analysis of each alternative with impact on the users’ needs and objectives 6. Provide recommendation on best alternative a. Justify based on users’ needs and objectives and constraints Conclusion: 1. Conclude based on your role a. Advisor: What decision have I been asked to make? (e.g. whether to untake a proposed transaction, which alternative to select, etc.) b. Assurer: What opinion have I been asked to provide? (e.g. financial statements are fairly presented, audit was correctly performed, etc.) 2. Recalculate any covenants Common required tasks: 1. Analyze a system of internal controls (assurer and advisor) 2. Evaluate financial information in the context of an agreement (assurer and advisor) 3. Plan or review an assurance agreement (assurer) 4. Discuss the tax implications of a business decision (assurer and advisor) 5. Evaluate a proposed business decision (advisor) Analyze a system of internal controls Assurer and Advisor i. Identify significant control weaknesses a) a weakness is a control that does not exist or has not been effectively designed ii. Explain the risk associated with each control weakness a) risk is the potential loss the business might experience because of the weakness iii. Provide a recommendation to address each weakness a) recommendation should reduce risk to appropriately low level iv. Explain how to implement recommendation a) who is responsible and what resources are needed? v. Conclude on the overall effectiveness of the control system a) do the weaknesses prevent the system from achieving its objective? Assurer vi. Discuss the impact of the control assessment on engagement risk or approach and suggest alternate procedures necessary to complete the engagement a) How does this affect our assessment of control risk? b) Can we rely on controls or do we have to use a substantive approach? Advisor vi. Discuss the impact of the control assessment on the decision to invest a) Are the control risks too great to justify investing? b) If the control system is ineffective, can our recommendations Evaluate financial information in the context of an agreement i. Identify material issues with the information a. Issue can be an accounting policy or assumption ii. Explain why the issue is material a. What effect does the issue have users and use of the financial information? iii. identify alternative treatments for the issue a. What are the acceptable accounting treatments per GAAP? b. For an assumption, what is considered reasonable and fair? iv. Recommend an alternative a. Which alternative achieves the fairest presentation? v. Revise the financial information based on the recommendations a. Prepare an exhibit to demonstrate the quantitative impact of your recommendations Assurer vi. Conclude as to whether the financial information is materially misstated a. Is the financial information suitable for its purpose? Advisor vi. Conclude as to the impact of the information and agreement on the client's interest a. What is the appropriate business decision? Plan or review an assurance agreement (assurer only!) i. Identify significant engagement issues a. Issue can relate to scope, materiality, procedures, etc. ii. Explain why the issue is significant a. How does the issue affect engagement risk or ability to complete engagement? iii. Identify alternatives to resolve issue a. What needs to be corrected or changed to meet engagement standards? iv. Recommend an alternative to resolve issue v. Conclude as to the overall impact of issues on engagement a. If planning, is it possible to complete engagement as standards require? b. If reviewing, was engagement properly performed? Evaluate a proposed business decision (advisor only!) Quantitative analysis i. Prepare exhibit to evaluate the proposed decision a. Choice of quantitative method should reflect specified investment criteria ii. Conclude whether the investment meets the specified criteria a. Is the return sufficient to justify the investment? Qualitative analysis i. Identify risks and opportunities associated with the decision a. Does the contract contain any favourable or unfavourable terms? b. What is the likelihood that key success factors will be achieved? ii. Where a risk is identified, provide recommendation to reduce risk to appropriate low level a. Is it possible to mitigate risk by changing the structure of the agreement? iii. Conclude on the overall balance of risk and opportunity a. Are the risks significantly greater than the opportunities, or vice versa? Overall conclusion i. Conclude whether to undertake the decision a. Based on both quantitative and qualitative analysis Ranking issues Analyze a system of internal controls  3 types and their ranking: o 1. Management o 2. IT-based o 3. Manual Evaluate financial information in the context of an agreement  Greater materiality, greater importance – how issue relates to the use of the financial statements, not necessarily the financial amount Plan or review an assurance agreement  Issues that involve business as a whole are more important Evaluate a proposed business decision  Quantitative – those that affect whether investment criteria is met (covenants)  Qualitative – those that relate to key success factors of proposed decision COMMON CASE ISSUES IFRS ASPE (used if there are differences) Asset criteria  Provide a future benefit to the entity  Be controlled by entity that will obtain the benefits  Be the result of a past transaction/event  Measurable Liability criteria  Be the result of a past transaction/event  Unavoidable  Require economic sacrifice to settle Revenue recognition 5 Criteria  Significant risks and rewards of ownership transferred to the buyer  Seller has no control over the goods sold  Payment reasonably assured  Revenue reasonably measurable  Costs reasonably measured Methods 1. Percentage-of-Completion 2. Completed-Contract (ASPE requires this if (1) cannot be used) 3. Zero-Profit  Use %of completion if can estimate costs + revenues, but zero-profit if cannot Cost  Cost includes purchase price and any costs directly attributable to bringing the asset to the location and setting it up for use o Deduct any proceeds from selling items produced from setting up the asset  Specific exclusion of costs: o Administration & overhead (IFRS only!) o Abnormal costs (IFRS only!) o Cost of setting up a business o Costs of borrowing (depends!)  IFRS: capitalize for certain qualified assets (qualified being an asset that takes a substantial period of time to get ready for use)  ASPE: may be included for all assets Subsequent Recognition  Costs related to everyday servicing are expensed  Costs related to major parts or components are capitalized  Betterment – increases useful life, efficiency, effectiveness  Repairs/maintenance – allow an asset to operate as intended Amortization  Review amortization method at least annually  Review amortization method periodically given significant events  Three methods: o Straight-line o Accelerated o Units of activity/usage based  Affects: NI and Net Assets!  Non-cash  Components approach – break down asset and amortize individual components  Amortization based on asset class (e.g. building) Asset Valuation  IFRS only!  ASPE has cost model – record at cost, but
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