EC Flashcards
THE CPA Way
CPA mindset
assess the situation
analyze major issues
conclude and advise
communicate
Decision maker = external client
— Your external client needs tax-planning advice.
— You notice deficiencies in your external client’s governance structure.
Decision maker = internal customer
— Your boss wants you to perform an analysis to help company managers make a decision (assuming you work for the company).
— Your CPA firm manager asks you to prepare an audit planning memo.
Decision maker = you
— You become aware that a co-worker is stealing office supplies (you need to decide whether and how to address this information).
Codes of professional conduct
objectivity
integrity and due care (Recognize bias and ambiguity in the info) ( Skepticism)
professional competence (knowledge of technical and professional standards)
confidentiality
professional behaviour (Skepticism)
“COPP-IC” stands for:
Confidentiality
Objectivity
Professional competence
Professional behavior
Integrity and due care
CPA Mindset
Objectivity
independence in mental attitude
professional skepticism
Assess the situation
1- take a snapshot
gain a general idea of what is being asked to be
- Zooming in on individual features:
Gather information
Major issues and alternatives
—Major issues and alternatives to be investigated
—Decision maker goals/objectives
—Other key stakeholders and their needs/preferences
—Constraints (internally or externally imposed)
—Professional resources, including relevant briefing documents
—Key situation factors such as economic circumstances, business opportunities/ threats, and risks
—Other available information such as financial statements, memoranda, interviews, and analyses
Techniques:
FA - ratios, trends, benchmarks, comparative anlaysis
Materiality assessment: for assurance
Risk assessments:
Internal - mission, vision, goals/targers, contraints, stakeholders preferences, KSF, key risks, core competencies , strength and weaknesses - swot, value chain analysis.
External: opportunities and threats - swot, porters five forces, pastel, constrains and kSF, key risks.
- Planning the route:
Create a preliminary plan of the additional work to be performed. Focus on -
*Identify major issues to be addressed:
- larger problems to sub probs
- identify decision alternatives
*Choosing the sequence for address ion issues
* gather additional situational info for each major issue
Examples of Factors: Identifying Important Issues and Alternatives
- Role and purpose of engagement/assignment/problem * Requirements of relevant professional standards/rules/guidelines * Goals, needs, and preferences of relevant decision makers and/or key stakeholders * Ability to address conflicts * Satisfaction of constraints (established by the decision maker or others; goals/targets/limitations; capacity, resource utilization, people, skills, financial, regulations, and so forth; ethically prohibited actions)
- Degree of risk (for example, risk of material misstatement, critical weaknesses and threats that must be eliminated or mitigated)
- Financial impact / monetary value / materiality * Degree of precision needed (including the use of estimates, forecasts, or projections) * Strategic priority / business opportunities / competitive strengths and weaknesses * Key success factors of organization and/or industry that must be maintained or enhanced * Potential impact (for example, the number of divisions/departments involved) * Existing or potential breaches of professional, organizational, or personal values and ethics * Concerns about professionalism (for example, objectivity, confidentiality, public interest, conflicts of interest, competence, need to exercise due care, professional skepticism)
Examples of Methods for Thoroughly Analyzing Relevant Information
- Carefully read and review case/assignment material. * Look for opportunities to demonstrate deeper technical knowledge. * Ensure that sufficient relevant information is obtained to satisfy the purpose of the analysis. * Ensure thorough exploration of issues and alternatives: — Identify a comprehensive set of pros and cons/ strengths and weaknesses for each viable alternative. —Consider all key viewpoints/perspectives. —Gain insights from more in-depth scrutiny.
- Expand the type and quality of alternatives, issues, approaches, perspectives, and implications considered by, for example: —Brainstorming to identify new ideas, approaches, and perspectives. —Questioning assumptions. — Integrating multiple approaches /divergent perspectives. — Integrating across competency areas (e.g. financial reporting, strategy and governance, management accounting, audit and assurance, finance, and taxation).
—Setting aside preconceived ideas that might bias or limit analyses. - When appropriate, use information technology to support and improve analysis. * Thoroughly interpret/analyze relevant quantitative and/or qualitative information, such as: —Cause-and-effect relationships; —Cost-and-benefit analysis; —Trends, relationships, or other patterns; —Risks and rewards; —Logical inferences; —Alternative interpretations; —Analysis/synthesis of key aspects of the situation.
- When appropriate, perform or consider additional analyses such as: —Sensitivity analysis; —Methods for monitoring and/or controlling risk of negative outcomes; —Extensions beyond immediate, short-term effects to longer-term, indirect implications; —Further investigation of unexpected or inconsistent findings; —Consideration of uncertainties, contingencies, and future developments.
- Gather (or identify the need to gather) additional relevant information, as needed, to explore unexpected or inconsistent findings.
- Investigate potential use of unconventional approaches to gather information or perform analyses.
Examples of Quantitative and Qualitative Methods/Tools for Analysis
- Apply a conceptual framework approach to evaluate choice of accounting policy and procedure. * Assess source documents or information to determine accounting implications. * Assess the operational or financial reporting implications of the entity’s risks and related controls. * Document and perform an audit work plan with due care. * Analyze and predict the impact of strategic and operational decisions on the entity’s performance, financial position, and cash flows.
- Determine or evaluate relevant information to support decisions made by management and the governing body. * Prepare, analyze, or evaluate operational plans, budgets, and forecasts. * Compute, analyze, or assess implications of variances * Evaluate cost classifications and costing methods for management of ongoing operations. * Calculate cost-volume profit (CVP), including sensitivity analysis. * Evaluate sustainable profit maximization and capacity management performance. * Identify key financial and non-financial performance indicators (KPIs) that are in line with the entity’s strategies. * Investigate the effectiveness of control systems and accountability structures in aligning resources with strategy. * Analyze risks, risk tolerance and exposure, risk mitigation responses, and the risk monitoring process. * Perform financial analysis, including ratio analysis, industry benchmarking, trend analysis, and cash flow analysis. * Evaluate cash flow and working capital. * Develop or evaluate capital budgeting processes and decisions. * Analyze, calculate, or forecast a plausible range of values for a business (e.g. discounted cash flow). * Explain use of alternative forms of ownership. * Assess the implications of non-compliance with required government remittances. * Interpret and apply the Income Tax Act (ITA) and various reference sources to the entity’s tax issues * Identify, evaluate, and recommend possible tax-planning opportunities. * Identify and classify the different sources and types of income for an individual (employment, business, property, capital gains, and other income).
Elements of analyzing an issue
Evaluate the quality and sufficiency of information
Approach for indentifying, questioning and justifying key assumptions
- State key assumptions Documentation of key assumptions is a good habit to develop . It will encourage you to question the assumptions and allow other decision makers the opportunity to question them, too .
- Evaluate the reasonableness of key assumptions (e.g. appropriateness, relevance, reliability). * Determine whether key assumptions are sufficiently justified. * Explain to decision makers the purpose and effects of any key assumptions.
Verify / corroborate/ test information examples
- You are preparing monthly financial statements to be distributed to company management. The company recently experienced turnover in a key accounting position, and you are not sure whether all of the usual adjustments have been made. You decide to perform ratio analysis to identify any unusual relationships for further investigation.
- You are performing a cost-volume-profit analysis, and you notice that the contribution margin for one product is significantly higher than for another product. Based on your knowledge of the customer markets and production processes for each product, you would expect the contribution margins to be similar. In this situation, you decide to verify the selling prices and variable costs used in the analysis.
- A product manager gives you information to be used in a capital budgeting analysis for a proposed new product. When you perform the analysis, the net present value is positive, suggesting that the new product would be a good investment. However, you are not confident that all of the cash outflows have been included in the analysis. Before presenting results to the management team, you decide to investigate the cash flows for similar projects to identify cash flows that might have been omitted.
- Consider the same facts as above. Using sensitivity analysis, you determine results are highly sensitive to assumptions for selling volumes and prices. The data for these assumptions were obtained from a study conducted by an outside market research firm. You do not have the time or budget to test the reliability of the market research results. In your report to the management team, you decide to highlight the source of information for these key assumptions and the sensitivity of results to changes in the assumptions. In addition, you recommend that the company gather additional information to verify the market research findings.
Stages of conclude and advise
