Comp 2 Kid Friendly Assurance Role 2023 CFE

Kid friendly Assurance Role Evaluation Guide & Solution

Kid Friendly Assurance Role

Evaluation Guide

Kid Friendly Inc. Ref Description AO1 (Financial Reporting — Daycare Licence ) General intangible asset - definition criteria: - Identifiable - Control 1 - Future benefits Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

Required Fields CPA Way A

Analyze Analyze Analyze

A

2

General intangible asset - recognition criteria: - Future benefits - Reliable measurement Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

A

3

Useful life assessment - Identify that indefinite useful life no longer appropriate - Conclude an appropriate treatment Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

A

4

Testing for impairment - Discusses need to test for impairment before amortization is taken - Explains that license does not produce independent cash flows so would need to test CGU - Indicates information required to determine whether impairment exists Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

A

5

Assessment of amortization - Identify useful life and amortization period - Calculate amortization Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

6 7 NA NC RC C CD

D

D Analyze Analyze

D Analyze Analyze

D Analyze Analyze Analyze

D Analyze Analyze

Concludes on the appropriate treatment of the daycare license, consistent with the analysis. Conclude Provides a reasonable adjustment, consistent with analysis. Conclude The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to discuss the daycare license issue ([partial on definition criteria OR partial on recognition criteria] + [partial on useful life assessment + partial on assessment of amortization]). The candidate provides a reasonable discussion of the daycare license issue (yes on definition criteria + yes on recognition criteria + yes on useful life assessment + yes on assessment of amortization + yes on concludes + yes on reasonable adjustment). The candidate provides an in depth discussion of the daycare license issue (yes on definition criteria + yes on recognition criteria + yes on useful life assessment + yes on testing for impairment + yes on assessment of amortization + yes on concludes + yes on reasonable adjustment).

N/P/Y

Feedback

Kid Friendly Inc. Ref Description AO1 (Financial Reporting — Daycare Licence ) General intangible asset - definition criteria: - Identifiable - Control 1 - Future benefits Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

Required Fields CPA Way A

Analyze Analyze Analyze

A

2

General intangible asset - recognition criteria: - Future benefits - Reliable measurement Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

A

3

Useful life assessment - Identify that indefinite useful life no longer appropriate - Conclude an appropriate treatment Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

A

4

Testing for impairment - Discusses need to test for impairment before amortization is taken - Explains that license does not produce independent cash flows so would need to test CGU - Indicates information required to determine whether impairment exists Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

A

5

Assessment of amortization - Identify useful life and amortization period - Calculate amortization Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts.

6 7 NA NC RC C CD

D

D Analyze Analyze

D Analyze Analyze

D Analyze Analyze Analyze

D Analyze Analyze

Concludes on the appropriate treatment of the daycare license, consistent with the analysis. Conclude Provides a reasonable adjustment, consistent with analysis. Conclude The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to discuss the daycare license issue ([partial on definition criteria OR partial on recognition criteria] + [partial on useful life assessment + partial on assessment of amortization]). The candidate provides a reasonable discussion of the daycare license issue (yes on definition criteria + yes on recognition criteria + yes on useful life assessment + yes on assessment of amortization + yes on concludes + yes on reasonable adjustment). The candidate provides an in depth discussion of the daycare license issue (yes on definition criteria + yes on recognition criteria + yes on useful life assessment + yes on testing for impairment + yes on assessment of amortization + yes on concludes + yes on reasonable adjustment).

N/P/Y

Feedback

AO2 (Financial Reporting — revenue recognition) 1 Identify the contract Determine the performance obligations: - Distinct good or service 2 - A series of distinct goods or services that are substantially the same Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. 3 Identify when the performance obligation is satisfied Determine the transaction price: - Significant financing component (qualitative or quantitative discussion) - Fees paid upfront for one year 4 - Fees paid upfront for two years - 3 month payers - accrue Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. Identify other financial accounting impacts: - Contract liability - Accrued interest 5 Note: Partial if 1 attempted (A); Yes if 1 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. 6 7 NA NC RC C

CD

Analyze A

D Analyze Analyze

Analyze A

D Analyze Analyze Analyze Analyze

A

D Analyze Analyze

Provides a conclusion on appropriate revenue recognition, consistent with the analysis. Conclude Provides a reasonable adjustment, consistent with analysis (adjustment may not take into account interest or breakdown between current and long Conclude term liabillity) The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to discuss the revenue recognition issue (partial on contract identification + partial on determining performance obligation + partial on performance obligation satisfaction + partial on determining the transaction price). The candidate provides a reasonable discussion of the revenue recognition issue (yes on contract identification + yes on determining performance obligation + yes on performance obligation satisfaction + yes on determining the transaction price + yes on identify other financial accounting impacts + yes on conclusion + yes on reasonable adjustment). The candidate provides an in-depth discussion of the revenue recognition issue (yes on contract identification + yes on determining performance obligation + yes on performance obligation satisfaction + yes on all 3 components of determining the transaction price + yes on identify other financial accounting impacts + yes on conclusion + yes on reasonable adjustment)

AO2 (Financial Reporting — revenue recognition) 1 Identify the contract Determine the performance obligations: - Distinct good or service 2 - A series of distinct goods or services that are substantially the same Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. 3 Identify when the performance obligation is satisfied Determine the transaction price: - Significant financing component (qualitative or quantitative discussion) - Fees paid upfront for one year 4 - Fees paid upfront for two years - 3 month payers - accrue Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. Identify other financial accounting impacts: - Contract liability - Accrued interest 5 Note: Partial if 1 attempted (A); Yes if 1 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. 6 7 NA NC RC C

CD

Analyze A

D Analyze Analyze

Analyze A

D Analyze Analyze Analyze Analyze

A

D Analyze Analyze

Provides a conclusion on appropriate revenue recognition, consistent with the analysis. Conclude Provides a reasonable adjustment, consistent with analysis (adjustment may not take into account interest or breakdown between current and long Conclude term liabillity) The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to discuss the revenue recognition issue (partial on contract identification + partial on determining performance obligation + partial on performance obligation satisfaction + partial on determining the transaction price). The candidate provides a reasonable discussion of the revenue recognition issue (yes on contract identification + yes on determining performance obligation + yes on performance obligation satisfaction + yes on determining the transaction price + yes on identify other financial accounting impacts + yes on conclusion + yes on reasonable adjustment). The candidate provides an in-depth discussion of the revenue recognition issue (yes on contract identification + yes on determining performance obligation + yes on performance obligation satisfaction + yes on all 3 components of determining the transaction price + yes on identify other financial accounting impacts + yes on conclusion + yes on reasonable adjustment)

AO3 (Financial Reporting — modification of playground equipment) PPE - recognition criteria: A D - Future economic benefit Analyze 1 - Reliably measured Analyze Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. 2 Provides a conclusion on treatment of playground modification, consistent with the analysis. Conclude 3 Provides a reasonable adjustment, consistent with analysis. Conclude NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts to discuss the playground equipment modification issue ([partial on recognition criteria + partial on conclusion] OR yes on either). The candidate provides a reasonable discussion of the playground equipment modification issue (yes on recognition criteria + yes on conclusion). C CD The candidate provides an in-depth discussion of the playground equipment modification issue (yes on recognition criteria + yes on conclusion + yes on reasonable adjustment). AO4 (Financial Reporting — lawsuit) Provision - criteria: A D - Present obligation - past event Analyze - Probably outflow of resources Analyze 1 - Reliable estimate Analyze Note: Partial if 3 attempted (A) or 2 discussed (D); Yes if 3 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. 2

3

4

5 6 NA NC RC C

Provides a conclusion on whether a contingent loss related to the lawsuits exists, consistent with the analysis. Conclude Lawsuit reimbursement A D - Certainty of recoverability Analyze - Best estimate of the amount to be recovered Analyze Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. F/S Presentation A D - Do not net asset and liability Analyze - Net in comprehensive income statement Analyze Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. Provides a conclusion on reimbursement related to the lawsuits, consistent with the analysis. Conclude Provides a reasonable adjustment, consistent with analysis. Conclude The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to discuss the lawsuit issue ([partial on provision criteria + partial on lawsuit reimbursment + partial on F/S presentation] OR yes on either). The candidate provides a reasonable discussion of the lawsuit issue (yes on provision criteria OR yes on lawsuit reimbursement OR yes on F/S presentation OR partial on 2 of 3 + yes on conclusion + yes on reasonable adjustment).

AO3 (Financial Reporting — modification of playground equipment) PPE - recognition criteria: A D - Future economic benefit Analyze 1 - Reliably measured Analyze Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. 2 Provides a conclusion on treatment of playground modification, consistent with the analysis. Conclude 3 Provides a reasonable adjustment, consistent with analysis. Conclude NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts to discuss the playground equipment modification issue ([partial on recognition criteria + partial on conclusion] OR yes on either). The candidate provides a reasonable discussion of the playground equipment modification issue (yes on recognition criteria + yes on conclusion). C CD The candidate provides an in-depth discussion of the playground equipment modification issue (yes on recognition criteria + yes on conclusion + yes on reasonable adjustment). AO4 (Financial Reporting — lawsuit) Provision - criteria: A D - Present obligation - past event Analyze - Probably outflow of resources Analyze 1 - Reliable estimate Analyze Note: Partial if 3 attempted (A) or 2 discussed (D); Yes if 3 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. 2

3

4

5 6 NA NC RC C

Provides a conclusion on whether a contingent loss related to the lawsuits exists, consistent with the analysis. Conclude Lawsuit reimbursement A D - Certainty of recoverability Analyze - Best estimate of the amount to be recovered Analyze Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. F/S Presentation A D - Do not net asset and liability Analyze - Net in comprehensive income statement Analyze Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 discussed (D) Discussed = Technically correct discussion of the criterion, incorporating relevant case facts. Provides a conclusion on reimbursement related to the lawsuits, consistent with the analysis. Conclude Provides a reasonable adjustment, consistent with analysis. Conclude The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to discuss the lawsuit issue ([partial on provision criteria + partial on lawsuit reimbursment + partial on F/S presentation] OR yes on either). The candidate provides a reasonable discussion of the lawsuit issue (yes on provision criteria OR yes on lawsuit reimbursement OR yes on F/S presentation OR partial on 2 of 3 + yes on conclusion + yes on reasonable adjustment).

The candidate provides an in-depth discussion of the lawsuit issue (yes on provision criteria + yes on lawsuit reimbursement + yes on F/S presentation + yes on conclusion + yes on reasonable adjustment). AO5 (Financial Reporting — adjustments to pre-tax income and equity) Adjustments A R - Daycare license amortization Analyze - Revenue Analyze - Current and deferred revenue Analyze - Accrued interest Analyze 1 - Playground equipment modification capitalization Analyze - Playground equipment depreciation Analyze - Lawsuit provision Analyze - Countersuit reimbursement Analyze Note: Partial if 7 attempted (A) or 4 reasonably calculated (R); Yes if 5 reasonably calculated (R) Reasonably calculated = minor errors acceptable. Calculations are well supported with assumptions (where appropriate). CD

2 3 4 5 NA NC RC C CD

Revises pre-tax income based on accounting adjustments Analyze Revises equity based on accounting adjustments Analyze Concludes on the overall impact of the adjustments on pre-tax income Conclude Concludes on the overall impact of the adjustments on equity Conclude The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to calculate the impact of adjustments on pre-tax income and/or equity (partial on adjustments + yes on [either revises pre-tax income or revises equity]). The candidate calculates the impact of adjustments on pre-tax income and equity (yes on adjustments + yes on revises pre-tax income + yes on revises equity + yes on concludes on overall impact of adjustments on pre-tax income + yes on concludes on overall impact of adjustments on equity). The candidate performs a thorough calculation of the impact of adjustments on pre-tax income and equity (yes on adjustments + yes on revises pre-tax income + yes on revises equity + yes on concludes on overall impact of adjustments on pre-tax income + yes on concludes on overall impact of adjustments on equity and reasonably calculates 7 adjustments).

The candidate provides an in-depth discussion of the lawsuit issue (yes on provision criteria + yes on lawsuit reimbursement + yes on F/S presentation + yes on conclusion + yes on reasonable adjustment). AO5 (Financial Reporting — adjustments to pre-tax income and equity) Adjustments A R - Daycare license amortization Analyze - Revenue Analyze - Current and deferred revenue Analyze - Accrued interest Analyze 1 - Playground equipment modification capitalization Analyze - Playground equipment depreciation Analyze - Lawsuit provision Analyze - Countersuit reimbursement Analyze Note: Partial if 7 attempted (A) or 4 reasonably calculated (R); Yes if 5 reasonably calculated (R) Reasonably calculated = minor errors acceptable. Calculations are well supported with assumptions (where appropriate). CD

2 3 4 5 NA NC RC C CD

Revises pre-tax income based on accounting adjustments Analyze Revises equity based on accounting adjustments Analyze Concludes on the overall impact of the adjustments on pre-tax income Conclude Concludes on the overall impact of the adjustments on equity Conclude The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to calculate the impact of adjustments on pre-tax income and/or equity (partial on adjustments + yes on [either revises pre-tax income or revises equity]). The candidate calculates the impact of adjustments on pre-tax income and equity (yes on adjustments + yes on revises pre-tax income + yes on revises equity + yes on concludes on overall impact of adjustments on pre-tax income + yes on concludes on overall impact of adjustments on equity). The candidate performs a thorough calculation of the impact of adjustments on pre-tax income and equity (yes on adjustments + yes on revises pre-tax income + yes on revises equity + yes on concludes on overall impact of adjustments on pre-tax income + yes on concludes on overall impact of adjustments on equity and reasonably calculates 7 adjustments).

A06 (Management Accounting — analysis of outsourcing opportunity) Calculation components - Weekday lunch attendance - Weekday dinner attendance - Weekday variable cost - Weekday fixed cost - Total weekday in-house cost - Expected weekday FFI cost 1 - Weekend lunch attendance - Weekend dinner attendance - Weekend variable cost - Weekend fixed cost - Total weekend in-house cost - Expected weekend FFI cost Note: Partial if 8 attempted (A) or 7 reasonably calculated (R); Yes if 9 reasonably calculated (R) Reasonably calculated = minor errors acceptable. Calculations are well supported with assumptions (where appropriate). 2 Excludes allocated salary from fixed costs (with explanation) 3 Calculates the point at which producing in-house is more cost effective (may do so by doing a break even) 4 Calculates costs of internal preparation versus FFI at more than one level of attendance (e.g. at 2 ends of the range) 5 Calculates an average cost, with explanation 6 Concludes on which option is more cost effective, consistent with the analysis The candidate prepares a balanced qualitative discussion of the outsourcing opportunity Pros - Use of fresh ingredients - Availability of choices - Frees up additional space if kitchen is converted to playroom - Frees up staff availability - Other reasonable discussion (up to a maximum of 1) 7 Cons - Food poisoning - Lack of daycare experience - Other reasonable discussion (up to a maximum of 1) Note: Partial if 5 attempted (A) or 3 discussed (D); Yes if 4 discussed (D) (at least 1 pro and 1 con) Discussed = Technically correct discussion of the factors, incorporating relevant case facts. 8 9 NA NC RC C

CD

A

R Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze

Analyze Analyze Analyze Analyze Conclude A

D Analyze Analyze Analyze Analyze Analyze

A

D Analyze Analyze Analyze

Advises against dismantling the kitchen right away Conclude Provides a recommendation with regard to an appropriate course of action, consistent with the analysis Conclude The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to quantitatively and qualitatively assess the outsourcing opportunity (partial on calculation components + partial on qualitative discussion). The candidate prepares a reasonable quantitative and qualitative assessment of the outsourcing opportunity (yes on calculation components + [yes on calculates the point at which producing in-house more cost effective OR calculates at more than one level of attendance OR calculates average with explanation] + yes on conclusion of most cost effective option + yes on qualitative discussion + yes on provides recommendation). The candidate prepares an in-depth quantitative and qualitative assessment of the outsourcing opportunity (yes on calculation components + yes on excludes allocated cost + yes on calculates point at which producing in-house more cost effective + calculates at more than one level of attendance + yes on conclusion of most cost effective option + yes on qualitative discussion + yes on advises against dismantling kitchen right away + yes on provides recommendation).

A06 (Management Accounting — analysis of outsourcing opportunity) Calculation components - Weekday lunch attendance - Weekday dinner attendance - Weekday variable cost - Weekday fixed cost - Total weekday in-house cost - Expected weekday FFI cost 1 - Weekend lunch attendance - Weekend dinner attendance - Weekend variable cost - Weekend fixed cost - Total weekend in-house cost - Expected weekend FFI cost Note: Partial if 8 attempted (A) or 7 reasonably calculated (R); Yes if 9 reasonably calculated (R) Reasonably calculated = minor errors acceptable. Calculations are well supported with assumptions (where appropriate). 2 Excludes allocated salary from fixed costs (with explanation) 3 Calculates the point at which producing in-house is more cost effective (may do so by doing a break even) 4 Calculates costs of internal preparation versus FFI at more than one level of attendance (e.g. at 2 ends of the range) 5 Calculates an average cost, with explanation 6 Concludes on which option is more cost effective, consistent with the analysis The candidate prepares a balanced qualitative discussion of the outsourcing opportunity Pros - Use of fresh ingredients - Availability of choices - Frees up additional space if kitchen is converted to playroom - Frees up staff availability - Other reasonable discussion (up to a maximum of 1) 7 Cons - Food poisoning - Lack of daycare experience - Other reasonable discussion (up to a maximum of 1) Note: Partial if 5 attempted (A) or 3 discussed (D); Yes if 4 discussed (D) (at least 1 pro and 1 con) Discussed = Technically correct discussion of the factors, incorporating relevant case facts. 8 9 NA NC RC C

CD

A

R Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze Analyze

Analyze Analyze Analyze Analyze Conclude A

D Analyze Analyze Analyze Analyze Analyze

A

D Analyze Analyze Analyze

Advises against dismantling the kitchen right away Conclude Provides a recommendation with regard to an appropriate course of action, consistent with the analysis Conclude The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts to quantitatively and qualitatively assess the outsourcing opportunity (partial on calculation components + partial on qualitative discussion). The candidate prepares a reasonable quantitative and qualitative assessment of the outsourcing opportunity (yes on calculation components + [yes on calculates the point at which producing in-house more cost effective OR calculates at more than one level of attendance OR calculates average with explanation] + yes on conclusion of most cost effective option + yes on qualitative discussion + yes on provides recommendation). The candidate prepares an in-depth quantitative and qualitative assessment of the outsourcing opportunity (yes on calculation components + yes on excludes allocated cost + yes on calculates point at which producing in-house more cost effective + calculates at more than one level of attendance + yes on conclusion of most cost effective option + yes on qualitative discussion + yes on advises against dismantling kitchen right away + yes on provides recommendation).

Kid Friendly Inc. Ref Description CPA Way AO7 (Assurance — internal controls) Weaknesses: W I R - General controls relating to outsourced services Analyze - Controls over the completeness and integrity of information emailed to AE Analyze - All data must be manually entered Analyze - No backup retained by Kid Analyze - AE backup only performed monthly Analyze - All modules can access the same data files Analyze - Management too busy to review the controls at AE Analyze 1 - Client data tracked on a spreadsheet and manually entered Analyze - All AE users have access to Kid's information Analyze - Banking information can automatically be downloaded Analyze - Backdating of entries Analyze - Public Wi-Fi connection Analyze - Other valid Analyze Note: Partial if 7 incomplete rows (W+I OR W+R) OR 5 complete rows (W+I+R); Yes if 7 complete rows (W+I+R) Weakness (W) = identifies the wekaness; Implication (I) = explains the implication oof the weakness; Recommendation (R) = provides a recommendation that is specific, clear and able to resolve the control weakness identified NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate discusses some of the control weaknesses (partial on weaknesses). The candidate discusses several of the control weaknesses (yes on weaknesses). C CD The candidate discusses several of the control weaknesses in depth (yes on weaknesses + 8 complete rows). AO8 (Assurance — overall financial statement risk assessment) Risk factors: A D - Impact of identified adjustments on net income (pre-tax loss) Analyze - Impact of identified adjustments on equity (negative equity) Analyze - Transition to a new accounting service provider Analyze - Breach of covenants Analyze - Going concern Analyze - Possible expansion through purchase of BDC Analyze 1 - Implementation of new automated consolidation technology Analyze - Ethical standards of the Board Analyze - Knowledge and expertise of key staff Analyze - Positive history with the owners and audit with no significant issues Analyze - Stable industry with continued growth Analyze - Other valid (award only one time) Analyze Note: Partial if 6 attempted (A) or 4 discussed (D); Yes if 6 factors discussed (D) Discussion = An explanation of how the risk factor impacts risk and why there is an impact, incorporating case facts. 2 Provides a balanced analysis, including at least 1 factor that increases and 1 factor that decreases risk Analyze 3 Provides a supported conclusion on the overall financial statement level risk, consistent with the analysis Conclude NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts to perform an overall financial statement risk assessment (partial on risk factors). The candidate performs a reasonable overall financial statement risk assessment and concludes on the risk level (yes on risk factors + yes on conclusion). C CD The candidate performs an in-depth overall financial statement risk assessment and concludes on the risk level (yes on risk factors + yes on conclusion + yes on balanced analysis + discusses 7 risk factors).

Required Fields N/P/Y

Feedback

Kid Friendly Inc. Ref Description CPA Way AO7 (Assurance — internal controls) Weaknesses: W I R - General controls relating to outsourced services Analyze - Controls over the completeness and integrity of information emailed to AE Analyze - All data must be manually entered Analyze - No backup retained by Kid Analyze - AE backup only performed monthly Analyze - All modules can access the same data files Analyze - Management too busy to review the controls at AE Analyze 1 - Client data tracked on a spreadsheet and manually entered Analyze - All AE users have access to Kid's information Analyze - Banking information can automatically be downloaded Analyze - Backdating of entries Analyze - Public Wi-Fi connection Analyze - Other valid Analyze Note: Partial if 7 incomplete rows (W+I OR W+R) OR 5 complete rows (W+I+R); Yes if 7 complete rows (W+I+R) Weakness (W) = identifies the wekaness; Implication (I) = explains the implication oof the weakness; Recommendation (R) = provides a recommendation that is specific, clear and able to resolve the control weakness identified NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate discusses some of the control weaknesses (partial on weaknesses). The candidate discusses several of the control weaknesses (yes on weaknesses). C CD The candidate discusses several of the control weaknesses in depth (yes on weaknesses + 8 complete rows). AO8 (Assurance — overall financial statement risk assessment) Risk factors: A D - Impact of identified adjustments on net income (pre-tax loss) Analyze - Impact of identified adjustments on equity (negative equity) Analyze - Transition to a new accounting service provider Analyze - Breach of covenants Analyze - Going concern Analyze - Possible expansion through purchase of BDC Analyze 1 - Implementation of new automated consolidation technology Analyze - Ethical standards of the Board Analyze - Knowledge and expertise of key staff Analyze - Positive history with the owners and audit with no significant issues Analyze - Stable industry with continued growth Analyze - Other valid (award only one time) Analyze Note: Partial if 6 attempted (A) or 4 discussed (D); Yes if 6 factors discussed (D) Discussion = An explanation of how the risk factor impacts risk and why there is an impact, incorporating case facts. 2 Provides a balanced analysis, including at least 1 factor that increases and 1 factor that decreases risk Analyze 3 Provides a supported conclusion on the overall financial statement level risk, consistent with the analysis Conclude NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts to perform an overall financial statement risk assessment (partial on risk factors). The candidate performs a reasonable overall financial statement risk assessment and concludes on the risk level (yes on risk factors + yes on conclusion). C CD The candidate performs an in-depth overall financial statement risk assessment and concludes on the risk level (yes on risk factors + yes on conclusion + yes on balanced analysis + discusses 7 risk factors).

Required Fields N/P/Y

Feedback

AO9 (Assurance — materiality and approach) Assesses users, their needs and their sensitivities Analyze 1 Note: Partial if 2 users identified; Yes if 1 user discussed 2 Explains an appropriate materiality base to use, considering the users Analyze Calculates materiality, consistent with the analysis Analyze Note: Partial if calculates based on preliminary numbers and explains that this amount will be impacted by the accounting errors identified; Yes if 3 calculates based on preliminary numbers adjusted for errors identified. 4 Discusses performance materiality, explaining the concept and reasonably calculating a value Analyze 5 Discusses the need for specific materiality for accounts receivable and inventory Analyze Discusses approach Analyze 6 Note: Partial if approach is identified (combined or substantive); yes if approach is discussed NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts a discussion of the appropriate audit approach and materiality level as part of the audit plan ([partial on assesses users + partial on explains an appropriate materiality base + partial on calculation of materiality + partial on approach] OR [yes on assesses users + yes on explains an appropriate materiality base] OR yes on approach). The candidate provides a reasonable discussion of the appropriate audit approach and materiality level as part of the audit plan (yes on assesses users + yes on C explains an appropriate materiality base + partial on calculation of materiality + yes on approach). CD The candidate provides an in-depth discussion of the appropriate audit approach and materiality level as part of the audit plan (yes on assesses users + yes on explains an appropriate materiality base + yes on calculation of materiality + yes on performance materiality + yes on specific materiality + yes on approach). AO10 (Assurance — procedures) Procedures: R P - Daycare license (not essential to provide procedures re impairment) Analyze - Lawsuit and countersuit Analyze - Revenue recognition Analyze - Playground equipment modification Analyze 1 - Other valid (award only one time) Analyze Note: Partial if 3 incomplete rows or 2 complete rows; Yes if 3 complete rows Risk (R) explains the specific risk (may state the assertion or explain the risk) and why it is a risk, incorporating case facts; Procedure (P) is specific, clear and useful in responding to the risk identified. NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate discusses specific audit procedures for some of the significant accounts (partial on procedures). The candidate discusses specific audit procedures for several of the significant accounts (yes on procedures). C CD The candidate discusses specific audit procedures for most of the significant accounts (yes on procedures + 4 complete rows). AO11 (Assurance — impact of adjustments on bank covenants) 1 Calculates debt to total assets covenant, using adjusted financial statement amounts. Analyze 2 Provides a conclusion on the debt-to-total assets ratio covenant compliance. Conclude 3 Calculates current ratio, using adjusted financial statement amounts. Analyze 4 Provides a conclusion on the current ratio covenant compliance. Conclude 5 Explains what Kid’s next steps should be as a result of the recalculated covenants. Conclude NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts to discuss the impact of the financial statement adjustments on the debt-to-total assets covenant and the current ratio covenant ([partial on calculation of debt-to-total assets covenant + partial on calculation of current ratio covenant] OR yes on either). The candidate provides a reasonable discussion of the impact of the financial statement adjustments on the debt-to-total assets covenant and the current ratio C covenant (yes on calculation of debt-to-total assets covenant + yes on debt-to-total assets conclusion + yes on calculation of current ratio covenant + yes on current ratio conclusion). CD The candidate provides an in-depth discussion of the impact of the financial statement adjustments on the debt-to-equity covenant and the borrowing base (yes on calculation of debt-to-total assets covenant + yes on debt-to-total assets conclusion + yes on calculation of current ratio covenant + yes on current ratio conclusion + yes on next steps). AO12 (Assurance — summary of identified misstatements and revisions to audit report) 1 The candidate prepares the summary of identified misstatements using the provided template

Analyze

AO9 (Assurance — materiality and approach) Assesses users, their needs and their sensitivities Analyze 1 Note: Partial if 2 users identified; Yes if 1 user discussed 2 Explains an appropriate materiality base to use, considering the users Analyze Calculates materiality, consistent with the analysis Analyze Note: Partial if calculates based on preliminary numbers and explains that this amount will be impacted by the accounting errors identified; Yes if 3 calculates based on preliminary numbers adjusted for errors identified. 4 Discusses performance materiality, explaining the concept and reasonably calculating a value Analyze 5 Discusses the need for specific materiality for accounts receivable and inventory Analyze Discusses approach Analyze 6 Note: Partial if approach is identified (combined or substantive); yes if approach is discussed NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts a discussion of the appropriate audit approach and materiality level as part of the audit plan ([partial on assesses users + partial on explains an appropriate materiality base + partial on calculation of materiality + partial on approach] OR [yes on assesses users + yes on explains an appropriate materiality base] OR yes on approach). The candidate provides a reasonable discussion of the appropriate audit approach and materiality level as part of the audit plan (yes on assesses users + yes on C explains an appropriate materiality base + partial on calculation of materiality + yes on approach). CD The candidate provides an in-depth discussion of the appropriate audit approach and materiality level as part of the audit plan (yes on assesses users + yes on explains an appropriate materiality base + yes on calculation of materiality + yes on performance materiality + yes on specific materiality + yes on approach). AO10 (Assurance — procedures) Procedures: R P - Daycare license (not essential to provide procedures re impairment) Analyze - Lawsuit and countersuit Analyze - Revenue recognition Analyze - Playground equipment modification Analyze 1 - Other valid (award only one time) Analyze Note: Partial if 3 incomplete rows or 2 complete rows; Yes if 3 complete rows Risk (R) explains the specific risk (may state the assertion or explain the risk) and why it is a risk, incorporating case facts; Procedure (P) is specific, clear and useful in responding to the risk identified. NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate discusses specific audit procedures for some of the significant accounts (partial on procedures). The candidate discusses specific audit procedures for several of the significant accounts (yes on procedures). C CD The candidate discusses specific audit procedures for most of the significant accounts (yes on procedures + 4 complete rows). AO11 (Assurance — impact of adjustments on bank covenants) 1 Calculates debt to total assets covenant, using adjusted financial statement amounts. Analyze 2 Provides a conclusion on the debt-to-total assets ratio covenant compliance. Conclude 3 Calculates current ratio, using adjusted financial statement amounts. Analyze 4 Provides a conclusion on the current ratio covenant compliance. Conclude 5 Explains what Kid’s next steps should be as a result of the recalculated covenants. Conclude NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts to discuss the impact of the financial statement adjustments on the debt-to-total assets covenant and the current ratio covenant ([partial on calculation of debt-to-total assets covenant + partial on calculation of current ratio covenant] OR yes on either). The candidate provides a reasonable discussion of the impact of the financial statement adjustments on the debt-to-total assets covenant and the current ratio C covenant (yes on calculation of debt-to-total assets covenant + yes on debt-to-total assets conclusion + yes on calculation of current ratio covenant + yes on current ratio conclusion). CD The candidate provides an in-depth discussion of the impact of the financial statement adjustments on the debt-to-equity covenant and the borrowing base (yes on calculation of debt-to-total assets covenant + yes on debt-to-total assets conclusion + yes on calculation of current ratio covenant + yes on current ratio conclusion + yes on next steps). AO12 (Assurance — summary of identified misstatements and revisions to audit report) 1 The candidate prepares the summary of identified misstatements using the provided template

Analyze

2

3 4 5 6 7

8

NA NC RC C

CD

Identified misstatements - Daycare license amortization - Revenue and deferred revenue adjustment - Accrued interest expense and liability - PPE capitalization and depreciation - Lawsuit provision and countersuit reimbursement Note: Partial if 4 incomplete rows or 3 complete rows; Yes if 4 complete rows Reasonably calculated = minor errors acceptable. Calculations are well supported with assumptions (where appropriate). The candidate discusses the audit report modification options The candidate concludes on the appropriate audit report modification, consistent with the analysis The candidate identifies the possibility of a going concern issue The candidate discusses the impact on the audit report of the potential going concern issue The candidate suggests recommendations to help with the going concern possibility Reasons for going concern - Negative equity - Negative income - Drop in revenues - Covenant violations - Lawsuit - Other valid Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 factors discussed (D) Discussion = An explanation of why there might be a going concern, incorporating case facts.

A

R Analyze Analyze Analyze Analyze Analyze

Analyze Conclude Analyze Analyze Analyze A

D Analyze Analyze Analyze Analyze Analyze Analyze

The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts a discussion on the summary of identified misstatements and revisions to the audit report (yes on provided template + partial on identified misstatements + [partial on audit report modifications OR partial on identifying possible going concern]). The candidate provides a reasonable discussion on the summary of identified misstatements and the revisions to the audit report (yes on provided template + yes on identified misstatements + [(yes on audit report modification options + yes on conclusion) OR (yes on identifying the going concern + yes on providing reasons for the going concern)]. The candidate provides an in depth discussion on the summary of identified misstatements and the revisions to the audit report (yes on provided template + yes on identified misstatements + yes on audit report modification options + yes on conclusion + yes on identifying the going concern + yes on providing reasons for the going concern + yes on recommendations to help with the going concern).

2

3 4 5 6 7

8

NA NC RC C

CD

Identified misstatements - Daycare license amortization - Revenue and deferred revenue adjustment - Accrued interest expense and liability - PPE capitalization and depreciation - Lawsuit provision and countersuit reimbursement Note: Partial if 4 incomplete rows or 3 complete rows; Yes if 4 complete rows Reasonably calculated = minor errors acceptable. Calculations are well supported with assumptions (where appropriate). The candidate discusses the audit report modification options The candidate concludes on the appropriate audit report modification, consistent with the analysis The candidate identifies the possibility of a going concern issue The candidate discusses the impact on the audit report of the potential going concern issue The candidate suggests recommendations to help with the going concern possibility Reasons for going concern - Negative equity - Negative income - Drop in revenues - Covenant violations - Lawsuit - Other valid Note: Partial if 2 attempted (A) or 1 discussed (D); Yes if 2 factors discussed (D) Discussion = An explanation of why there might be a going concern, incorporating case facts.

A

R Analyze Analyze Analyze Analyze Analyze

Analyze Conclude Analyze Analyze Analyze A

D Analyze Analyze Analyze Analyze Analyze Analyze

The candidate does not address this assessment opportunity. The candidate does not meet the standards for reaching competence. The candidate attempts a discussion on the summary of identified misstatements and revisions to the audit report (yes on provided template + partial on identified misstatements + [partial on audit report modifications OR partial on identifying possible going concern]). The candidate provides a reasonable discussion on the summary of identified misstatements and the revisions to the audit report (yes on provided template + yes on identified misstatements + [(yes on audit report modification options + yes on conclusion) OR (yes on identifying the going concern + yes on providing reasons for the going concern)]. The candidate provides an in depth discussion on the summary of identified misstatements and the revisions to the audit report (yes on provided template + yes on identified misstatements + yes on audit report modification options + yes on conclusion + yes on identifying the going concern + yes on providing reasons for the going concern + yes on recommendations to help with the going concern).

AO13 (Assurance — automation technology) The candidate discusses the qualitative considerations management should take relating to the quality of information A D - Dimensions of information quality Analyze - types of data and their attributes Analyze - Professional skepticism Analyze 1 - Information quality Analyze - Data cleansing Analyze Note: Partial if 3 attempted (A) or 2 discussed (D); Yes if 3 factors discussed (D) Discussion = disscussed the impact of each factor, incorporating case facts. NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts a discussion of the considerations (partial on qualitative considerations) The candidate prepares a reasonable discussion of the considerations (yes on qualitative considerations) C CD The candidate prepares an in depth discussion of the considerations (yes on qualitative considerations + 4 factors discussed) Communication – the candidate prepares a response that is logically organized with good use of headings and bullet points. The response is professional in tone and sufficiently readable in terms of spelling, grammar, punctuation, and acronyms/abbreviations. (Note: Y or N rating only)

AO13 (Assurance — automation technology) The candidate discusses the qualitative considerations management should take relating to the quality of information A D - Dimensions of information quality Analyze - types of data and their attributes Analyze - Professional skepticism Analyze 1 - Information quality Analyze - Data cleansing Analyze Note: Partial if 3 attempted (A) or 2 discussed (D); Yes if 3 factors discussed (D) Discussion = disscussed the impact of each factor, incorporating case facts. NA The candidate does not address this assessment opportunity. NC The candidate does not meet the standards for reaching competence. RC The candidate attempts a discussion of the considerations (partial on qualitative considerations) The candidate prepares a reasonable discussion of the considerations (yes on qualitative considerations) C CD The candidate prepares an in depth discussion of the considerations (yes on qualitative considerations + 4 factors discussed) Communication – the candidate prepares a response that is logically organized with good use of headings and bullet points. The response is professional in tone and sufficiently readable in terms of spelling, grammar, punctuation, and acronyms/abbreviations. (Note: Y or N rating only)

Kid Friendly Assurance Role Solution

PASS Practice Common Final Exam Day 2 – (Kid Friendly Inc.) Practical Solution – Common Note: The following is a practical solution. It is meant to resemble a complete, technically correct solution that demonstrates case-writing best practices as outlined in the CPA Canada Learning eBook Volume 7 – Enabling Competencies. The formatting and presentation of this solution are representative of how a student may format a response efficiently and effectively in a timed case environment. Refer to the feedback guide (FG) for guidance on the breadth and depth of analysis required to achieve competency. To: From: Subject:

Sakeena Bovaird CPA Issues raised

Assessment Opportunity #1 (Common) – The candidate discusses the accounting for the daycare license. (Core Financial Reporting) Daycare licenses Assess the situation The accounting issues associated with the daycare license are: 1. Whether the daycare license has been appropriately capitalized; and 2. Whether the carrying value of the asset should have changed from the previous year. Analyze the issue Capitalization Kid Friendly Inc. (Kid) is currently capitalizing its daycare license. We need to determine whether the license meets the definition of “intangible asset”. An item meets the definition of an intangible asset under IAS 38 if it meets the criteria for: a. Identifiability: The license is identifiable as it arises from a legal right, regardless of the fact that it is not separable from the company. MET. b. Control over a resource: The Company has control as it has legal rights over the license. MET. c. Existence of future economic benefits: The Company must obtain a license for each daycare location. The number of daycare centre spaces are limited and demand for care is growing. Therefore, future economic benefits exist. MET. Therefore, the license meets the definition of an intangible asset. The company capitalizes the license based on the cost of the acquisition plus the legal costs incurred to acquire the license. In order to capitalize the following recognition criteria need to be met:

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Common



Future benefit will flow to Kid: MET as normally, the price an entity pays to acquire separately an intangible asset reflects expectations about the probability that the expected future economic benefits embodied in the asset will flow to the entity.



Cost of the asset can be measured reliably: MET as the cost of a separately acquired intangible like a license can be measured reliably (based upon the cost charged for the license). It is also correct to include the legal costs incurred to acquire the license as the carrying value of an intangible asset should comprise the purchase price as well as “any directly attributable cost of preparing the asset for its intended use”.

Carrying Value of the License in Current versus Previous Year The Company is treating the license as an intangible with an indefinite life with no amortization. This is evident from the fact that the carrying value of the license has not changed from December 31, 2022 to September 30, 2023. The license continues to be valued at $100,000 as at September 30, 2023. 

Initially the policy of treating the license as an intangible with an indefinite life would have been legitimate, given that until January 2, 2023, it was possible to renew the license at a nominal cost upon expiry and the license was renewed each time it expired.



As the company had every intention of generating cash flows from this license indefinitely, the license truly had an indefinite life. However, during the 2023 fiscal year (on January 2, 2023), the rules were changed and there is now a substantial cost to renew. Furthermore, renewals are now at the government’s discretion.

In light of the above: 

For the 2023 fiscal year, the license should be treated as an intangible with a finite life and should be amortized over its useful life to the company.



Before commencing to amortize the license, the company should test the license for impairment and write it down if it is impaired, before amortization is taken. Given that there is now a substantial cost to renew the license and renewals are now at the government’s discretion the value of the license may have declined.



In order to determine whether there is an impairment, more information is required to determine the recoverable value of the license based on fair value less cost to sell and value in use.



Given that the license does not produce cash flows that are largely independent of the cash flows of other assets it will be necessary to determine the recoverable amount for the cash generating unit to which the license belongs (which likely would be the full company).

Assuming that there is no impairment, amortization should have been computed as follows: 

The carrying value of the license as at the end of the previous year was $100,000.

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PASS 





Day 2 (Kid Friendly Inc.) Practical Solution – Common

Amortization should have commenced on January 2, 2023. The useful life for the license for the daycare centre as at January 2, 2023 would have been 11.5 months as it expires on December 15, 2023. Therefore, the amount of amortization that should have been expensed in the 2023 fiscal year (as at September 30, 2023) is $78,261 based upon monthly amortization of $8,695.65 (100,000/11.5), for 9 months. Amortization is being dealt with on a prospective basis as the need to start amortizing represents a change in estimate. Also, for the purpose of amortizing the license, a residual value of 0 is assumed given that: o Kid does not have a commitment from a third party to purchase the license at the end of its useful life (given that the licenses can’t be sold); and o The residual value cannot be determined by reference to an exchange transaction in an existing market which is expected to exist at the end of the asset’s useful life, given that there is no market for daycare centre home licenses.

Conclude and advise The daycare license meets the requirements to be capitalized as an intangible asset, however, the assumption of an indefinite useful life is not appropriate and therefore the license needs to be amortized over its useful life of 11.5 months. Therefore the asset as at September 30, 2023 should be measured at $21,739 (i.e. $100,000 - $78,261) after reflecting amortization. See Exhibit I for details of the impairment and amortization calculations and required adjusting entry to be recorded. For Assessment Opportunity #1 (Core Financial Reporting), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts to discuss the daycare license issue. Competent – The candidate provides a reasonable discussion of the daycare license issue. Competent with distinction – The candidate provides an in-depth discussion of the daycare license issue.

Assessment Opportunity #2 (Common) – The candidate discusses revenue recognition. (Core Financial Reporting) Revenue recognition Assess the situation Charlotte is concerned with the company’s current revenue recognition policy. The issue is that

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Common

in the current year Kid implemented new payment plans but did not change its policy, although the new policy impacts the timing of revenue recognition. The Company started to offer a discount of $1,000 for the annual cost of daycare if parents make a payment for one year upfront. Kid also began to offer another type of discount $1,000 in the first year and $3,000 in the second year, if a two-year payment is made up-front. Analyze the issue The revenue recognition policy should have been modified given that the earnings process for customers who opt for this payment plan differs from the current revenue recognition. 1.

Identify the contract with the customer 

2.

Parents enter into a contract with Kid for the provision of day care services.

Identify the separate performance obligation(s), if they exist The performance obligations should be identified as follows: 

3.

A performance obligation that is distinct or is a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. o In this case, the performance obligation is a distinct service, the provision of daycare services on a weekly basis. This is the only performance obligation. MET.

Determine the overall transaction price. 

In determining the transaction price, an entity should adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer. In those circumstances, the contract contains a significant financing component.

Fees paid upfront for 1 year  As a practical expedient, an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the transaction covers one year or less. o o

Therefore, the reduced fee for those parents who pay for one year upfront need not be adjusted for a financing component. The $1,000 reduction would simply be treated as a discount and accounted for accordingly. For those situations where parents paid the fees upfront for 2 years, in determining the transaction price, Kid Friendly would adjust the promised amount of consideration for the effects of the time value of money as discussed below.

With regard to the allocation of the discount, IFRS 15 says the following: 

The entity shall allocate a discount proportionately to all performance obligations in the contract unless there is observable evidence in accordance that the entire discount

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Common relates to only one or more, but not all, performance obligations in a contract. o o

In this case there is no debate that a discount is being offered and the total price paid for one year of services is less by taking advantage of the discount and paying up-front. Also, the fee is non-refundable, so no estimation of any potential refund is necessary. MET.

Fees paid upfront for two years  The upfront payment for the 2-year period should be adjusted for the time value of money as the difference between the cumulative cash-selling price of the service of $36,000 ($1,500 x 24 months) and the financed amount of $32,000 ($17,000 + $15,000) which is 12.5% of the financed amount ($4,000/$32,000).  The next step would be to come up with a discount rate that would be reflected in a separate financing transaction between Kid and the customer. Since there is no discernable financing between Kid and their customers, Kid may want to use the implied discount rate of .96% per month (or 11.52% per year). It is assumed that the implied discount rate is consistent with the market rate of interest for companies with the same credit rating as its own. (Note: the implied discount rate is the discount rate at which the present value of an annuity of $1,500 per month over 24 months equals $32,000. This can be computed using the IRR function in excel or on a the calculator provided at the CFE.) 5.

Determine when the performance obligation is complete and revenue can be recognized. 



Per IFRS, an entity shall recognize revenue when the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. This can be over time or at a point in time. An entity transfer control of a good or service over time, and therefore satisfies a performance obligation and recognizes revenue over time, if the following criterion is met: o The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.  In this case, the service is being provided weekly, at which time the customer simultaneously receives and consumes the benefit. This is the point of transfer when the customer has “control” of the asset, or, in this case, the “service”. MET.

Conclude and advise Fees paid upfront for one year There are 13 children with a one-year advance payment. The $17,000 plan should be recognized at a monthly rate of $1,417. All 13 children purchased an annual service plan in August, for total annual revenues of $221,000. Therefore, only two months (August & September) should be recognized, for total revenue of $36,833. This results in a total adjustment at September 30, of $184,167. That is $184,167 should be removed from revenue and treated as a contract liability. 5 / 11

PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Common

Fees paid upfront for two years Kid will recognize revenue for 2-year contracts over the contract term as the performance obligation is satisfied and interest expense using the effective interest method (Exhibit I). Total revenue adjustment required is a downward adjustment of $416,167 with the credit being recorded to contract liability ($144,000 credit to current contract liability). Additionally, as at September 30, 2023, $4,592 of accrued interest expense and liability would be recorded. See Exhibit I, adjusting journal entry #2 and the related note to the entry that details the calculations. Parents paying on a monthly basis or at the end of 3 months Revenue should be recognized on a weekly basis as services are provided.

For Assessment Opportunity #2 (Core Financial Reporting), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts to discuss the revenue recognition issue. Competent – The candidate provides a reasonable discussion of the revenue recognition issue. Competent with distinction – The candidate provides an in-depth discussion of the revenue recognition issue.

Assessment Opportunity #3 (Common) – The candidate discusses the accounting for the modification to the playground equipment. (Core Financial Reporting) Playground equipment Assess the situation During the year $100,000 was spent on modifications to the outdoor playground equipment. The amount was expensed rather than capitalized. Analyze the issue – modification of equipment Per IAS 16, the cost is recognized as an asset if, and only if: a. It is probable that future economic benefits will flow to the entity; and b. The cost of the item can be reliably measured.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Common

With regard to condition a, IAS 16 says the following:  Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets. Such items of property, plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired.



o

In this case it would appear that there is a probable future economic benefit given that Kid was ordered to modify or replace the equipment in question with a toddler-friendly design that meets Ministry safety standards and would have lost its daycare license had they not complied with the order. Therefore, it can certainly be argued that modification of the equipment was necessary for Kid to obtain the future economic benefits from its other assets given that the company would have effectively been closed, had they not made the modifications, which would have prevented the company from deriving any profits from its other assets. MET.

o

A further argument that can be made is that the equipment was replaced with a newer technology and different materials that are highly durable and environmentally friendly. This may indicate that the quality of the equipment has increased which is also a form of future benefit.

With regard to condition b, there is no reason why the cost of the modification could not be determined reliably. MET.

Conclude and advise The modification should have been capitalized. Given that the company plans to use the equipment for 5 years the equipment should have been depreciated over a five-year period. Given that the modification was made at the start of the year, 9 months of depreciation should have been taken up to September 30, 2023. Assuming that the residual value is 0, the amount of depreciation that should have been charged is $20,000 per year or $15,000 up to September 30, 2023. Any old parts that were replaced should have been de-recognized if material. Refer to entry 3 in Exhibit I for the required adjusting journal entry. For Assessment Opportunity #3 (Core Financial Reporting), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts to discuss the playground equipment modification issue.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Common

Competent – The candidate provides a reasonable discussion of the playground equipment modification issue. Competent with distinction – The candidate provides an in-depth discussion of the playground equipment modification issue.

Assessment Opportunity #4 (Common) – The candidate discusses the accounting for the lawsuit. (Core Financial Reporting) Contingent liability Assess the situation During the year, a slip and fall incident triggered the filing of a lawsuit against Kid. Therefore there is the potential that Kid has a liability for any amounts that may be payable as part of the lawsuit. The issue is whether a provision should be recorded related to the lawsuit.

Analyze the issue Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision exists when there is a liability of uncertain amount or timing.  MET. As Kid has been sued for $2.5 million and the amount that will have to be paid out is uncertain. (The timing is also uncertain). A provision must be recognized when: a. An entity has a present obligation (legal or constructive) as a result of a past event.  The event has taken place and resulted in a present obligation. MET. b. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.  Based on discussions with legal counsel, they indicated more likely than not that the lawsuit would be successful. MET. c. A reliable estimate can be made of the amount of the obligation.  Legal counsel can make a reliable estimate of the award for $1.5 million. MET. If the lawsuit is successful against Kid, it is not possible at this time to determine with 100% certainty the likelihood of Kid’s counter suit being successful, although the lawyer is virtually certain that Kid would be successful in recovering at least a half million dollars of the damages. Given that it is virtually certain that the company will recover damages from the snow removal company, the amount that is expected to be recovered should be treated as a reimbursement (asset) in the financial statements. The amount of the reimbursement is $500,000, as this represents management’s best estimate of the amount that will be recovered. The asset and liability would not be netted in the statement of financial position, although a net amount could be presented as an expense in the statement of comprehensive income. Conclude and advise Based on the above, a provision for the lawsuit filed by the parent who slipped on the ice in front

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Common

of the daycare of $1.5 million should be accrued in the financial statements and deducted from equity. A reimbursement asset of $500,000 should be recognized. The liability that should be accrued of $1.5 million and reimbursement asset that should be recognized of $500,00 are both classified as current given that both the payout of the claim and the receiving of the reimbursement are expected to take place within a year. Refer to adjusting journal entry 4 in Exhibit I. For Assessment Opportunity #4 (Core Financial Reporting), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts to discuss the lawsuit issue. Competent – The candidate provides a reasonable discussion of the lawsuit issue. Competent with distinction – The candidate provides an in-depth discussion of the lawsuit issue.

Assessment Opportunity #5 (Common) – The candidate calculates the impact of adjustments on pre-tax income and equity. (Core Financial Reporting) Adjusted pre-tax income and equity I have adjusted pre-tax income and equity based on the required accounting adjustments that have been identified. See Exhibit II. After accounting for the adjusting entries:  There is a decrease in income before tax of $1,414,020. Income before tax prior to adjustments is $400,225 and after adjustments there is a loss before tax of $1,013,795.  There is also a decrease in equity of $1,414,020 (ignoring taxes). Equity before adjustments is $636,890 and after adjustment there is negative equity of $777,130.

For Assessment Opportunity #5 (Core Financial Reporting), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts to calculate the impact of adjustments on pre-tax income and/or equity.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Common

Competent – The candidate calculates the impact of adjustments on pre-tax income and equity. Competent with distinction – The candidate performs a thorough calculation of the impact of adjustments on pre-tax income and equity. Assessment Opportunity #6 (Common) – The candidate provides an analysis of the outsourcing opportunity. (Core Management Accounting) Fresh Feast Inc. I have prepared the quantitative analysis using all of the information provided. See Exhibit III. To summarize:  

Assuming average weekday and weekend attendance of 60 and 25 respectively, switching to FFI is less expensive. Producing in-house is less expensive if weekday attendance is 62 students or more and weekend attendance is 26 students or more.

In order to make a recommendation, I have also considered several pros and cons of switching to FFI, as follows: Pros for outsourcing to FFI 

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FFI prepares fresh meals for its customers, using only fresh ingredients from local farms. The use of healthy ingredients to provide healthy meals is in line with Kid’s mission of taking care of children when their parents are not available, and the healthy meals helps Kid play a holistic role in the children’s development. FFI offers customers a variety of meal options each day so parents would be able to choose their child’s meals 3 days in advance. This provides parents with more choice over what food their child is consuming, which can be used as an additional advertising and selling point for Kid. This could result in additional revenues for the company. Given that staff members will not have to assist with the preparation of the meals, they will have more time available to spend with the children. Also Charlotte will no longer have to spend time overseeing meal preparation, which will free up time to focus on other priorities. It will be possible to convert the kitchen into a playroom which will mean additional space for the children to play. It is however not advisable to dismantle the kitchen right away if the company decides to outsource to FFI, in case things don’t work out and it is decided to continue to go back to preparing meals internally. After the company has some experience working with FFI it will be in a better decision to determine whether it is likely that the relationship will be long term, at which time a decision can be made with regard to dismantling the kitchen.

Cons for outsourcing to FFI 

FFI recently caused food poisoning for one of Charlotte’s neighbors at her company event.

10 / 11

PASS

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Day 2 (Kid Friendly Inc.) Practical Solution – Common

If a similar situation arose with a child in Kid’s care, this could be more serious given the young age of the children. Additionally, this could result in potential legal issues if it is deemed that Kid did not monitor the care of the food sufficiently, i.e. proper refrigeration, ensuring food is served at the “best before date” etc. FFI does not have any experience with daycares which means there could be some growing pains and customer service issues once they begin preparing meals for Kid.

Recommendation After considering the quantitative and qualitative analyses performed, I recommend that Kid pursue the outsourcing opportunity given that it is currently cheaper if Kid continues to operate at average attendance levels as well as based on the qualitative pros identified above. For Assessment Opportunity #6 (Core Management Accounting), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts to quantitatively and qualitatively assess the outsourcing opportunity. Competent – The candidate prepares a reasonable quantitative and qualitative assessment of the outsourcing opportunity. Competent with distinction – The candidate prepares an in-depth quantitative and qualitative assessment of the outsourcing opportunity.

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PASS Practice Common Final Exam Day 2 – (Kid Friendly Inc.) Practical Solution – Assurance Note: This solution demonstrates case-writing best practices as outlined in the Enabling Competencies volume of the CPA Canada Learning eBook. While this solution is technically correct, candidates are reminded that there may be additional acceptable and reasonable points that are not reflected in the solution. The feedback guide (FG) provides guidance on the breadth and depth of analysis required to achieve competency. See Common Practical Solution for the Common Assessment Opportunities #1 - #6. Assessment Opportunity #7 - The candidate discusses the internal control weaknesses related to Kid’s financial processes with respect to the accounting agreement with AE. (Assurance) Control weaknesses General controls relating to outsourced services may be weak.  IF AE is not reliable or if its control environment is not strong, Kid’s entire system could be at risk. This could result in loss of data, breach of confidentiality, costly reconstructions of data, and other problems.  Kid’s management is still accountable for the accounting records. The agreement should be reviewed and may need to be revised to include additional controls, particularly over the risk areas identified. There are no controls over the completeness and integrity of the information (downloaded electronic data and hardcopy scanned data) e-mailed to AE.  The transactions recorded by AE may be incomplete and inaccurate.  Sending unencrypted data may result in breach of confidential information.  A hash total should be used to reconcile electronic data e-mailed to AE. For hardcopy source documents a reconciliation using pre-numbered documents can be completed. All transmitted data should be encrypted. All data e-mailed to AE, other than downloaded sales data must be entered manually.  Manual entry may result in errors and omissions. The risk of fraudulent entries/adjustments increases.  A weekly reconciliation should be performed. A report of all transactions entered should be reviewed weekly by Kid’s management. No backups of source documents which support the transactions recorded by AE are retained by Kid.  Kid’s control environment could be a risk. If an error in transmission to AE is incurred, or in the event of a system failure, Kid’s control system could be at risk. This could result in loss of data and the inability to reconstruct data.  Kid should maintain a backup of information (hard copy and electronic) transmitted to AE. Backup is performed monthly by AE. Professional Accounting Supplementary School (PASS) Inc. © 2023, Professional Accounting Supplementary School (PASS) Inc. All Rights Reserved.

PASS  

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

As Kid destroys all supporting documentation once e-mailed, there is at least one month of data/transactions at risk of being corrupted, destroyed, or manipulated. Backup should be performed more frequently by AE and tested frequently.

All modules access the same data files.  Confidentiality of data is at risk. Additionally, data and the audit trail can be unintentionally overwritten or destroyed. Inappropriate changes could be made to the data resulting in errors.  Modules should only access data on an as needed basis. Changes to data should be tracked in an audit log and reviewed by Kid on a weekly basis. One individual should not have access to the entire system. Incompatible functions should be separated. This can be achieved by use of individual profiles. This should include access hierarchy (for viewing, modifying, deleting of information). The management team has been too busy to review the detailed description of controls at AE.  There could be weaknesses or errors built into the controls that management is not aware of.  The management team should review the control descriptions and correct any errors or deficiencies. Client data is tracked on a spreadsheet and then manually updated in the customer module.  Sending unencrypted data may result in a breach of confidential information. Manual entry may result in errors and omissions. The risk of fraudulent entries / adjustments increases.  All transmitted data should be encrypted. Validity checks and hash totals should be implemented to ensure data is correctly entered. AE’s system may be able to provide an interface for users to access and make edits to select master data, such as customer information. Kid should discuss this with AE. Alternatively, Kid should consider the possibility of an interface between AE’s software and Kid’s electronic data to transfer data. All AE users have access to Kid’s information. Data could be accessed for unjustified reasons.  Unauthorized changes and errors could be made. This may result in duplication, manipulation, and omissions of financial and non-financial information. Additionally, confidentiality of data and privacy (of customer and employee information) may be at risk.  A designated individual(s) should be assigned to the Kid account. All changes should be tracked via an audit log. A confidentiality clause should be included in the agreement to prevent AE staff from using Kid’s data for an unauthorized purpose. Lastly, Kid’s privacy policy should be reviewed and updated if necessary. The policy should outline what data is collected, how it is used, stored, protected, and ultimately disposed of. Banking information can be downloaded automatically.  Using a web-interface to download information increases the risk that information can be hacked by competitors. This may result in a loss of data and other problems, including fraud and reputational damage.  Data should only be accessed using a secure internet connection. Any information downloaded from the web should be encrypted. Kid should review whether AE can complete any banking transactions in Kid’s bank account(s). AE should only have access to download a list of banking transactions.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

The system allows for the backdating of entries.  Data could be changed without Kid’s knowledge. Transactions could be recorded in the incorrect period.  Transactions for the previous month should only be open for posting for a pre-determined period (e.g. a few days). Any backdated entries should be reviewed by Kid. The Wi-Fi connection used by Kid and AE to transmit information is available to the public.  The internet connect may be intercepted and data may be stolen or manipulated.  The wi-fi connection used by Kid for processing information and transmitting data to AE should not be used by daycare clients. A separate connection should be made available to customers. Although the accounting agreement has already been signed, Kid should work with AE to make the modifications needed to improve the overall control environment. For Assessment Opportunity #7 (Assurance), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate discusses some of the control weaknesses. Competent – The candidate discusses several of the control weaknesses. Competent with distinction – The candidate discusses several of the control weaknesses in depth.

Assessment Opportunity #8 - The candidate provides an overall financial statement risk assessment as part of the audit plan for the 2023 financial statement audit. (Assurance) Risk assessment Kid is an existing client of the firm. Although B&M has performed audit engagements for Kid on its prior year financial statements and it seems there were no significant issues, there have been some changes which will have an impact on the current year audit. This will result in additional users and expanded user objectives. Factors that increase overall financial statement level (OFSL) risk 

While the draft financial statements showed a profit, after adjusting for the accounting errors, that is no longer the case. After adjustment there is a pre-tax loss of $1,023,677. In addition, the payout of $1M for the lawsuit is expected to materialize within the next fiscal year. This is only partially offset by the cash on hand at September 30, as a result of the prepaid revenue plans. There is also significant negative equity after adjustments.

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PASS o

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance Due to the decrease in profitability, management may have more of an incentive to put the company in a more positive light, especially given the reliance on the bank for the potential expansion in Beamstown.

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Kid is in breach of its covenant at the interim period. o This may put Kid at risk of having to immediately pay back its bank loan. We will need to re-assess at year end whether Kid is in breach of its existing covenant, as this increases the risk, especially considering the increased reliance on the financial statements.

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Going Concern issue o As discussed later, the breach of covenant along with other factors may result in the company no longer being a going concern.

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There is a possible expansion through the purchase of another daycare facility in Beamstown. o This increases reliance on the financial statements by the bank and the Board. This increases the bias of management to show better results to attract additional financing.

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There has been a transition of the preparation of financial statements from internal employees to an outsourced accounting service provider. o The outsourced service provider lacks the required expertise and adequate controls. This increases the risk of errors in the financial statements.

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Several accounting errors have been discovered in our analysis. o This brings into question the competence and availability of the people overseeing financial reporting. The management team seems busy running the business and has not dedicated time to review the new AE accounting controls. This increases the risk of material misstatements in the financial statements.

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The company has introduced a new automated consolidation technology to help automate manual processes. o The automation of processes without sufficient testing and understanding of the tool increases the risk of material misstatements in the financial statements.

Factors that decrease overall financial statement level (OFSL) risk 

The Board is appropriately involved in reviewing quarterly financial statements. o This decreases the risk of material misstatement as the Board exhibits strong ethical standards.

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Pro-active ownership effort to bring in additional resources, i.e. hiring Charlotte Kwan, who has valuable experience in a previous job, to oversee programming, business development and financial reporting. o This reduces the risk of material misstatement as there will be fewer errors.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

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There is a positive history with the owners (majority is still owned by the Kensington family) and the audit. o There has been no significant issues in the past, decreasing the risk of probable material misstatements in the future.

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The industry remains stable with continued growth in demand. o This reduces any going concern risk and management bias.

Conclusion Based on the risk analysis performed above, the OFSL risk is assessed as high due to the significance of financial statement errors found to date, the breach in the existing bank covenant, and increased reliance on the financial statements for future expansion opportunities. For Assessment Opportunity #8 (Assurance), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts to perform an overall financial statement risk assessment. Competent – The candidate performs a reasonable overall financial statement risk assessment and concludes on the risk level. Competent with distinction – The candidate performs an in-depth overall financial statement risk assessment and concludes on the risk level.

Assessment Opportunity #9 - The candidate discusses the appropriate audit approach and materiality level as part of the audit plan for the 2023 financial statement audit. (Assurance) Approach Control Environment - Positive Points   

Management reviews monthly financial statements prepared by AE. This includes a standard report of Kid’s results vs. industry data. The Board reviews the quarterly reporting packages. There appears to be an ethical tone at the top as the Board is concerned that the company run ethically.

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PASS 

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

Management has implemented an automation technology to help simplify and eliminate manual processes which indicates their commitment to improvement and openness to change.

Control Environment - Negative Points  

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Accounting has been outsourced to a provider that may not have strong controls and possibly not have the relevant expertise to address the current year changes. Accounting Easy (AE) completes all accounting activities, including entering sales, purchasing, payroll, and cash information with no additional approval by management. Errors may not be detected or corrected until the monthly review of financial statements by management and quarterly review by the Board. The monthly reporting package prepared by AE is incomplete as the additional reports are not tailored to the daycare business and management must manually compare the budget to actual results. This makes it more difficult to detect and correct errors. A post conversion check is still outstanding from the transfer of balances January 1, 2023 to AE’s accounting (software) system. There may be errors in the opening balances and/or current year transactions, and data may be incomplete and inaccurate. The new automation tool implemented by management can have an impact on the reports used by our audit team in performing the audit. We will need to perform testing over the automation tool in order to ensure the data we are receiving is complete and accurate.

Conclusion Overall, control risk is high as financial reporting is outsourced. In addition, the Board involvement only occurs on a quarterly basis, and there is a lack of Board involvement in financial oversight. The audit approach could rely on controls where available or efficient, but this is unlikely since there has been a significant change in the financial reporting process this year. The financial balances were transferred to another financial reporting system which has not been tested for completeness, accuracy or integrity. As a result, a substantive approach will be required. We will also have to perform IT testing of the system to test for completeness and accuracy of the balances and transactions transferred, as management has not performed post conversion testing. In addition, we need to review whether a service organization audit report is available for AE. Materiality Materiality needs to be set considering the users and their needs. The main users of the financial statements are: 

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The bank o They will be reviewing the audited statements and the existing covenant in deciding whether to extend additional financing for a future daycare purchase. Future investors

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PASS o

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance Should Kid decide to offer more shares to the public, future investors will also be reviewing the financial statements prior to investing in the daycare as community owners.

Since we currently have only the September 30 amounts (9 months), we will use these and annualize them to estimate the year-end amounts for purposes of calculating materiality. Professional judgment is required in calculating materiality. A percentage is often applied to a chosen benchmark (such as profit before tax) as a starting point in determining materiality for the financial statements as a whole. Using the annualized revenue and expenses after accounting adjustments, Kid has a before tax loss of $1,013,795. As Kid is no longer profitable, we cannot choose profit before tax as the benchmark for determining materiality. Users will be making various decisions and will therefore be sensitive to the financial results. The bank and potential investors will be very sensitive to available cash flow, so revenue seems most appropriate. We will use 0.5% of annualized revenue, $874,444 x 0.5% = ~$4,372. (revenue per f/s of $1,072,000 – adj. entry #2, Exhibit 1 $416,167 = $655,833 x 12/9) Conclusion Given the adjustments made to the financial statements, planning materiality is rounded to $4,000. Performance materiality (PM) must also be determined and will be lower to allow for possible undetected misstatements. PM is a matter of professional judgement. A possible base that is often used is 60% to 80% of overall materiality, but the final percentage varies among firms and is based on professional judgement. Since the risk of material misstatement is assessed at high, a PM in the lower range is selected and a rate of 60% has been applied. Therefore, PM is $2,400 (60% × $4,000). For Assessment Opportunity #9 (Assurance), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts a discussion of the appropriate audit approach and materiality level as part of the audit plan. Competent – The candidate provides a reasonable discussion of the appropriate audit approach and materiality level as part of the audit plan. Competent with distinction – The candidate provides an in-depth discussion of the appropriate audit approach and materiality level as part of the audit plan.

Assessment Opportunity #10 - The candidate recommends appropriate audit procedures

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

as part of the audit plan for the 2023 financial statement audit. (Assurance) Audit procedures Risk:  There have been changes with respect to the daycare license and there is now a substantial cost to renew. The daycare license may need to be written down and the amortization is improperly computed. Account and assertion(s): Daycare license - existence and valuation Procedure(s):  Obtain evidence of the fair value less cost to sell and value in use. o In order to determine the fair value of a license will need to determine the cost to acquire a license. It should be possible to confirm with the education Ministry the cost of purchasing a license. o The license does generate cash flows that are largely not independent of other assets so in order to determine the recoverable amount of the license it will be necessary to verify the recoverability of the CGU to which the license belongs. o The full company would likely constitute a CGU as there is only one location. Will therefore need to verify the value in use by obtaining and assessing management’s discounted cash flow analysis for the company; in assessing future cash flows will need to compare growth rates to the industry growth rate and discount rates to the market discount rate for comparable risk as well as consider the reasonableness of other assumptions used to compute cash flows. o Will also need to compare the greater of fair value less costs to sell and value in use for the company’s assets with the carrying values in the G/L in order to determine the amount (if any) of the impairment loss for the CGU. The evidence required to verify fair value of assets will depend on the nature of the asset.  Will need to confirm with the Ministry that the rules for renewing licenses have changed; will also need to review government documentation relating to the license in order to verify the expiry date.  Will then need to re-compute amortization and ensure that a correct amount is reflected in the G/L. Risk:  Kid is being sued for $2.5 million negligence and Kid has counter-sued the snow removal company. There is uncertainty as to whether Kid will win the lawsuit and if not, how much they will have to pay, as well there is uncertainty as to the counter-suit and the possible outcome. Account and assertion(s): Lawsuit – completeness and valuation Procedure(s):  Obtain a legal letter confirming the probability and amount of the lawsuit against Kid and countersuit against the snow company.  For the reimbursement will need to confirm with the lawyers that the countersuit is virtually certain to be successful. 8 / 14

PASS  

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

A subsequent event note may be required if the lawsuit(s) are settled or more information becomes available after year-end, before the audit opinion is issued. It should be verified if there is any existing liability insurance that would cover all or part of the cost of the lawsuit. If there is any coverage, the adjustment to the financial statements would be impacted.

Risk:  Daycare service revenue may be recognized prematurely using advanced payments for the recognition date and the amounts may be incorrectly calculated (for the two-year plans). Therefore, revenue may be incorrectly recognized and could be overstated or understated. Account and assertion(s): Revenue - occurrence, completeness, accuracy, cut-off Procedure(s):  For the new pre-paid annual plans, obtain the service contract and review for service period and contract amount as well start date (for one-year vs. two-year plans) and re-calculate the amount of revenue that should be recognized (versus deferred) based on the number of months that have passed by year end and compare with the G/L to ensure revenue is being recorded accurately.  Recalculate the implicit interest rate used for the financing to ensure the interest rate is accurate.  Review source revenue records for additional service revenue (e.g. field trip and transportation permission slips, proof of payment (for supplemental purchases). Risk:  Kid spent $100,000 to modify the outdoor playground equipment. Kid has expensed the amount and the costs may be incorrectly classified. Account and assertion(s): Playground equipment - completeness, valuation, occurrence Procedure(s):  Review documentation from the Ministry in order to verify that the company was required to modify the equipment. Documentation may also be available from the Ministry attesting to the fact that the new equipment meets their standards; otherwise (with the company’s permission) may be possible to confirm with the industry whether the equipment meets Ministry standards.  Obtain invoices to back up the $100,000 expenditure and examine the invoices to ensure that they relate to the modifications necessary to comply with the industry requirements.  Verify that the useful life of the equipment is 5 years. Should be possible to verify this by communicating with the company that provided the equipment. Should also verify with that company whether the equipment has any residual at the end of the period that Kid is expected to be able to use the equipment. For Assessment Opportunity #10 (Assurance), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate discusses specific audit procedures for some of the significant accounts. Competent – The candidate discusses specific audit procedures for several of the significant accounts. Competent with distinction – The candidate discusses specific audit procedures for most of the significant accounts.

Assessment Opportunity #11 – The candidate assesses the impact of accounting adjustments on the bank covenants. (Assurance) Bank covenants The company’s bank loan is subject to two covenants: 1. Current ratio – must not be lower than 2:1 2. Debt-to-total assets ratio – must not exceed 0.5:1 Prior to any accounting adjustments, Kid’s current ratio was 6.35 and its debt-to-total assets ratio was 0.28. These ratios indicated that the company was in compliance with both bank covenants. After adjusting for the correction of accounting errors, Kid’s current ratio decreased to 0.49, and its debt-to-total assets ratio increased to 1.56. (See Exhibit IV). The result of the accounting adjustments clearly indicates that the company is in breach of both of its covenants. This could result in the bank requesting immediate repayment of the outstanding loan of $180,000. Kid currently has $410,835 cash on its balance sheet which is in excess of the amount of debt that may become payable due to the covenant breach. However Kid may require this cash in order to meet other obligations, in particular the payout of the lawsuit. They also will require cash to invest in the growth of the business. Given that Kid has some potential business opportunities, Kid should communicate these covenant breaches to the bank immediately and determine if the bank is willing to forgive the breaches or amend the lending arrangement. If the bank is not willing to forgive the breaches and is therefore planning to call the loan, the loan should be re-classified as current. For Assessment Opportunity #11 (Assurance), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts to discuss the impact of the financial statement adjustments on the debt-to-total assets covenant and the current ratio covenant. Competent – The candidate provides a reasonable discussion of the impact of the financial statement adjustments on the debt-to-total assets covenant and the current ratio covenant. Competent with distinction – The candidate provides an in-depth discussion of the impact of the financial statement adjustments on the debt-to-equity covenant and the borrowing base.

Assessment Opportunity #12 – The candidate prepares the summary of identified misstatements to date to determine whether revisions to the audit report are required and discusses the impact on the audit opinion. (Assurance) Impact of identified misstatements on the audit opinion The summary of identified misstatements to date has been prepared in Exhibit V. The total impact of the identified adjustments decreases pre-tax income by $1.4 million. Because there are uncorrected misstatements above the level of planned materiality, there is an impact on the audit opinion. To determine the type of modification required to the auditor’s report, we have to determine whether the misstatements are pervasive. According to CAS 705 – Modifications to the Opinion in the Independent Auditor’s Report, pervasive effects on the financial statements are those that are not confined to specific accounts or if they are confined to specific accounts, represent a substantial proportion of the financial statements. A qualified opinion is issued if the misstatements are material, but not pervasive to the financial statements. An adverse opinion is issued when the misstatements are both material and pervasive to the financial statements. It could be argued that each of these misstatements individually are pervasive to the financial statements, and they are certainly material. Therefore, if the errors are not corrected, an adverse opinion should be issued on Kid’s financial statements. We should first discuss with Kid’s management the impact of not making the proposed adjustments. Going concern issue 

The adjusted interim results may indicate insolvency and a breach of covenants. We will need to consider whether there are adequate signs of a potential going concern issue within the company. Signs indicating a going concern are as follows: o There is significant negative equity of almost $800,000 which indicates that the company is no longer solvent as at September 30.

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PASS o o o

o

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance The company is not profitable; rather there is a significant pre-tax loss of over $1 million in the current year Revenue is down year over year after adjusting for a reduction in 2023 revenue of $416,167 The company is currently in violation of its covenants (both the current ratio and debt/total assets). .As previously discussed although the company has cash in excess of the amount required to repay the debt, this cash may be required for other purposes. The company has a major lawsuit that may require a massive payout of as much as $2.5 million. Even if the expected payout of $1.5 million materializes and $500,000 of damages is recovered, it may be very difficult for the company to come up with the net $1 million required, especially given that the payout is expected to occur in only 9 months. Given the breach of the bank covenant it may be very difficult for the company to acquire financing to pay out the claim.

On the other hand: o Kid’s potential acquisition of BDC could result in additional income and balance sheet strength for them moving forward. o There may be an opportunity for the Kensington family to provide a personal guarantee or collateral in which case the bank may be willing to waive the covenant violation and possibly advance more cash. We should communicate with the bank to determine whether they are planning to call the loan. We will also have to do other procedures in order to confirm whether we believe the company is a going concern, such as looking at projections of cash flows and assessing the reasonableness of assumptions. Conclusion Based on the outcome of our procedures including our communication with the bank, we will first need to determine whether a material uncertainty exists. If we decide that there is a material uncertainty, adequate disclosure will have to be made in the financial statements. If this is done, we will express an unmodified opinion and include an “emphasis of matter” paragraph in our report. If adequate disclosure is not provided, since the misstatements are pervasive, we will have to express an adverse opinion. For Assessment Opportunity #12 (Assurance), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts a discussion on the summary of identified misstatements and revisions to the audit report.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

Competent – The candidate provides a reasonable discussion on the summary of identified misstatements and the revisions to the audit report. Competent with distinction – The candidate provides an in-depth discussion on the summary of identified misstatements and the revisions to the audit report.

Assessment Opportunity #13 – The candidate discusses the considerations that need to be addressed related to the quality of the data and analysis prepared by the new automation and analysis tool and used by Kid in decision making. (Assurance) Kid has recently implemented Automated Consolidation Technology Inc.’s (ACT) technology to help automate manual processes. I have been asked to discuss the considerations that need to be addressed by management related to the quality of the data and analysis prepared by the tool used in decision making. There are 5 main things that Kid’s management needs to address as it relates to the quality of information provided by the tool that is used in their decision making: 1. Dimensions of information quality: management should ensure that the information provided by the tool is relevant, easy to use, and is available on a timely basis. 2. Types of data and their attributes: the data provided by the tool should be easy to prepare and understand. 3. Professional skepticism regarding the data: management needs to be conscious of the fact that the information has been manipulated by a custom workflow in a third party software and needs to understand where data could be lost in the tool. 4. Information quality: the information used by the tool in the workflows needs to be high quality to avoid the using poor quality data in decision making. 5. Data cleansing: management should make sure the data is in a format that is easily readable. 

Since the tool allows users to develop custom work flows that achieve a desired result at the click of a button, management can specify the type of information they want to see prepared by the tool and can prepare the information easily and quickly once the custom work flow is designed.

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The tool is new to the company and requires knowledge of its available functions to be able to build custom workflows within it. It is unlikely that anyone at Kid has experience with the tool (since it is new), therefore management should ensure that they identify what training options are available for their staff to ensure that they know how to use it properly.

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PASS

Day 2 (Kid Friendly Inc.) Practical Solution – Assurance

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Management should also ensure that someone with a good technical knowledge of the tool (perhaps someone outside of the company) reviews any custom workflows developed and helps them identify if there are any functions within these workflows that could be subject to data loss.

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To address information quality, management should be sure to only use reliable input data in the tool (i.e. data coming directly from their accounting system) and avoid using already manipulated data as an input for any custom workflows.

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Lastly, the system already includes a data cleansing tool so management should ensure the data cleansing tool is used in any custom workflow developed.

For Assessment Opportunity #13 (Assurance), the candidate must be ranked in one of the following five categories: Not addressed – The candidate does not address this assessment opportunity. Nominal competence – The candidate does not attain the standard of reaching competence. Reaching competence – The candidate attempts a discussion of the qualitative considerations of the new automation and analysis tool. Competent – The candidate prepares a reasonable discussion of the qualitative considerations of the new automation and analysis tool. Competent with distinction – The candidate prepares an in-depth discussion of the qualitative considerations of the new automation and analysis tool.

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Kid Friendly Excel Solution Will be Provided Electronically