Assurance Role Flashcards

Question

25 Employer provided automobile – Operating cost benefit Taxation Core – Level B

Answer 1

Employer provided automobile – Operating cost benefit (Tax) • Taxable employment benefit, calculated as: o $0.26 (for 2018) or $0.28 (for 2019) per km of personal use; or o 50% of the standby charge (only when vehicle used at least 50% for business) • Operating costs include gas, insurance and maintenance, but not parking Case: Ferguson Real Estate Reference: IT-63R5

Answer 2

Employer provided automobile – Tax planning (Tax) • Consider employee purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost) • Consider employee including allowance in income and claiming business portion of actual car expenses if they exceed the allowance • Consider sale and leaseback for employer-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost) • Maintain log to justify business vs. personal km • Lower standby charge by reducing number of days vehicle available for personal use • Increase business use by visiting clients on the way to and from work Case: Ferguson Real Estate Reference: IT-63R5

Answer 3

Employment – Taxable benefits (Tax) • Board and lodging (unless at remote location) • Most rent-free and low-rent housing • Trips of a non-business nature • Gifts greater than $500 (that are not cash or near-cash) • Cash and near-cash gifts • Cost of tools where employee is not required to have tools to work • Forgiveness of debt • Employer-paid education costs when primarily for the benefit of employee Case: Perkins Packing Reference: ITA 6(1)

Answer 4

Employment – Non-taxable benefits (Tax) • Uniforms and special clothing required to be worn • Transportation to job site • Moving expenses reimbursed, excluding housing loss reimbursement • Recreational facilities at place of work • Premiums paid under private health services plans • Professional membership fees when primarily for benefit of the employer Case: Perkins Packing Reference: ITA 6(1)

Answer 5

Impairment of long-lived assets (ASPE) • Steps: 1. Determine if factors indicating impairment exist 2. Group asset with other assets/liabilities to form group at the lowest level that generates cash flow (i.e. cash generating unit) 3. Determine if there is impairment by comparing net book value to recoverable amount (i.e. undiscounted future cash flows) 4. Calculate impairment by comparing carrying amount to fair value) • Cannot reverse write-downs Case: TankCo, Ferguson Real Estate Reference: ASPE 3063.04-.09, .12, .18

Answer 6

Impairment of assets (IFRS) • An entity is required to assess whether there are any indicators of impairment at the end of each reporting period. If an indication of impairment exists, the asset will need to be tested for impairment. • To test for impairment, compare the asset’s recoverable amount to the carrying value. The extent to which the carrying value exceeds the recoverable amount (if any) is the impairment loss. • Recoverable amount: Higher of the fair value less costs to sell and value in use o Fair value less costs to sell: price that would be received to sell an asset or paid to transfer a liability between market participants, less incremental costs directly attributable to the disposal of the asset (excluding finance cost and income tax expense) o Value in use: Present value of the future cash flows from the continuing use of the asset and its ultimate disposal • Impairment can be reversed if the asset subsequently recovers in value, but not to more than the “would be” value had the impairment not been recognized. Case: Atlantic Shellfish Reference: IAS 36

Answer 7

Investments – Equity method (IFRS) • IAS 28: an entity with significant influence over an investee shall treat the investee as an associate and account for its investment in the associate using the equity method • Significant influence can be demonstrated by owning (directly or indirectly) 20% or more of the voting power of the investee • The entity may be able to demonstrate influence, even with less than 20% ownership. Evidence of influence can include: o Representation on the board of directors o Participation in policy-making processes o Material transactions between the entity and its investee o Provision of essential technical information • Under the equity method, the investment is initially recognized at cost, and is adjusted for the post-acquisition change in the investor’s share of the investee’s net assets Case: Atlantic Shellfish Reference: IAS 28

Answer 8

``` Accounting for subsidiaries (ASPE) An enterprise can make an accounting policy choice to account for its subsidiaries using one of the following methods: • Cost method • Equity method • Consolidation method ``` ** Once a method has been selected, it must be applied consistently (i.e. all subsidiaries must be accounted for using the same method) Reference: ASPE 1591, ASPE 3051

Answer 9

PPE – Costs (ASPE) • PPE costs represent the amount of consideration given up to acquire, construct, develop, or better a PPE and comprise of all costs directly attributable to the acquisition, construction, development or betterment, including installing it at the location and in the condition necessary for its intended use • PPE costs include direct construction or development costs (such as materials and labour) and overhead / carrying costs directly attributable to the construction or development activity • The cost of each item of PPE acquired as part of a basket purchase (i.e. when a group of assets is acquired for a single amount) is determined by allocating the price paid for the basket to each item on the basis of its relative fair value at the time of acquisition Reference: ASPE 3061.03, .06, .08

Answer 10

Capital lease criteria – Lessee (ASPE) • Must meet one of the criteria: o Transfer of ownership or bargain purchase option at the end of the lease term o Lease term at least 75% of economic life of asset o PV of minimum lease payments at least 90% of FV of leased asset  Discount rate = lower of lessee’s incremental borrowing rate and implicit rate Case: CHHP, TankCo, King Street Theatre Reference: ASPE 3065.06

Answer 11

Capital lease criteria – Lessor (ASPE) • Capital lease if all of the following exist: • Credit risk is normal • Unreimbursable costs are estimable • Any one of the following criteria are met: o Transfer of ownership or bargain purchase option at the end of the lease term o Lease term at least 75% of economic life of asset o PV of minimum lease payments at least 90% of FV of leased asset  Discount rate = implicit rate Reference: ASPE 3065.07

Answer 12

Types of capital leases – Lessor (ASPE) • Sales-type lease o Arise when a dealer uses leasing as a way to sell their products o Record as sale • Direct financing lease o At inception, FV of the leased property is equal to its carrying value o Usually arises when a lessor acts as intermediary between manufacturer and lessee o Record as lease receivable (payments to be received and guaranteed residual value, if any) o Difference between lease receivable and carrying value should be recorded as unearned finance income o Finance income will be recognized each year Reference: ASPE 3065.29, .30, .37

Answer 13

Compound Financial Instruments (ASPE) • Financial instruments, or their component parts, should be classified as a liability or equity in accordance with the substance of the contractual arrangement on initial recognition and the definitions of a liability and an equity instrument • Financial instruments that contain both a liability and an equity element, including warrants or options issued with and detachable from a financial liability, should be separated into component parts, as follows: o The equity component is measured as zero, i.e. the entire proceeds of the issue are allocated to the liability component; or o The less easily measurable component is allocated the residual amount after deducting from the entire proceeds of the issue the amount determined for the component that is more easily measurable • The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the carrying amount that would be ascribed to the instrument as a whole, i.e. no gain or loss can arise from recognizing and presenting the components of the instrument separately Reference: ASPE 3856.20 - .22

Answer 14

Capital Budgeting – Buy vs. Lease (Finance) • Calculate NPV of each option and compare to determine which option is cheapest • NPV of buy option – consider: o Cost of asset o PV of tax shield o Maintenance costs • NPV of lease option – consider: o PV of after tax lease payments • Other factors to consider: o Impact on covenants o Cash flows (leasing lessens the current cash burden) o Leasing may be easier to come by if company has trouble obtaining financing o Purchasing the asset might provide more flexibility (ownership of asset) o Leasing might insulate company from severe declines in asset value o Possible tax advantages (no capital leases for tax purposes – CRA sees all leases the same so cash payments would be deductible, however no CCA) Case: CHHP

Answer 15

Financing Options – Debt vs. Equity (Finance) • Debt financing options: o Loan- consider loan term, and security/collateral required o Lease o Government assistance • Equity financing options: o Angel investors- can be friends or family looking for a return on investment; generally passive investors o Venture capitalists- professional investment funds, looking for superior returns (>30%); active participants in management, with a clear exit strategy o Private equity- tends to participate later in business lifecycle, hence lower risk o Public markets Case: Ferguson Real Estate, World Wide Windows

Answer 16

Revenue recognition criteria – Completed contract method (ASPE) • The completed contract method would only be appropriate when performance consists of the execution of a single act or when the enterprise cannot reasonably estimate the extent of progress toward completion. • NOTE: There is no equivalent recognition criteria under IFRS. Case: CHHP, TankCo, Ferguson Real Estate Reference: ASPE 3400.18

Answer 17

Revenue recognition criteria – Percentage-of-completion method (ASPE) The percentage-of-completion method is appropriate when: • performance consists of the execution of more than one act, and • revenue would be recognized proportionately by reference to the performance of each act. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue would be recognized on a straight line basis over the period unless there is evidence that some other method better reflects the pattern of performance. The amount of work accomplished would be assessed by reference to measures of performance that are reasonably determinable and relate as directly as possible to the activities critical to the completion of the contract. Case: CHHP, TankCo, Ferguson Real Estate Reference: ASPE 3400.17

Answer 18

Revenue recognition – Effect of uncertainties (ASPE) Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured. • If significant and unpredictable amounts of goods being returned, do not recognize revenue • If the amount of returns can be reasonably estimated based upon experience, it may be possible to provide for an allowance for a returns expense. Reference: ASPE 3400.19-.21

Answer 19

Business use of home expenses (Tax) A taxpayer can deduct expenses for the business use of a workspace in the home, as long as they meet one of the following conditions: • The home is the principal place of business. • They use the space only to earn business income, and the taxpayer uses it on a regular and ongoing basis to meet clients, customers, or patients. Eligible costs include: heat, home insurance, electricity, property taxes, repairs and maintenance, mortgage interest or rent (if tenant). • Expenses are pro-rated using a reasonable basis such as the area of the work space divided by the total area of the home. • Home office expenses are also pro-rated for a short business year. • Losses cannot be created by home office expenses. Unused expenses are carried forward for use in a later year. • Do not claim CCA on a principal residence, as it may negatively impact the ability to use the principle residence exemption. Case: Culinary Crawl, Roxanne Kalpert, Solar Panel Solutions Reference: ITA 18(12), IT-514

Answer 20

Inventory measurement – Cost formulas (specific identification) (ASPE) • The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs. Reference: ASPE 3031.22

Answer 21

Inventory measurement – Allocation of overhead (ASPE) • The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. • The actual level of production may be used if it approximates normal capacity. • Unallocated overheads are recognized as an expense in the period in which they are incurred. Reference: ASPE 3031.14

Answer 22

Intangible assets (ASPE) • In order to meet the definition of an intangible asset, assets must meet the identifiability, control, and future economic benefits tests. • An asset meets the identifiability criterion in the definition of an intangible asset when it: o is separable, or o arises from contractual or other legal rights • An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. • An intangible asset shall be recognized if, and only if: o it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and o the cost of the asset can be measured reliably. Case: CHHP, TankCo Reference: ASPE 3064

Answer 23

``` Lease inducements (ASPE) • Lease inducements are an inseparable part of the lease agreement and, accordingly, are accounted for as reductions of the lease expense over the term of the lease. ``` Reference: ASPE 3065.27

Answer 24

Business income vs. property income (Tax) • It is a question of fact whether income is from business or property. • Capital property is property that provides a long term or enduring benefit • Disposition of capital property gives rise to capital gains or losses • Business income will arise from an “adventure or concern in the nature of trade”, determined as follows: o Conduct  How long was the asset held? Have there been similar transactions? o Nature of the asset  Is the asset capable of producing income? Is the asset related to the taxpayer’s ordinary business? o Intent  Did the taxpayer originally acquire the asset with the intention to sell? • For an individual, business income is generally taxed at a higher rate than capital gain, as only 50% of capital gains are taxable. • For a CCPC earning less than the SB Limit, capital gain is generally taxed at a higher rate than business income, as the SBD doesn’t apply to capital gains Case: TankCo Reference: ITA 9, ITA 248(1), IT-218R

Answer 25

Incremental Cash Flows (Finance) • Incremental cash flows comprise the additional cash flows from taking on a new project, incorporating the tax-affected initial outlay, annual revenues & expenses and terminal value (or cost) associated with the project, in accordance with the scale and timing of the project • When determining incremental cash flows from a new project, consider: o Sunk Costs – These are the initial outlays that cannot be recovered even if a project is accepted. As such, these costs will not affect the future cash flows of the project and are not considered incremental o Opportunity Costs – These represent any potential loss of current cash flows due to accepting a new project and are considered incremental o Cannibalization – This is the opportunity cost where a new project takes sales away from an existing product o Working Capital Changes – These represent changes in receivables, payables and inventory due to accepting a new project and are therefore considered incremental Case: TankCo, Solar Panel Solutions, King Street Theatre

Answer 26

``` Control Deficiencies (Assurance) • The most effective format to address controls weaknesses consists of a short statement of the problem (deficiency), its potential effect(s) on the financial statements or operations (implication) and suggestions to address the matter (recommendation) o Deficiency (D) – this is generally a case fact outlining something that might be deficient with the current controls o Implication (I) – here, we go beyond case facts to explain the effects of the noted deficiency either on the financial statements or on operations. To the extent possible, effects on the financial statements must be tied to assertions or at least the affected accounts must be outlined along with a discussion of how they might be affected by the deficiency o Recommendation (R) – this involves suggesting a solution to rectify the noted deficiency that is specific and practical given the case facts and circumstances. Case: Culinary Crawl, Atlantic Shellfish, CHHP, TankCo, Ferguson Real Estate, Solar Panel Solutions ```

Answer 27

Internally generated intangible assets (IFRS) • Research is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding • Development is defined as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use • Research costs are always expensed • Development costs must be capitalized if all of the following exist: o Technically feasible o Intention to complete it o Ability to use or sell it o Probable future economic benefits will be generated o Availability of adequate technical, financial and other resources o Ability to reliably measure the expenditures attributed • Costs meeting the tangible asset criteria should not be capitalized as intangible Case: Atlantic Shellfish Reference: IAS 38.4, .8, .54, .57

Answer 28

Intangible assets – Definition and recognition (IFRS) • To meet the definition of an intangible asset the item must be: identifiable, the entity must have control over the future benefit and the item must meet the recognition criteria • The asset is identifiable if it either: o It can be separated from the entity o Arises from contractual, legal right that allow it to be transferrable or separable • The entity controls the asset if it has the power to obtain future economic benefits • Recognition criteria: o Probable that the expected future economic benefits will flow to the entity o Cost of the asset can be measured reliably Reference: IAS 38.12, .13,.17 .21

Answer 29

Intangible assets – Amortization (IFRS) • Intangibles are to be amortized over their estimated useful lives unless they are considered to have an indefinite life • Assets with indefinite lives are not to be amortized until the life is no longer considered indefinite, but they must be tested for impairment annually • Assets with definite lives can be reported following either the cost model or the revaluation model • Amortization method and useful life should be reviewed annually • Consider expected use, life of related assets, contractual provisions, product life cycles and other economic factors Reference: IAS 38.72, .88, .97, .104, .107, .109

Answer 30

``` Discontinued operations (IFRS) • A component of an entity where its operations and cash flows can be clearly distinguished operationally and for financial reporting purposes, from the rest of the entity and it has been disposed of or classified as held for sale • Report results of discontinued operations on the statement of comprehensive income for current and prior periods, net of tax, segregated as follows: o the post-tax profit or loss of discontinued operations o the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation. ``` Reference: IFRS 5.03, .31 - .33

Answer 31

Assets held for sale (IFRS) • Non-current assets (or disposal group) to be disposed of other than by sale should continue to be classified as held and used until they are disposed of • Non-current assets (or disposal group) to be sold should be classified as held for sale when all of the following are met: o Management commits to a plan to sell o Steps to locate a buyer and complete the sale have started o It is being actively marketed at a reasonable price o It is available for immediate sale in its present condition o The sale is probable and expected to occur within a year o Actions required to complete the sale indicate it’s unlikely significant changes to the plan will be made or that the plan will be withdrawn • Non-current assets (or disposal group) held for sale should be measured at lower of carrying amount and fair value less costs to sell, and should not be amortized Reference: IFRS 5.06 - .15, .25

Answer 32

``` Borrowing costs (IFRS) • Interest and financing costs that an entity incurs in connection with the borrowing of funds • Capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset • Possible qualifying assets: o Inventories o Manufacturing plants o Intangible assets o Investment properties ``` Reference: IAS 23.05, .07, .08

Answer 33

Share-based compensation (IFRS) • For equity-settled share-based payment transactions, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which case fair value of the equity instruments granted is used • Transactions with employees and others providing similar services require use of the fair value of the equity instruments granted measured at grant date, because typically it is not possible to estimate reliably the fair value of the services received Reference: IFRS 2.10, .11

Answer 34

Common audit risk factors (Assurance) * New or additional users * Management bias * Going concern * Debt covenants * Cash flow issues * Control issues * New problems or issues * Significant growth in revenues or assets * Legal claims * High risk industry * Complex systems * Changes in operating environment * New personnel * Changes to information systems * New technologies * Changes in products or activities * Corporate restructuring * Expanded foreign operations * New accounting pronouncements Case: Dogani, Atlantic Shellfish, TankCo, Ferguson Real Estate, Solar Panel Solutions Reference: CAS 315, Appendix 2

Answer 35

Materiality (Assurance) • A misstatement in financial statements is considered to be material if, in the light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities (the user), would be changed or influenced • Common base = 5% of Normalized Net Income before Taxes (NIBT) for profit-oriented entities • Materiality is not purely quantitative; qualitative factors must be considered • Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users- i.e. “specific” materiality • Performance materiality (generally 60% to 80% of materiality) means the amount less than materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality Case: Dogani, Atlantic Shellfish, TankCo, Ferguson Real Estate, Solar Panel Solutions Reference: CAS 320

Answer 36

Audit approach (Assurance) • If Control Risk assessed at Maximum, then no reliance may be placed on controls, resulting in no Tests of Controls, and a Substantive approach must be followed • If Control Risk assessed at less than Maximum, then some reliance may be placed on controls, based on results of Tests of Controls, which could lower the amount of substantive work to be done at year-end. Such an approach is generally referred to as a Combined approach Case: Dogani, Atlantic Shellfish, TankCo, Solar Panel Solutions

Answer 37

Financial statement assertions (Assurance) • Assertions about classes of transactions and events for the period under audit: o Occurrence – transactions and events that have been recorded have occurred and pertain to the entity o Completeness – all transactions and events that should have been recorded have been recorded o Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately o Cut-off – transactions and events have been recorded in the correct accounting period o Classification – transactions and events have been recorded in the proper accounts • Assertions about account balances at the period end: o Existence – assets, liabilities, and equity interests exist o Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity o Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded o Valuation and allocation – assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded • Assertions about presentation and disclosure: o Occurrence and rights and obligations – disclosed events, transactions, and other matters have occurred and pertain to the entity o Completeness – all disclosures that should have been included in the financial statements have been o Classification and understandability – financial information is appropriately presented and described, and disclosures are clearly expressed o Accuracy and valuation – financial and other information are disclosed fairly and at appropriate amounts Case: Atlantic Shellfish, TankCo, Ferguson Real Estate, Roxanne Kalpert, Solar Panel Solutions; Reference: CAS 315.A124

Answer 38

Use of an expert (Assurance) • Evaluate the competence, capabilities and objectivity of the expert • Obtain an understanding of the expert’s work • Evaluate the appropriateness of the expert’s work as audit evidence for the relevant assertion Case: Solar Panel Solutions Reference: CAS 500.A37 - .A48

Answer 39

Revenue recognition criteria (ASPE) Revenue from sales and service transactions shall be recognized when: • Performance is complete (risks and rewards transferred, significant acts performed, no continuing managerial involvement) • Consideration is measurable • Collection reasonably assured Case: CHHP, TankCo, Ferguson Real Estate, Elder Care Centre and Spa Reference: ASPE 3400.04 - .06

Answer 40

Revenue recognition – performance criteria (ASPE) Performance would be regarded as being achieved when all of the following criteria have been met: • Persuasive evidence of an arrangement exists • Delivery has occurred or services rendered • Price to the buyer is fixed or determinable In determining if the seller's price to the buyer is fixed or determinable, an entity would consider the impact of the following factors: • Cancellable sales arrangements; • Right of return arrangements; • Price protections and/or inventory credit arrangements; and • Refundable fee for service arrangements. Case: TankCo, Ferguson Real Estate, Elder Care Centre and Spa Reference: ASPE 3400.07, .10

Answer 41

Revenue recognition – collectability criteria (ASPE) • Recognition of revenue requires that the revenue is measurable and that ultimate collection is reasonably assured • When there is reasonable assurance of ultimate collection, revenue is recognized even though cash receipts are deferred • When there is uncertainty as to ultimate collection, recognize revenue only as cash is received Case: Ferguson Real Estate Reference: ASPE 3400.19

Answer 42

Revenue recognition – multiple deliverables (ASPE) • Evaluate all deliverables to determine whether they represent separate deliverables • If you can identify separate deliverables, revenue recognition criteria should be assessed for each deliverable separately • If two or more transactions are linked together in such a way the commercial effect can’t be understood without reference to the series of transactions as a whole, then the recognition criteria will be applied to the series of transactions as one Case: Elder Care Centre and Spa Reference: ASPE 3400.11

Answer 43

Government assistance (ASPE) • Assistance for non-capital items: o Include in net income for period when incurred o When government assistance relates to expenses of future accounting periods, the appropriate amounts shall be deferred and amortized to income as related expenses are incurred. • Assistance for capital items: o Reduce cost of capital item with any depreciation computed on the net amount; or o Defer and amortize on the same basis of depreciation • Provided there is reasonable assurance that the enterprise has complied and will continue to comply with the conditions for receipt of the government assistance, the accrual basis of accounting for the assistance is appropriate Reference: ASPE 3800

Answer 44

``` Discontinued operation (ASPE) • A discontinued operation is a component of an entity where its operations and cash flows can be clearly distinguished from the rest of the entity and it has been disposed of or classified as held for sale • Report results of discontinued operations on I/S for current and prior periods, net of tax ``` Reference: ASPE 3475.03, .30

Answer 45

Assets held for sale (ASPE) • Long-lived assets to be disposed of other than by sale should continue to be classified as held and used until they are disposed of • Long-lived assets to be sold should be classified as held for sale when all of the following are met: o Management commits to a plan to sell o It’s available for immediate sale in its present condition o Steps to locate a buyer and complete the sale have started o The sale is probable and expected to occur within a year o It’s being actively marketed at a reasonable price o Actions required to complete the sale indicate it’s unlikely significant changes to the plan will be made or that the plan will be withdrawn • Asset held for sale should be measured at lower of carrying amount or fair value less cost to sell, and should not be amortized Reference: ASPE 3475.04, .08, .13

Answer 46

Accounting changes – change in estimate (ASPE) • The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability • An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience • By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error. • The effect of a change in an accounting estimate is recognized prospectively by including it in net income in: o the period of the change, if the change affects that period only; or o the period of the change and future periods, if the change affects both. Reference: ASPE 1506.20 - .23

Answer 47

Net Present Value (NPV) vs. Internal Rate of Return (IRR) (Finance) • The NPV rule states that you invest in any project which has a positive NPV when its cash flows are discounted at the opportunity cost of capital, also known as the discount rate (usually the cost of raising the capital to fund the project) • The IRR rule states that you invest in any project offering a rate of return which exceeds the opportunity cost of capital • A project’s rate of return is calculated as the discount rate at which the NPV of the project would be zero • Therefore, the NPV and IRR rules should give the same accept/reject answer about a project, in most circumstances • A project’s cash flows should include incremental elements only (i.e. additional sales, associated expenses, lost margin on cannibalization, investment & associated tax-shield, etc., but no financing elements, as discounting of the cash flows already addresses financing)

Answer 48

Discounted vs. Undiscounted Cash Flows (Finance) • Incremental cash flows (excluding financing elements) should be discounted to recognize the time value of money for the purposes of making a decision regarding accepting or rejecting a project • Incremental cash flows (including financing elements) should be analyzed year over year, without discounting, to determine if a certain cash position would be met by a certain time Case: TankCo, Ferguson Real Estate, Elder Care Centre and Spa, Solar Panel Solutions

Answer 49

Payback Period (Finance) • Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment • In general, investments with lower payback period are preferred • To determine, calculate the cumulative net cash flow for each period and then use the following formula for payback period: Payback Period = A + B / C, where: o A is the last period with a negative cumulative cash flow; o B is the absolute value of cumulative cash flow at the end of the period A; and o C is the total cash flow during the period after A.

Answer 50

Reporting alternatives – Compliance with agreement (Assurance) • Section 5815 Special Report – Audit reports on compliance with agreements, statutes and regulations o A report stating compliance with the terms of the agreement, through procedures such as inspection, observation, inquiry, confirmation, recalculation, reperformance and analytical procedures o High level of assurance and therefore more costly alternative • Section 8600 Report – Reviews of compliance with agreements, statutes and regulations o A report stating compliance with the terms of the agreement, through procedures such as inquiry, discussion and analysis o Moderate level of assurance and therefore less costly alternative • Section 9100 Report – Results of Applying Specified Auditing Procedures o A report providing the factual results of the specific procedures that can be chosen to be performed o No assurance provided but is the most flexible of all alternatives Case: TankCo, Ferguson Real Estate Reference: 5815, 8600, 9100

Answer 51

Methods of collecting audit evidence (Assurance) • Inspection – thorough examination of an item by the auditor • Observation – use of the senses to assess certain activities • Inquiry – obtain written or oral information from the client in response to questions • Confirmation – receipt of a written or oral response from an independent third party verifying the accuracy of information • Recalculation – recheck the computations and mathematical work completed by the client • Reperformance – redo other non-mathematical procedures such as internal controls • Analytical procedures – use comparisons and relationships between financial and non-financial information to determine whether account balances appear reasonable Case: TankCo, Ferguson Real Estate, Roxanne Kalpert, Solar Panel Solutions, King Street Theatre, Lake Country Camping Reference: CAS 500-A10-A25

Answer 52

Related Party Transactions (ASPE) • For transactions carried out in the normal course of operations o monetary related party transactions, or non-monetary RPT with commercial substance should be recorded at their exchange amount, unless  it is a non-monetary RPT that is an exchange of a product/property to be resold in the same line of business. This type of RPT will be recorded at carrying amount, adjusted for any additional consideration/ • For transaction NOT in the normal course of business o monetary RPT, or non-monetary RPT with commercial substance should be recorded at their exchange amount, IF  the change in ownership interest in item transferred/service provided is substantive, and  the exchange amount is supported by independent evidence • When the RPT has been measured at carrying amount, any difference between the carrying amounts of items exchanged, together with any related tax amounts, shall be booked to equity. Reference: ASPE 3840.08-.09, .18, .22, .29

Answer 53

Financial Ratio Analysis Financial ratios are categorized according to the financial aspect that the ratio measures: • Liquidity ratios measure the availability of cash to pay short-term debts. E.g., Current ratio, Quick ratio, Working capital ratio • Asset turnover ratios measure efficiency in utilizing assets. E.g., accounts receivable turnover, inventory turnover • Profitability ratios measure how well assets are used and expenses are controlled to generate a return. E.g., gross profit margin, net profit • Debt service ratios measure the ability to repay long-term debt. E.g., debt to equity, times interest earned Ratios generally are not useful unless they are benchmarked against something else such as past performance or another organization. Therefore, the ratios of organizations in different industries, which face different risks, capital requirements, and competition, are usually hard to compare. Case: Atlantic Shellfish, TankCo, Ferguson Real Estate, World Wide Windows, Solar Panel Solutions

Answer 54

Lease Accounting – Land & Building (ASPE) When a lease contains both land and building, it must first be determined whether the terms allow ownership to pass or provide for a bargain purchase option. o If yes, the lessee will capitalize the land separately from the building, based upon fair values. o If no, is the FV of the land at the inception of the lease significant in relation to the total FV of the leased property?  If yes, the land and building(s) are considered separately for purposes of classification. The lessee and lessor allocate the minimum lease payments between the land and building(s) in proportion to their fair values. Both parties classify the portion of the lease applicable to land as an operating lease.  If no, the land and building are considered a single unit, and the economic life of the building is considered the economic life of the unit.

Answer 55

Subsequent Events (ASPE) • In general, there are two types of subsequent events: o those that provide further evidence of conditions that existed at the financial statement date; and o those that are indicative of conditions that arose subsequent to the financial statement date. • Financial statements shall be adjusted when events occurring between the date of the financial statements and the date of their completion provide additional evidence relating to conditions that existed at the date of the financial statements. • Disclosure shall be made of those events occurring between the date of the financial statements and the date of their completion that do not relate to conditions that existed at the date of the financial statements but: o cause significant changes to assets or liabilities in the subsequent period; or o will, or may, have a significant effect on the future operations. Reference: ASPE 3820

Answer 56

Contingencies (ASPE) • Existing condition involving uncertainty as to a possible gain or loss • Uncertainty will result in a range of probabilities o likely o unlikely o not determinable • Contingent losses o must be accrued if the future event is likely and a reasonable estimate of the loss can be made o disclosed if the future event is likely but a reasonable estimate of the loss CANNOT be made o disclosed if the future event is not determinable • Contingent gains o must NOT be accrued o disclosed if the future event is likely Case: TankCo, Ferguson Real Estate Reference: ASPE 3290

Answer 57

Revenue Recognition (IFRS) In a transaction involving the sale of goods or provision of services, the amount of revenue to recognize and how it is measured is determined by applying the following five steps: • identify the contract with the customer • identify separate performance obligations in the contract • determine the overall transaction price • allocate the transaction price to the separate performance obligations in the contract • determine when the performance obligation(s) is satisfied, as revenue is recognized when (or as) the entity satisfies the performance obligation o revenue is recognized as control is passed, either over time or at a point in time Case: Solar Panel Solutions Reference: IFRS 15

Answer 58

Accounting Policies, Changes, Errors (IFRS) Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. Only change a policy if: • Standard/interpretation requires it, or • Change will provide more relevant and reliable information to users Apply changes to policy retrospectively unless it is impractical. Changes to accounting estimates should be applied prospectively. Corrections to errors should be applied retrospectively unless it is impractical Reference: IAS 8

Answer 59

Property, Plant and Equipment (IFRS) Initial recognition if: • The future economic benefits associated with the asset will flow to the entity, and • The cost of the asset can be reliably measured. Initial measure- recorded at cost. Subsequent measurement • Carried at cost less accumulated depreciation, and impairment losses, OR • Carried at revalued amount, i.e. FV, less subsequent depreciation if FV can be reliably measured o An increase in value is credited to OCI, unless it is a reversal of a revaluation decrease previously recognized as an expense Significant components are required to be depreciated over their estimated useful life. Case: Atlantic Shellfish Reference: IAS 16

Answer 60

Agriculture (IFRS) This standard is intended to apply to the following which relates to agricultural activity • Biological assets • Agricultural produce at the point of harvest • Government grants related to biological assets Initial recognition if: • The entity controls the asset as a result of a past event. • The future economic benefits associated with the asset will flow to the entity, and • The cost of the asset can be reliably measured. Initial measurement at: • FV, less estimated point of sale costs • Cost, if no reliable measurement of FV is available. Subsequent measurement • FV, less estimated point of sale costs • Cost, less accumulated depreciation if no reliable measurement of FV is available. Reference: IAS 41

Answer 61

Revenue Recognition – Identification of the performance obligations (IFRS) Performance obligations are identified as each promise to transfer to the customer either: • a good or service (or bundle of goods or services) that is distinct; or • a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer A good or service that is promised to a customer is distinct if: • the customer can benefit from the good or service on its own or together with other resources readily available to the customer; and • the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract Two or more promises are not separately identifiable if the nature of the promise, within the context of the contract, is to transfer a combined item in which the promised goods or services are inputs. If a promised good or service is not distinct, it is combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct. Case: Solar Panel Solutions Reference: IFRS 15.22-.30

Answer 62

Provisions, Contingent Liabilities, Contingent Assets (IFRS) Provisions- a liability of uncertain timing or amount. May be recognized when: • The entity has a present legal or constructive obligation as a result of a past event, • It is probable that an outflow of economic benefits will be required to settle the obligation; and • A reliable estimate can be made of the amount of the obligation Contingent losses  NOT recognized: • A possible obligation that arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly in the control of the entity; • A present obligation that arises from past events is not recognised when an outflow of future economic benefits is not probable or the amount of the obligation cannot be measured reliably. Contingent gains NOT recognized: • – possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Case: Atlantic Shellfish, Solar Panel Solutions Reference: IAS 37

Answer 63

Tax Implications of Going Public • Company status will change from CCPC to Public company. • Deemed year end on date of change in status. • Possible acquisition of control • Tax balances that are no longer available CDA, RDTOH • Small business deduction only available to CCPC  public company will be taxed at “high rate”, creating General Rate income pool (“GRIP”) and eligible dividends. • Any undistributed Small Business earnings in the Low Rate income pool must be paid out first as other than eligible dividends. • SRED – public company qualifies for lower rate of ITC, and they are not refundable (only refundable for CCPC) • Public company shares do not qualify for Capital Gains exemption

Answer 64

Employer paid automobile expenses – Taxable benefit (Tax) • A taxable benefit arises when an employee is given something that is personal in nature or if something that is personal in nature is paid for by the company • A benefit may include an allowance or a reimbursement of an employee’s personal expense (e.g. personal fuel is reimbursed) • The value of the benefit is generally its FMV • If an employee is provided with a taxable benefit, the amount must be included in their income Case: Perfecto Painters Inc., Solar Panel Solutions

Answer 65

Owner- manager compensation – salary vs. dividends (Tax) • Corporations are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary • The Canadian tax system is meant to charge the same level of tax on income regardless of whether it is earned directly as an individual (i.e. salary) or flowed through a corporation (i.e. dividend); this is referred to as integration • Salary payments are deductible to the corporation whereas dividends are not • Dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid • Salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP • Salary payment may result in reduced net cash flow available to an owner-manager, as there are CPP costs associated with this type of compensation; these remittances are not required for dividend payments • Dividend payments will reduce an individual’s cumulative net investment loss (CNIL) Case: Perfecto Painters Inc., Ferguson Real Estate

Answer 66

Reserves for bad debts (Tax) • A reserve may be deducted for bad debts to the extent that it is reasonable and based on specific uncollectible accounts • A reserve claimed in one taxation year must be included in income in the following tax year and a new reserve based on the current specific uncollectible accounts will be calculated and deducted from income o Effectively this means that the increase in the reserve amount should be deducted each year Case: Perfecto Painters Inc. Reference: ITA 20(1)(l), ITA 12(1)(d)

Answer 67

Business investment loss (Tax) • For tax purposes, in the year a corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(s) may file an election to deem the shares to have been disposed of for proceeds equal to nil o Generally, this will yield a capital loss equal to the ACB of the shares • A capital loss of small business corporations is given special treatment and is deemed to be a business investment loss o Half of the business investment loss is determined to be an “allowable business investment loss” (ABIL) and can be applied immediately against income from any source o The ABIL can be carried back up to three years or forward up to 10 years o If the ABIL is not used by the end of the 10 years, it will become a capital loss Case: Perfecto Painters Inc. Reference: ITA 50(1), ITA 39(1)(c), ITA 111(1)(a), ITA 111(8)

Answer 68

Activity based costing (Management Accounting) • Costs are allocated to activity cost pools and activity rates are calculated • Costs that are not driven by activities are not allocated to cost pools Case: Perfecto Painters Inc.

Answer 69

Moving expenses In order for any moving costs to be deductible for tax purposes, the move must be an “eligible relocation” and the costs incurred must be deductible moving expenses. • Eligible relocation is: o Occurring as a result of a new work location within Canada, and o One in which the new residence is at least 40 kilometres closer to the new work location than the old residence • Deductible moving expenses include: o Selling costs related to the old residence (i.e. commissions) o Costs to transport household goods (i.e. moving company costs, etc.) o Legal fees associated with the purchase of a new residence o Disconnecting and connecting utilities, revising legal documents to reflect a new address, replacing driver’s licenses o Travelling costs o Meals and lodging (not exceeding 15 days, not including travel days) o Costs of cancelling a lease on the old residence o Up to $5,000 of interest, property taxes, insurance, heating and utilities costs on the old resident, subsequent to the time when the taxpayer has moved out, during which reasonable efforts are made to sell the property • Examples of costs that are not deductible include: o Home renovations for the old property in advance of the sale (these are capital in nature and would be added to the capital cost of the old property) o Travel expenses for a house-hunting trip Case: Play Canada Inc. Reference: ITA 248(1); 62

Answer 70

Principal residence exemption (PRE) The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free. • The formula for determining the PRE is (A x (1 + B) /C), where A = the capital gain on the disposition of the property, B = number of years the property is being designated as the principal residence, and C = number of the years the property was owned by the taxpayer. • Only 1 property can be designated as a principal residence for a taxpayer and his/her family in any given year • A principal residence is an accommodation that is ordinarily inhabited by the taxpayer/taxpayer’s family in the year o To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the taxpayer/taxpayer’s family • If more a taxpayer/taxpayer’s family own more than 1 principal residence in a year, they will have to choose 1 to designate as the principal residence • To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence Case: Play Canada Inc. Reference: ITA 54; 40(2)(b)

Answer 71

Replacement property rules (Tax) • In an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the fair market value, and any excess of proceeds over adjusted cost base is a capital gain • If replacement property criteria are met, then an election is available to fully defer any recapture/capital gain arising on the deemed disposition, by reducing the UCC/cost base of the acquired property by the amount of the recapture/capital gain, respectively. • To be eligible to defer the gain, the replacement property rules must apply: o It is reasonable to conclude that the property was acquired by the taxpayer to replace the former property (and put to the same or similar use) o Where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose o Where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer Case: Dogani; Reference: ITA 13(4), 44(1), 44(5)

Answer 72

Refundable dividend tax on hand (RDTOH) For tax years beginning on or after January 1, 2019, there are two types of RDTOH balances: • Non-eligible RDTOH: Includes refundable taxes on investment income and Part IV tax on non-eligible portfolio dividends. o Only the payment of a non-eligible dividend can trigger a refund from this account. • Eligible RDTOH: This tracks refundable taxes paid on eligible dividends received by the corporation. o Any type of dividend (either eligible or non-eligible) can trigger a refund out of this account; however, when non-eligible dividends are paid, the refund must come out of non-eligible RDTOH first. At the date of transition, the eligible RDTOH balance will be calculated as the lesser of: • The existing RDTOH balance; and • 38 1/3 % of the General Rate Income Pool (GRIP) balance. Case: Solar Panel Solutions, Lake Country Camping Reference: ITA 123.3, 129(3), 186, 187

Answer 73

Eligible versus non-eligible dividends • Individuals must include the actual dividend plus a gross-up in their net income for tax purposes. The grossed-up dividend is referred to as the taxable dividend. Dividends received by individuals will have been designated as either eligible or non-eligible by the corporation paying the dividend. • Non-eligible dividends are paid by Canadian-controlled private corporations (CCPCs) out of after-tax active business income eligible for the small business deduction or from after-tax aggregate investment income subject to RDTOH. o Since both of these types of income are taxed at preferential rates inside the corporation, the gross-up and dividend tax credit rates on non-eligible dividends are lower than the gross-up and dividend tax credit rates on eligible dividends. • Eligible dividends are paid by: Canadian public companies out of after-tax income taxed at the general corporate tax rate, or CCPCs out of the general rate income pool (GRIP). • A CCPC’s GRIP balance comprises eligible dividends received and 72% of active business income not eligible for the small business deduction. Case: Solar Panel Solutions Reference: ITA 82(1)(b)

Answer 74

Filing and payment deadlines • Income taxes o Filing deadline is six months after year end. o Tax balances owing are due two months after year end (three months for CCPCs eligible for small business deduction). • GST/HST filing deadline o Annual taxable supplies of:  $1.5 million or less = annual reporting  More than $1.5 million up to $6 million = quarterly reporting  More than $6 million = monthly reporting o Annual or quarterly filers have the option to report more frequently. o Quarterly and monthly filers must file and remit the balance owing within one month after the end of the reporting period. o Annual filers must file and remit the balance owing within three months after the fiscal year end. o Annual filers are required to pay quarterly instalments if net GST owing in the previous year was more than $3,000. Case: King Street Theatre

Answer 75

Contribution margin (Finance) • Contribution margin (CM) is the determination of how much variable profit is available to cover fixed costs and generate a profit. • In general, the higher CM, the better. • To determine CM, calculate the variable revenues per unit (hour, day, year, quantity) offset by the variable costs of the same. • CM is A – B where:  A is the total variable revenue per unit;  B is the total variable expenses per unit. Case: Lake Country Camping

Answer 76

Break-even analysis (Finance) • Break-even is the determination of sales volumes necessary to generate a zero-profit. • Break-even can be expressed in number of units, total revenues, or a percentage of expected revenues. • To determine, calculate the fixed costs per period, and divide them by the contribution margin (CM) per unit, to determine the necessary sales volumes to generate zero-profit. • Break-even is A / B where:  A is the total fixed costs;  B is the CM per unit. Case: Lake Country Camping

Answer 77

Warranties (IFRS) • Two types of warranties: o those that provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications o those that provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications • Warranty shall be accounted for in accordance with IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) if: o The customer does not have the option to purchase a warranty separately, and o The warranty does not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. Case: Solar Panel Solutions Reference: IFRS 15.B28 – B31

Answer 78

Business combinations (IFRS) • For a business combination to occur, there must be: o an acquirer who has gained control, and o a business that has been purchased  A business is defined as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.  “Determining whether a particular set of assets and activities is a business should be based on whether the integrated set is capable of being conducted and managed as a business by a market participant.” Case: Solar Panel Solutions Reference: IFRS 3

Answer 79

Earnings per share (EPS) (IFRS) • Basic EPS: Net earnings available to common shareholders / weighted average common shares outstanding (WACSO) during the year • Diluted EPS: Hypothetical measure of company earnings attributable to each common shareholder assuming all dilutive securities have been converted to common shares; dilutive elements must be ranked from most to least dilutive in completing the diluted EPS calculation. o Stock options: the difference between the number of ordinary shares issued from exercising the options and the number of ordinary shares that would have been issued at the average market price during the period — difference is treated as an issue of ordinary shares for no consideration (no impact on the earnings in the EPS calculation). o Convertible bonds: dilutive impact if the after-tax interest per share that would be issued is less than the basic EPS — the after-tax interest on the bond increase earnings and the number of shares issued on conversion is added to the WACSO. Case: Solar Panel Solutions Reference: IAS 33

Answer 80

Using the work of internal auditors • The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating the following: o The extent to which the internal audit function's organizational status and relevant policies and procedures support the objectivity of the internal auditors; o The level of competence of the internal audit function; and o Whether the internal audit function applies a systematic and disciplined approach, including quality control. • In determining the nature and extent of work that may be assigned to internal auditors the external auditor shall consider: o The amount of judgment involved in planning/performing audit procedures, and evaluating the audit evidence o The assessed risk of material misstatement o The existence of significant threats to objectivity and competence of the internal auditor Reference: CAS 610.15, 610.29

Answer 81

Reporting alternatives – Specific Items (Assurance) CAS 805 Report – Audit of a Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement • A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole The auditor must • comply with all CAS’s relevant to the audit (CAS 200) • determine the acceptable financial reporting framework to be applied and document the agreed terms of the audit engagement, including the expected form of any reports to be issued (CAS 210) CAS’s written in the context of an audit of financial statements are to be adapted as necessary when applied to audits of other historic financial information. When forming an opinion and reporting on a single financial statement or on a specific element of a financial statement, the auditor shall apply the requirements in CAS 700, adapted as necessary in the circumstances of the engagement. Reference: CAS 805

Answer 82

General assurance standards (Assurance) Standards for assurance engagements OTHER THAN audits of financial statements and other historical financial information. • Attestation engagements (CSAE 3000): a party other than the practitioner measures or evaluates the underlying subject matter against the criteria • Direct engagements (CSAE 3001): the practitioner measures or evaluates the underlying subject matter against the criteria General standards: • Before undertaking an assurance engagement, the practitioner should have a reasonable basis for believing the engagement can be completed in accordance with the relevant standards. • The practitioner should seek management's acknowledgment of responsibility for the subject matter as it relates to the objective of the engagement. • The assurance engagement should be performed with due care and with an objective state of mind. • The practitioner and any other persons performing the assurance engagement should have adequate proficiency in such engagements and collectively possess adequate knowledge of the subject matter. Reference: CSAE 3000/CSAE 3001

Answer 83

Responsibility of the Auditor for Assessment of Going Concern • The external auditor should obtain sufficient appropriate audit evidence about management’s use of the going concern assumption in preparation of the financial statements • Conclude if a material uncertainty exists that the entity cannot continue as a going concern • Determine the implications on the auditor’s report • Communicate with those charged with governance if events or conditions cast doubt on the going concern Additional Audit Procedures When Conditions or Events Are Identified • If no assessment has been made by management, request one • Evaluate management’s plan for future actions • Where there is a cash flow forecast and the forecast is a significant factor: o Evaluate the reliability of underlying data o Assess adequate support for assumptions • Consider additional information • Request written representations from management regarding future plans and feasibility Impact on the Auditor’s Report if Material Uncertainty exists • If adequate disclosures are made in the financial statements, unmodified option but include an emphasis of matter in the auditor’s report • If adequate disclosures are not made, qualified or adverse opinion Reference: CAS 570