Core 1 — Integrated Problem 3

Scenario (120 minutes)

You, CPA, are a controller with Old Timey Furniture Ltd. (OTF), a company that
manufactures furniture to look like it is from the 1960s and ’70s. The latest trend in
home decor is to have your home look old-fashioned and OTF entered the market just
at the right time.

You recently met with the CFO of OTF, Layla Mendez, and she is looking for your help
with some accounting issues that were identified upon inspection of the December 31,
2022, financial statements. She has made a list of the issues she was unsure about
(Appendix). For each accounting issue, she would like you to discuss the potential audit
impact so that she is prepared for it.

Task #1

For each issue, you will need to provide Layla with the following:
• an explanation of why it is an issue
• an analysis of the issue using the relevant sections from ASPE
• a recommendation that is consistent with your analysis and considers the impact on
the relevant users

You know that the OTF management group is paid a bonus based on net income and
that you need to consider how these issues will impact the bonuses for the current year.

Your response should be no longer than four pages, excluding any Excel files.

Chartered Professional Accountants of Canada, CPA Canada, CPA

are trademarks and/or certification marks of the Chartered Professional Accountants of Canada.
© 2023, Chartered Professional Accountants of Canada. All Rights Reserved.

Les désignations « Comptables professionnels agréés du Canada », « CPA Canada » et « CPA »

sont des marques de commerce ou de certification de Comptables professionnels agréés du Canada.
© 2023 Comptables professionnels agréés du Canada. Tous droits réservés.
2022-07-12
Core 1 — Integrated Problem 3 Problem

Task #2

For each issue addressed in Task #1, discuss the potential audit impact by identifying
the key audit risk(s) posed by the issue and providing at least one specific audit
procedure to address the risk(s). You will recall that procedures should include three
components: what is being audited, why it is being audited, and how it is being audited.

Your analysis will flow best if you discuss each issue from an accounting perspective
first, and then, directly below your accounting discussion for that issue, consider the
audit impact.

Your response should be no longer than four pages, excluding any Excel files.

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Core 1 — Integrated Problem 3 Problem

Appendix
Accounting issues
Prepared by Layla Mendez

Design contracts

OTF has recently started to create contracts for clients that include a fee for the design
process of specialty furniture items. The first step in the design process is the creation
of a customized design plan. OTF charges customers a non-refundable flat fee of
$1,500 to prepare this design plan. However, if the customer proceeds with the project,
the full amount of the design fee is credited against the final invoice. There is no time
limit on the credit, so even if the customer decides to proceed with the project at a later
date, the credit can still be applied. OTF pays a designer $40 per hour to prepare the
design plans. The average plan takes about 10 hours to complete.

The design plan is created using OTF’s customized software, which interfaces with
OTF’s automated machinery. All of the specifications can be read by the computerized
machinery directly from the design plans. OTF retains the design plan; however, if a
customer decides not to use OTF to do the work, the customer can purchase a copy of
the plan at any time for an additional $500. Approximately 75% of customers proceed
with the project immediately after the design plan is created. Another 15% proceed with
the project at a later date. Of the customers who do not proceed with the project, about
half pay the additional $500 fee to obtain a copy of the design plan.

Land

OTF made a plan to build a new distribution centre and was interested in a piece of land
held by a customer. The land was listed for sale at $200,000. OTF approached the
customer and made a deal to trade furniture for the land. The furniture normally retails
for $185,000. I recorded the transaction at the land’s $200,000 market value.

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Core 1 — Integrated Problem 3 Problem

Appendix (continued)
Accounting issues
Prepared by Layla Mendez

Leased facility

OTF leased a facility to carry out the spray-painting of furniture and moved into the new
premises at the beginning of the year. The building belongs to a private developer, LAW
Properties Inc. (LAW). LAW and OTF signed a lease effective January 1, 2022. The
building met OTF’s requirements perfectly for the spray-painting equipment. OTF would
have liked to have purchased the building, but LAW did not want to sell it. I have
summarized the terms of the lease agreement below. The fair value of the building at
January 1, 2022, was $1,200,000, as determined by an independent appraiser. OTF
normally depreciates buildings on a straight-line basis over their useful life. I included
the lease payments in rent expense for the current year-end financial statements.

• The lease term is 15 years, with annual payments of $98,000.

• The first payment was made on January 1, 2022. All other payments will be payable
on January 1 of each year for the lease term.
• LAW is responsible for building maintenance.
• The property has a remaining useful life of 35 years.
• OTF’s borrowing rate is 5%.
• The residual value of the facility at the end of the lease term is estimated to be
$500,000.

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