question 1 multiple choice

16 questions, max 20 marks (1.25 EACH)

number of correct answers
1 C 1
2 D 2
3 B 3
4 B 4
5 B 5
6 C 6
7 B+C 7
8 C 8
9 A 9
10 D 10
11 C 11
12 C 12
13 C 13
14 C 14
15 D 15
16 D+B 16

explanations for certain questions

Q1 answer is not B because B could also be treated aws a change in estimate, depending on the situation
it is not D as this could sometimes be treated prospectiveluy as well

Q4 not A because A could be a change in estimate, depending, same with C

D is a change in estimate

Q7 Not A and D as they both deal with first time situations- this is not a change from a previous policy
 grade on question
1.25
2.5
3.75
5
6.25
7.5
8.75
10
11.25
12.5
13.75
15
16.25
17.5
18.75
20

n the situation
 part 1
from question:

adjustments given total this part = 15 marks

explanation I/S
NI as prev. reported # 600,000 880,000
depreciation was taken for 2009 but since the asset was p
instead begun in 2010 only. The entry moves the expense
1 (50,000) 50,000 that nbv was too low and by the end of 2010, the acc. dep
was when the asset was purchased so the error in the per

the insurance paid for in 2009 related partially to 2009 an

the income statement the expense was not enough. in 2
so that not enough expense was charged to 2010. The eff
2 payment was made so the misallocation between period
(6,000) 5,000 must alsohave been an overstatment of the ending 2010

The cost of goods sold was understated such that net inco
3 puchase was unrecorded as at the year end date. On the
80,000 (60,000) underunderstated at that time. In 2010 the effect of this 2
effect. The other 20k addback in 2010 is likely due to an u
the cost of goods sold or it is due to an overstatement of
overstatement of 2010 ending a/p. The inventory related
inventory is a non-cash adjustment.

The salary expense was insufficiently accrued as at the

would happen in 2010 such that the expenses were too
4 there is also a $20k understatement of the salary expe
5,000 (25,000)

the contingency that was likely and estimable was not

5 - (100,000) liability on the balance sheet was also understated. Th
There is no cash flow affect from this.

The fixed asset was expensed as part of the original net

understated at nd of 2010. There is no cash flow effect
6 30,000 ---
Part 2
Revised Net Income 659,000 750,000 the books are already closed for all prior years
to correct for all items 1-6 and to adjust the accumulat

RETAINED EARNINGS
PREPAID INSURANCE
FIXED ASSETS
CONTINGENT LIABILITIES
SALARIES PAYABLE
 INVENTORY
ACCUMULATED OCI
INVESTMENT

Part 3 ( 2 MARKS)

TOTAL COMPREHENSIVE INCME

RESTATED NET INCOME

OCI

TOTAL COMPREHENSIVE INCOME

Part 4

OPENING BALANCE, JAN.1, 2009

RESTATED NET INCOME 2009
DIVIDENDS

RESTATED RETAINED EARNINGS, DEC. 31, 2009

RESTATED NET INCOME 2010
DIVIDENDS

RESTATED RETAINED EARNINGS, DEC. 31, 2009

TOTAL PRESENTATION= 5.5

TOTAL NUMBERS USED RIGHT WAY RIGHT PLACE, RIGHT AMOUN
TOTAL AVAILABLE= 9.5
MAX = 9
 B/S C/F

n for 2009 but since the asset was purchased on the last day, depreciation expenses hould have been nil for 2009 and
only. The entry moves the expense to the correct year. On the B/S the effect is that acc. dep. was overstated in 2009 so
and by the end of 2010, the acc. dep. was correct. The effect on actual cash flows of the error is nil as the cash outflow
as purchased so the error in the period of depreciation has no bearing on this.

r in 2009 related partially to 2009 and partially to 2010- the prepaid was not set up on the balance sheet at the end of 2009 so on
nt the expense was not enough. in 2010, at the end of the year, the opposite situation occurred- the prepaid set up was too great
xpense was charged to 2010. The effect of the error on cash flows was nil as the cash outflow happended when the incsurance
o the misallocation between periods has no effect . in addition, because the adjustment in 2010 is $1 k more than in 2009, there
an overstatment of the ending 2010 prepaid insurance which is also being corrected for.

d was understated such that net income in 2009 was overstated, either due to the fact that ending inventory was too high or a
ded as at the year end date. On the balance sheet, either ending inventory was overstated at tbe end of 2009 or the a/p was
hat time. In 2010 the effect of this 2009 error is counter balanced so $60 K of the $80 k adjustment is due to the counterbalancing
addback in 2010 is likely due to an understatement of inventory on the B/S at the end of 2010 and a corresponding overstatement of
or it is due to an overstatement of the purchases which affects the cost of goods sold and which would have resulted in a $20 k
0 ending a/p. The inventory related problems have nothing to do with cash flow, as the allocation of the amounts between cogs and
h adjustment.

was insufficiently accrued as at the end of 2009 therefore both the expense on the I/S and the a/p on the balance sheet wer e understated.
0 such that the expenses were too high in that year on the income statement. The balance sheet would be fine. The fact that the addback
nderstatement of the salary expense accrual again at the end of 2010 so once again at that date the a/p is understateed. Cash flow is no

t was likely and estimable was not accrued so that the expense on the I/S was understated in 2009 and the
ce sheet was also understated. The amount has not yet been paid that is why there is no adjustment in 2010.
w affect from this.

xpensed as part of the original net income instead of being capitalized. The balance sheet fixed assets were therefore
2010. There is no cash flow effect.

y closed for all prior years

ms 1-6 and to adjust the accumulated OCI

71,000
1,000
30,000
100,000
20,000
 20,000
150,000
150,000

10 AVAILABLE-MAX=9

( 2 MARKS)

SIVE INCME
2010 2009
659,000 750,000
(130,000) (20,000)

SIVE INCOME 529,000 730,000

BTS INC
STATEMENT OF SHAREHOLDERS EQUITY
YEAR ENDED DEC. 31, 2010

RETAINED ACCUMULATED COMMON TOTAL

EARNINGS OCI SHARES
JAN.1, 2009 500,000 - 100,000 600,000
750,000 (20,000) 730,000
(100,000) (100,000)

EARNINGS, DEC. 31, 2009 1,150,000 (20,000) 100,000 1,230,000

659,000 (130,000) 529,000
(125,000) (125,000)

EARNINGS, DEC. 31, 2009 1,684,000 (150,000) 100,000 1,634,000

WAY RIGHT PLACE, RIGHT AMOUNT= 4

 d of 2009 so on
p was too great
e incsurance
in 2009, there

oo high or a
e a/p was
counterbalancing
overstatement of
ted in a $20 k
between cogs and

nce sheet wer e understated. This would mean that the opposite effect
ne. The fact that the addback in 2010 is $5 k and not $25k means that
understateed. Cash flow is not affected by these accrual adjustment.
ACCOUNT INFORMATION
Debit Credit
Cash 141,000

Receivables 163,500
Allowance for doubtful accounts 6,700

Prepaid Rent
Inventory 308,700
Available-For-Sale Investments - Long- 349,000
Term
Land 85,000
Factory Construction, Incomplete Project 124,000
Patents 28,000
Equipment 258,000
Unamortized Discount on Bonds Payable

Accounts Payable 148,000

Dividends Payable 15,000
Unearned Revenues
Notes Payable 90,000
Bonds Payable 400,000
Common Shares 500,000
Retained Earnings, 1/1/10 170,000
Accumulated Other Comprehensive 36,100
Income
Net Income
Dividends Declared
Prior Year’s error 9,800
1,473,700 1,359,100

CALCULATIONS LOOK IN CELL

CASH 116,000
Accounts receivable- 179,200
less: allowance for doubtful accounts (43,300)
inventory at cost 250,100 mkt is lower- assume ma
 prepaid rent 10,500
PATENTS 21,000
UNAMORTIZED BOND DISCOUNT 18,000
EQUIPMENT 400,000
ACCUM. AMORT 142,000
retained earnings

accum oci 37,100

UNEARNED REV 39,600

a/p 163,700

calculate retained earnings

retained earn 170,000
ppa (9,800)

net income given 65,000

BAD DEBT WEXP (50,000)
RENT EXP (2,100)
INVTY WRITEDOWN (5,100)
AMORT PATENT (7,000)
LAWSUIT (1,000,000)
AMORT BOND DISCOUNT (3,000)

REVISED NI (1,002,200) (1,002,200)

div declared (15,000)

(857,000)
 Cageco Inc.
Balance Sheet
As at December 31, 2010

Unknown current assets

Cash 116,000
1 Marketable securities 25,000
Accounts receivable- 179,200
2 less: allowance for doubtful accounts (43,300)
135,900
3 Inventory at nrv 245,000
12,600 Prepaid Rent 10,500
TOTALCURRENT ASSETS 532,400
Available for sale financial assets- longterm
4 350,000
( cost $349,000)

Property plant and equipment

21,000 Land 85,000
Cost of uncompleted facilities 124,000

Equipment, at cost 400,000

98,200 5 less: accumulated depreciation (142,000)
467,000
Intangible assets
6 Patents, net of accumulated amortization of $ 21,000
TOTAL ASSETS 1,370,400
LIABILITIES AND SHAREHOLDERS' EQUITY
65,000 Current liabilities
15,000 7 Notes payable- short term 20,000
Accounts payable 163,700
Dividends Payable 15,000
Unearned Revenues 39,600
8 Contingent liability 1,000,000
TOTAL CURRENT LIABILITIES 1,238,300

Long term Liabilities

Notes Payable 70,000
Bonds Payable 400,000
mkt is lower- assume market = nrv 9 less: Unamortized discoount (18,000)
 382,000
total long term liabilities 452,000
Total Liabilities 1,690,300

Shareholders' Equity

Common Shares (200,000 AUTHORIZED,

50,000 ISSUED AND O/S) 500,000
Retained Earnings (857,000)
Accumulated Other Comprehensive Income 37,100

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,370,400

-
assumed that the company had chosed to use market value adjustments for
the longterm securiteis as they already had OCI
it would have been ok also to add the oci to the retained earnings under PE gaap and then
to record the investment at 349,000 and not have an I/S adjustment this year
additional disclosure required
1 basis of valuation, interest rate if applicable
2 policy re ada
3 basis of valuation, flow
250,100 4 policy re valuation choice
5 amortization policy and rates
6 amortization policy and rates
7 terms and conditions, repayment plan, etc
8 details re probability, specifics
9 amortization policy and rates
djustments for

ngs under PE gaap and then

tment this year

max= 25
 rubric

Overview
As auditor must ensure full and fair disclosure in the financial
statements in order to issue an unqualified opinion
must ensure that gaap is followed
must exercise professional judgement as there is some degree of
uncertainty wrt the contingency- management, the auditor, the
lawyers may all have different probability assessments re the
contingency
management must make the disclosure that is most appropriate
given their knowledge of the situation ( they are management’s f/s)
management is likely in the best situation to predict/assess the
outcome
f/s must address user needs-
stewardship reporting to public shareholders and investors
cash flow prediction- contingent liability could compromise future
cash flows to shareholders

Discuss possible options re accounting for the contingency

Difficult to determine what likely is (probability) and effect of the
probability on the estimate
Handbook says to provide if likely and estimable

1.      Record full provision in 2010 of the probable amount using the
assessed probability to calculate. Note disclose that full provision
has been made and any other particulars regarding the assessment
of the possible and probable losses
2.      As above but do not detail probability and disclose that full
provision for likely losses has taken place
3.      Make no provision on the grounds that the likelihood is so
uncertain that any provision would impair the integrity of the f/s
and disclose as in 1 above
4.      Make no provision and do not disclose any amounts or ranges
or anything in the notes- all on the grounds that it is too early to
predict anything
5.      Other valid

total
 Satisfactory
Excellent understanding Very good understanding
understanding
Incorporated throughout response and in Incorporated sometimes in
providing recommendation response
Understood role in the case Understood role
Identified the bias-( that
management would want
to not say anything in the
f/s as management
generally motivated to
show highest net income
possible) and the needs
of the users but did not
incorporate in the
solutions

5 4 3
Discussed handbook
Discussed handbook disclosure re Discussed handbook
disclosure re
contingencies disclosure re contingencies
contingencies
Must have said likely and estimable to Must have said likely and Must have said likely and
provide estimable to provide estimable to provide
Discussed at least one
possibility in depth

Discussed at least two possibilities in depth least two possibilities in

and one other at a more superficial level depth

discussed repercussions of choices on the

financial statements and the effect on user
assessments thereof for each option
discussed
made a recommednation for the treatment in
the 2010 f/s

15 12 8
20 16 11
 Weak
understanding

Superficial
understanding of
the situation

Weak discussion
of the topic

4
5