Enabling

Question 1

Analyze Financial Reporting Issues

Answer 1

Step 1: Assess the Situation
A brief synopsis of what the issue is that you are addressing:
• a clear statement of the issue
• an explanation of why it is an issue
• consider whether you can disaggregate the issue.

Step 2: Analyze the Issue
• Clearly identify and include all of the criteria, linking each to a specific case fact.

Step 3: Conclude and Advise
• Clearly state which option or alternative you recommend, including the reason why?
• Be consistent with your analysis from Step 2.
• Clearly explain, and quantify when possible, the impact of your recommendation on the key financial statement elements that are important to the users, such as:

o Does it increase or decrease income?
o How does it impact assets and/or liabilities?
o How does it impact any covenants, a borrowing limit or other measures that are important to stakeholders?
o Are performance measures affected by financial reporting methods, such as a manager bonus based on net income?
o Will the financial statements be used for a valuation (for example, buying or selling shares)?
o Discuss any uncertainties or missing information that could affect the recommendation.

Question 2

Analyze Audit Issues

Answer 2

An audit planning memo generally encompasses four steps, which you may find easy to remember using the acronym RAMP:

1. Risko Identify case facts
   o Explain why the case fact is a risk (consider facts
   that increase/decrease risk)
   Conclude on OFSL risk.
2. Approach

  o    Identify case facts
  Consider case facts that discuss: •     the control environment •     the nature of the business
  o    Analyse the case facts (discuss the impact of these on the audit approach)
  o   Conclude: arrive at a clear conclusion on the approach you will take.

3. Materiality
   o Users: list the users with bullets and then use sub-bullets below to define each user’s objectives.

o Base: conclude on the base and percentage with reference to the users’ objectives.

o Calculation:
- Normalizations and errors. Normalizing items:
• unusual or non-recurring revenue or expenses
• special management bonuses
• unusual gains or losses on the disposition of property, plant and equipment
- Performance materiality
- Specific materiality

4. Procedures
   Use the acronym RAP (Risk, Assertion + account, and Procedure):

o Identify specific account risks
The specific account risks will be tied to FR issues:
• new transactions during the year
• the implementation of new systems or business processes during the year
• unusual or unexpected changes arising from the prior year
• possible control issues
• noted significant variances or changes in ratios between years

o Assertion and account affected

o Designing an audit procedure

1. Obtain a piece of documentation from the client that supports the balance you are looking at (A/R detail, asset valuation, revenue listing and so on).
2. Perform audit tests on that documentation by comparing it with support (recalculate, vouch to invoices, inspect terms and so on).

You can use the VOVOP acronym to write a procedure.

Question 3

Quantitative analysis

Answer 3

Prepare the quantitative side of your analysis first.

Step 1: Assess the situation

In assessing the situation, there are three tasks that generally need to be completed:
1. Determine the purpose of your analysis.-Start your quantitative analysis with a purpose statement.
2. Determine the information you have available to complete your analysis.
-make note of various facts and figures you have available for the analysis (sources: dialogues, F/S, exhibits).
-be sure to also flag potential biases in information. Note who is providing the information; if they have biases to misstate information.
-you should be prepared to make an assumption and explain it to the reader.
3. Select the right tool for the job.
Some examples of types of analysis include the following:

o Capital budgeting -Should the company purchase a new asset? Should it expand?:

• Discounted cash flow / net present value (NPV);
• Internal rate of return (IRR);
• Payback period

o Financing analysis-Does the company have enough cash to purchase the new asset? If it expands, will it still be viable?
*Undiscounted cash flow analysis

o Product analysis-Which product should be added / dropped?:

• Contribution margin analysis
• Constrained resource analysis

o Income tax calculations:

• Calculation of taxable income
• Calculation of taxes payable
• Capital cost allowance calculation

o CPA Canada Handbook – Accounting criteria-
Analysis may require a discussion of financial reporting issues:
*Impairment — cash flow analysis
*Capital lease analysis — NPV analysis
*Deferred tax analysis

Step 2: Analyze major issue(s)-Prepare your calculations in Excel.

A good quantitative analysis should do the following:

1. Always begin with a purpose:”Purpose: To calculate the IRR of expansion Option A” .
2. Document all calculations and assumptions.
3. End with a conclusion: for example, “Conclusion: The IRR of Option A is 44%. Since the hurdle rate is 15%, this project returns more than the required return and should be accepted.”

Step 3- Interpret your calculation in your memo

You must also write a memo explaining the results of your quantitative analysis:

1. Reference to the Excel spreadsheet for more detail.
2. A summary of key assumptions that are not obvious from case facts, are subject to variability and, if changed or adjusted, would impact the calculation significantly — This should include identifying any missing information or limitations of the analysis.
3. Conclusion: Interpretation of the results of the quantitative analysis, including key information .

Question 4

Qualitative analysis

Answer 4

Step 1: Assess the situation
This is best done by focusing on who the users of your analysis are, what their objectives are and what decision(s) need to be made.
-Users
You should pay attention to cues in the case, such as who the request is coming from as well as if there is evidence as to who the information will be presented to.
Types of users include:
• existing shareholders
• managers
• potential new shareholders
• bankers
• angel investors
.
-User objectives
Your analysis should consider the user objectives and take them into consideration when making recommendations.
Watch out for conflicting objectives. You may have multiple users of your analysis, and may have differing objectives. Users will likely have more than one objective. Your analysis should address both sets of objectives and identify where conflicts exist.
User objectives are usually revealed in the case narrative. Look for key success factors that have made the business a success in the past (or are expected to make it a success in the future).
Step 2: Analyze major issue(s)- discuss pros and cons of option(s)
A decision usually requires more than simply the numerical result; usually there are risks that cannot be quantified but that could impact the overall result. Common examples include:
• lack of management time or expertise
• cannibalization of sales from existing operations
• production capacity constraints
• uncertainties in demand or cost structure
• unknowns in quality or impacts on existing customers
It is also important to discuss rewards. If possible, tie these to the users’ objectives. Common examples include:
• creation of synergies in the business
• opening up a new market
• potential for future growth
• creating a competitive advantage

When discussing the risks and rewards identified for a decision, be sure to fully explain the “so what?” question — in other words, why is the factor a risk or why is it a reward? Simply restating case facts is not good enough. Think of it as a discussion of the “what” (the case fact) and the “why” (the explanation of why the case fact is a risk or a reward).
It is common to use headings “Pros” and “Cons” could be used, with bullet points listed below.

Step 3: Conclude and advise
Finally, it is important to give an integrated, comprehensive recommendation or conclusion. Tie in the results of any quantitative and qualitative analysis, and make a strong recommendation that connects back to the user objectives. Try to identify ways to mitigate the risks, showing the user how they can be overcome. This advice is how you illustrate value to your reader.
Hint: As long as your conclusion is logical, supported and does not contradict itself or previous analysis, it will not be considered wrong.

Question 5

Tax Issues-analysis

Answer 5

Step 1: Assess the situation
When preparing an analysis of a tax issue, start by providing a brief statement of what the case has told you about the issue in order to let the user of your analysis know what you are discussing.
Your assessment should include:
• what the issue is
• why it is a tax issue
In assessing the situation in a case, you should identify who the user is and if he or she will require the corporate perspective, personal perspective or both.
Step 2: Analyze the issue
• identifying the tax rule that affects the issue you have identified.
• identify the key facts from the case and discuss how they apply to the tax rule identified.
• if there are criteria associated with the tax rule, be sure to assess all of the criteria using case facts. Your analysis can be done in point form with analysis of the criteria completed in sub-points.
• Sometimes there may be more than one option for treatment of an issue. If multiple options are available, be sure to clearly discuss them all. You should clearly distinguish which option results in a more favourable outcome for your client.
3 Step 3: Conclude and advise
It is critical that you provide a recommendation to your client. How should the transaction be treated for tax purposes?
A good recommendation should:
• flow logically from your analysis
• clearly state which option the client should follow
• clearly explain the impact of your recommendation on taxable income and taxes payable, as applicable
• if applicable, clearly explain the consequences of non-compliance with the ITA (such as penalties and interest)

Question 6

Critiques (WIR)

Answer 6

Critiques can apply to many elements of cases, such as:
• an organization’s internal controls
• an organization’s governance structure
• a proposed contract
• an audit junior’s work
“WIR” analysis stands for
• Weakness,
• Implication of the weakness, and
• Recommendation to address(fix) the weakness.

Step 1: Weakness (assess the situation)
State the weakness for the users so that they understand the issue that you have identified. Usually, this is just a restatement of the relevant case facts.

Step 2: Implication (analyze major issues)
The second step is to providing the implication of the weakness. This tells users why the weakness is an issue and helps them to understand the significance. In your response, state the negative impact of the issue that you have identified. Your implication needs to relate specifically to the weakness you identified and why the user should care. The reader should see a clear link between the weakness and the implication.

Step 3: Recommendation (conclude and advise)
The final step of your analysis is to recommend a reasonable course of action to fix the weakness identified. This means telling the users exactly what they can do to improve. Be as specific as possible.
Format
An effective way to analyze issues with WIR is to use a bulleted approach for the issue. You would start by identifying the weakness. Under this, add an indented bullet with the implication and a second bullet that provides a recommendation to address the weakness.
Example:
The fridge door is being left open.
• This results in the fridge not remaining cold and the food spoiling, which wastes money.
• The fridge door should be closed.
Issues that have the greatest impact on the entity should be discussed first.

Question 7

Stakeholder Analysis

Answer 7

A stakeholder is an entity, individual, or group that can affect or be affected by an entity’s actions. Stakeholder goals, preferences, and needs can be divergent, often with competing interests and expectations.
1. Assess the situation
An important aspect of assessing the situation is the identification of various stakeholder groups as well as their goals, preferences, and needs.
- Identify stakeholders
Stakeholders come in many forms and include internal and external individuals or groups. It is usually helpful to think of stakeholders as belonging to one of the following three categories:
• decision makers - responsible for an organization’s actions. In a case scenario, decision makers are usually the people/groups to whom you will communicate.
• key stakeholders - have influence over an organization and are also highly affected by the decision under consideration.
• other stakeholders - are affected by the decision under consideration in a less direct manner.
- Identify stakeholder goals, preferences, and needs
The next step in assessing the situation for stakeholders is to identify the goals, preferences, and needs of both decision makers and key stakeholders.
• What are their priorities and expectations?
• How will the action impact them, both positively and negatively?
• How can they influence the success of the action, both positively and negatively?
• Do they have interests that will conflict with other stakeholders?
2. Analyze issues
A significant aspect of analyzing an issue is identifying key arguments for and against a course of action. Be sure to include the impact of each alternative on both decision makers and key stakeholders.
3 Conclude and advise
For most issues, you will have major arguments both for and against each viable alternative. To reach a conclusion, you will need to step back from the details of your analysis and consider the big picture. Which decision criteria are most important in this situation? To prioritize, you should draw primarily on the decision maker goals and objectives.
Remember, you will not always be favouring one group of stakeholders. Your decisions will never please all stakeholder groups all the time. You must analyze the facts gathered and make the decision that best aligns with the goals of the organization.

Question 8

Decision Making

Answer 8

1 Define the scope of the problem (assess the situation):
The first step of your analysis is to obtain an understanding of the problem and its context.
As part of assessing the situation, you should consider whether the issue is actually a larger problem containing multiple sub-problems that should be analyzed as separate issues. By differentiating the issues, it allows you to better analyze each, providing a clearer discussion for the reader.
In assessing the situation, it is also important to consider whether an issue requires attention at all.
In a case scenario, use the facts provided to you to guide your focus. If a lot of information is provided about a problem, an analysis is usually expected. If there is little to no information, you can likely assess that no attention is required.

2 Perform appropriate analysis (analyze major issues)
The second step is to perform appropriate analyses for each potentially viable alternative.
To complete an appropriate analysis, you first must collect and verify relevant information. In a case scenario, you should consider all the information provided to you and how the case facts may be used in an analysis.
This often involves a quantitative analysis, plus consideration of qualitative factors.

3 Make a recommendation (conclude and advise)
You should identify who the key decision maker is and what the decision maker’s goals and objectives are. The decision maker is the person or organization responsible for making a decision or drawing a conclusion. Decision criteria are guidelines used to draw conclusions. These are based primarily on decision-maker goals and objectives, and may include trade-offs among competing goals. Once you understand the decision criteria, you can use these to make a recommendation.