Вы находитесь на странице: 1из 19

MODULE 1

Demonstration case

(50 minutes)

Dunn, Faste & Wright

You, CGA, are a partner at Dunn, Faste & Wright, Certified General Accountants. You have been approached by Modeste Corporation (Modeste) to prepare a review engagement report for its December 31 year end that will be used to support an application for an increased line of credit with the Bank of Vegreville. William Fierce, Modeste’s controller, has informed you that he does not think there are any problems with the financial statements.

In addition to the review engagement, William also wants your opinion on his plans to change Modeste’s accounting policy regarding depreciation methods in the coming year (they are therefore not part of the review engagement for the previous year’s financial statements). Up to now, Modeste has been using tax depreciation rates and amounts for its financial reporting. However, tax losses and tax planning have meant that the depreciation amounts claimed have often been less than the maximum allowed by tax law. Modeste has been using the same depreciation amounts for both tax and financial reporting. After having gathered information on the assets’ useful lives, William has determined that financial reporting should be based on a lower rate of depreciation. He also wants a consistent depreciation expense so that Modeste can report a smoother series of accounting income for the sake of Modeste’s banker. The Bank of Vegreville has indicated that the rate on Modeste’s line of credit will be higher if the reported income fluctuates significantly from year to year.

William would also like your advice on some internal control issues that have recently arisen at Modeste. He has discovered some discrepancies between the prices negotiated verbally by buying agents and prices appearing on packing slips and invoices. William is also concerned about having received material and invoices that none of the buying agents had authorized.

As payment for the review engagement, William has offered 12.5% of the difference between the new line of credit limit and the existing credit limit. For the other two issues, William is proposing to pay you on an hourly basis at your hourly rate.

Required

In a 700- to 800-word letter to the controller, respond to his proposals for a review engagement and consulting work, including the method of compensation. Explain the key features of a review engagement to him.

Note:

Answers provided in the self-test and demonstration cases often exceed the stated word limits. These answers have been created to illustrate an “exceeds” answer. In writing responses to case studies in assignments and exams, candidates are advised to write within the time limit suggested, as this will best prepare them for writing the exam. The time limit is more critical than the word count; however, you should also be aware that conciseness is one of the attributes that is assessed in the communication competency.

Continued…

Demonstration of case analysis

This is an example of a short scenario that requires you to prepare a response to a proposal for a review engagement and consulting work, including a response to the issue of compensation. In Module 3, the case analysis approach is introduced. To give you an idea of the approach, this case will demonstrate the steps used in case analysis.

Step 1: Skim the case.

a. What is required of me and what is my role?

You are a partner at Dunn, Faste & Wright, a public practice firm. Your duty is to respond to your client’s request to provide a review engagement and consulting work. A contingency fee structure has been proposed by the client for payment of one of the services.

b. What are the main issues and why are they important to the organization?

The main issue is to determine if the proposed work can be accepted by the firm, and if so, what work would be involved and how it would be performed. This includes determining if the fee structure is acceptable ethically and ensuring the engagements do not cause any independence issues. The engagements would increase the firm’s profits.

Why are these issues important?

Fee options are important to you and your firm (Dunn, Faste & Wright) and must adhere to the code of ethics.

You must ensure that these engagements can be accepted from the viewpoint of independence. For example, if you prepared the financial statements, you would be reviewing your own work. Given your client has a controller, this is not likely; however, it should be on your list of issues.

You could become biased by doing both assurance and consulting work.

Client satisfaction with the firm’s services will be affected by the outcome of these engagements.

c. When does the issue need to be decided?

The fee options need to be explained to the client immediately, as you cannot start work on these engagements until it is clear how payment will be determined. You also need to determine if there are any independence issues immediately; otherwise, the engagements cannot be accepted. The client would prefer you to work on these engagements as quickly as possible as it will affect its financing options. However, you will need to prepare a review program before you commence the work.

d. How should I allocate my time on this case?

This case is very specific. You should start with the fee issue, and then from this decision you can move on to the other issues of the review and consulting work engagement. There is a word limit to the response, so you will need to deal with the issues in a concise manner.

Step 2: Read the case.

a. What are the key organizational factors?

Given this is a public practice firm, you need to ensure all standards are adhered to, including independence and ethics. Given you are a partner at the firm, experience with this type of engagement may be assumed.

b. Who are the affected stakeholders (investors, employees, managers, customers, suppliers, and members of the public or community)? What are their interests and what motivates them?

The affected stakeholders are Modeste Corporation, officers, shareholders, Bank of Vegreville, and creditors.

Continued…

c.

Who are the readers of any reports that I might prepare? What decisions will be made based on my report?

The senior officer of the company is your target audience, and this should be kept in mind as you prepare your response (that is, the level of your writing and use of terminology should be professional).

Step 3: Identify problems and issues.

Separate the cause from the effects and make sure you know which is which. It is the cause you want to correct; the effects will follow. The proposed contingency fees are the first issue. Next, look at the possibility of independence issues. The client’s motivation for the proposed review engagement needs to be considered. In this scenario, the cause of the bank application for an increased line of credit is the need for more funding. This may be attributed to short- or long-term liquidity needs.

Step 4: Analyze the case data.

This step may include a number of separate tasks, as follows:

a. Prioritize the issues. You must use your knowledge and judgment to determine which issue(s) must be addressed and what is the priority of issues.

The main issue in this scenario is the fee structure proposed by the client. You will need to research this in the Ethics Readings Handbook and Code of Ethical Principles and Rules of Conduct (CEPROC) to ensure that no violations are made.

The case information indicates that independence is probably not an issue since the client has its own controller. If independence were an issue in the case, it would have been more apparent from the information provided. However, you could become biased doing both assurance and consulting work, and you should watch out to make sure you don’t compromise your integrity.

The other issue in this case is from the client’s perspective — the motivation for the engagements. The review engagement may have a large implication in increasing the bank line of credit, especially if such incremental funding is required for inventory replenishment and discharge of short-term obligations.

The consulting assignment could also offer some synergies and develop expertise for other similar assignments.

b. Where possible, use both qualitative and quantitative analysis.

This case will use qualitative analysis to determine the details of the fee structure and other issues.

c. Identify any constraints and any opportunities.

The Code of Ethical Principles and Rules of Conduct and the Independence Standard must be adhered to.

Step 5: Generate alternatives.

In this case, there are two alternatives:

Option 1: Accept the proposed fee structure and thus the engagements.

Option 2: Propose alternate fee structures and/or accept only one or both of the engagements.

Continued…

Step 6: Select decision criteria.

Decision criteria help you sort through all the alternatives you have identified, ensuring that you apply a consistent standard to your analysis. Ask yourself these questions:

a. Have I considered the four ethical heuristics identified in the Ethics Readings Handbook [ERH]? (These are autonomy, non-malfeasance, beneficence, and justice. For a review, see Unit A5 of the ERH.)

Ethics is the number-one criterion in this case.

b. What organizational goals, strategy, objectives, values, principles, or critical business functions must the decision be judged against? All alternatives and recommendations should be judged against the key success factors of the organization.

Obeying the code of ethics is important for this firm. If the code is violated, the firm would face reprimand and reputation damage. Ensuring the work that is done on the engagements (if accepted) is done correctly is also important. The review must be performed according to CICA General Review Standards. However, this issue is beyond the scope of this case.

Step 7: Analyze and evaluate the alternatives.

Review the fee structure and discuss alternatives

Accepting the fee structure for the review engagement violates the code of ethics regarding the review engagement. In order to remain objective in the review engagement, accountants are not allowed to accept fees for services that may bias their work. In this case, Dunn, Faste and Wright would have motive to ensure that the client’s financial statements portray a favourable financial position such that the bank would extend the highest level of credit, which would ensure the highest fee revenue for the firm. The hourly fee for other consulting work seems appropriate.

Step 8: Make a recommendation.

From the prior analysis, it would seem that you can arrive at two possible solutions:

1. Reject the fee structure proposed and offer a fee structure based on a flat fee or hourly rate.

2. Reject the fee structure for the review engagement; offer an alternative (flat fee or hourly rate).

Step 9: Develop the action and implementation plan.

Write the letter explaining your recommendation. The client must agree to the terms of whatever alternative you conclude with. Explain to the client what constitutes a review engagement, and explain the need to sign an engagement letter before you can commence any of your work.

Continued…

Suggested solution

Note: We will consistently use the following format for letters. This is the format used in the May and May readings.

DUNN, FASTE & WRIGHT, CERTIFIED GENERAL ACCOUNTANTS 345 Downtown Street Vancouver, B.C. V6E 4A2

October 17, 20XX

Mr. William Fierce, Controller Modeste Corporation 678 Uptown Avenue Vancouver, B.C. V6E 4B3

Dear Mr. Fierce:

Dunn, Faste & Wright is pleased to be considered for your accounting needs. Before we can accept the proposed engagement, however, we need to discuss your proposed fee structure.

Fees that are contingent on decisions made by persons using formal accounting information, such as audit or review engagement reports, are not allowed by the accounting profession. The reason for this is that contingency fees would undermine the independence required of accountants in a public practice role and the credibility of our reports for third parties such as creditors. Therefore, we are unable to accept payment based on a percentage of the increase in the credit line. Typically, for a review engagement report, our firm bills on an hourly basis or on a negotiated flat rate. Both methods are acceptable to the profession. Regardless of the purpose of the review, we must still comply with general review standards outlined in the CICA Handbook — Assurance sections 8100-8600. The review will require a significant collection of evidence to support our conclusions. We will need to gain a certain level of assurance regarding the financial statements. Evidence gathering will consist of obtaining knowledge of your business; enquiry of your personnel; performing analytical procedures; and discussions with you and the management team.

On completion of our work, we will provide you with a review engagement report in accordance with General Review Standards in section 8100.15, CICA Handbook — Assurance indicating the scope of our review, the fact that the review does not constitute an audit, and a negative assurance that nothing has come to our attention that causes us to believe that the information is not, in all material respects, in compliance with appropriate standards. An explanation will be provided for areas where we have reservations and their effects. Since this is the first year that the financial statements are being reviewed, we will also need to inform users of this fact.

On the basis of the preceding discussion, therefore, we could accept the proposed engagement. We would be able to commence work on this project immediately on receipt of a signed copy of the enclosed engagement letter. In accordance with section 8100.13, CICA Handbook — Assurance, the engagement letter will include the following terms:

The services we will provide in accordance with generally accepted standards for review engagements

The anticipated form and content of the report, including any restrictions on its use

Your responsibility to provide accurate and complete information

No opinion will be expressed since we are not providing an audit

This engagement cannot be relied on to detect errors or fraud or other irregularities. We will be happy to discuss the review engagement fee with you at your earliest convenience.

Continued…

In addition to the review engagement, I can also assist in other matters. I can also review your internal controls surrounding inventory and purchasing. There are several options for tightening controls around inventory and purchasing. Modeste could utilize pre-numbered purchase orders, or establish a tracking procedure with Excel. It is important when implementing internal control procedures that all affected parties (in this case the purchaser, shipper, and accounts payable clerk) are all aware of the change in procedure and all agree it will make the operations run smoother. We can discuss your unique situation the next time we meet.

If my review of internal controls detects major discrepancies, I may need to do some substantive testing to ensure that the financial statements based on these internal controls are sound. However, it is important to make it clear that a review engagement is not designed to detect fraud.

I can also review your data on the useful life of your depreciable assets and advise whether your financial reporting should be based on CCA (or tax depreciation) rates or different rates. This may have an impact on your reported income. Section 3061, Property, Plant and Equipment, of Part II of the CICA Handbook — Accounting states that amortization shall be recognized in a rational and systematic manner appropriate to the nature of an item of property, plant, and equipment with a limited life and its use by the enterprise. For example, if a depreciable asset generates five years of revenues, it is entirely reasonable to depreciate the asset over a five-year life. Tax depreciation rates are often more generous since they are designed to also serve the government’s objective of providing incentives for businesses to invest in new assets and thereby create jobs.

While tax depreciation rates are generally higher than economic or accounting depreciation rates, many businesses do not take the maximum CCA amounts for various tax planning objectives. For example, firms do not take more CCA if they are already reporting a taxable loss. If Modeste has been claiming the same amounts for its financial reporting as it did for its tax reporting, then there is a possibility that Modeste may have understated its depreciation expense in some years.

If you change the depreciation policy this year, you will also have to change the previous year’s depreciation expense to make the financial statements comparable over time and also in accordance with section 1506.13, Accounting Changes. This should be more attractive to the bank, as it prefers borrowers who can report a smoother series of reported earnings.

Conservatism requires — among other things — assets to be reported at their depreciated values. If sufficient depreciation has not been taken in the past, historical reported incomes and reported asset balances may have been overstated. This may influence my review engagement for your last year’s financial statements.

We can assist you with both the review engagement and the consulting work concurrently, and we look forward to working with Modeste Corporation.

Sincerely,

Donald D. Wright, CGA Managing Partner

Continued…

Comments on the solution

You are expected to identify the ethical implications involved in a fee arrangement proposal. In satisfying these requirements, you demonstrate your ability to apply the ethical standards of the profession. You need to explain what constitutes a review engagement. A signed engagement letter is required before you commence the review. An understanding of the CICA Handbook is required to comment on the issues surrounding depreciation.

This is a focused short-answer question. The client has specific needs in terms of your firm’s services and has proposed a fee arrangement that you must respond to. The question is reviewing your understanding of CGA-Canada’s Code of Ethical Principles and Rules of Conduct (CEPROC). In an examination setting, you will not be asked to quote the Code. However, you are expected to be very familiar with it.

Continued…

Assessment Key

Competency Code

Competency

Baseline Competency

PK:AS:02

Determines and advises on whether to accept an engagement consistent with professional standards

Did the candidate explain that a signed engagement letter is necessary before any work begins, and outline some of the items required in an engagement letter: purpose; client will supply complete and accurate information; an audit is not conducted, so no opinion will be expressed; cannot rely on review to detect errors, fraud, or other irregularities?

PK:AS:03

Determines the scope of the engagement or management audit

Did the candidate explain the requirement for a review engagement as outlined in the CICA General Review Standards?

PR:ET:01

Applies professional ethical standards

Did the candidate explain that the accounting profession does not consider it ethically appropriate to set fees based on future benefit accrued to the client due to financial information presented?

PK:FA:02

Evaluates, interprets, and advises on accounting policies and procedures in accordance with professional standards

Did the candidate explain the implications of changing depreciation methods and/or rates?

PK:FA:05

Interprets and advises on the organization’s reporting obligations

Did the candidate explain the need to restate previous year’s expense to make the financial statements comparable?

PK:AS:08

Identifies, evaluates, and advises on internal control systems, and communicates weaknesses to the appropriate level of the organization

Did the candidate explain how corrective action for the internal control weakness may be undertaken?

PK:AS:04

Evaluates risks and business issues to determine their impact on the engagement or management audit

Did the candidate explain the potential of higher risk due to internal control weaknesses, and its impact on the review engagement?

PR:CM:03

Communicates information in a timely, clear, and concise manner

Did the candidate present a letter written to the client in good format at a level appropriate for understanding?

PR:CM:02

Prepares information in formats appropriate for specific purposes

Did the candidate communicate the issues identified in the case to the appropriate people in a timely, clear, and concise manner?

Continued…

PR:SE:03

Applies professional skepticism

Did the candidate identify the need to be aware of potential misstatement due to the contingent fee structure?

PR:IA:03

Evaluates implications and assess the appropriateness of solutions beyond the immediate or short term

Did the candidate discuss both short-term and long-term implications?

PR:PS:02

Collects, selects, verifies, and evaluates information relevant to the problem

Did the candidate analyze issues using relevant information given in the case?

LD:OE:02

Designs, evaluates, and reports on internal control systems to ensure organizational effectiveness

Did the candidate advise on appropriate internal controls systems at Modeste?

PR:SF:01

Anticipates and meets the needs and expectations of internal and external stakeholders

Did the candidate identify the needs of all stakeholders when preparing the letter for Modeste?

Continued…

Competency statements, levels of performance, and performance level descriptors

CORE AND CORE-RELATED COMPETENCIES

PK:AS:02 — Determines and advises on whether to accept an engagement consistent with professional standards (evaluates potential clients, communicates with predecessor auditor, checks for conflict of interest)

Baseline question: Did the candidate explain that a signed engagement letter is necessary before any work begins, and outlines some of the items required in an engagement letter: purpose; client will supply complete and accurate information; an audit is not conducted, so no opinion will be expressed; cannot rely on review to detect errors, fraud, or other irregularities?

Performance Level

Solution Key

 

0. NR/Inc. 1

Did not attempt or insufficient response to evaluate, OR incorrect.

1. Substantially below

Identified:

 

A review engagement is required.

2. Below

Discussed:

 

The need for an engagement letter

That the client provides the letter to the CGA (firm)

Other

 

3. Meets

Discussed AND explained:

The purpose of the engagement letter

The timing of the engagement letter

The items to be included in the engagement letter

 

o

Review as per Generally Accepted Review Standards

o

Form and content of the report

o

Management responsibility

o

No audit opinion being expressed

Other

4. Exceeds

Discussed AND explained AND advised client of:

Distinction between review engagement and audit, that is, no opinion is expressed

What engagement will not do; that is, not designed to detect fraud

Other

 

1 NR = No Response; Inc. = Incorrect

Continued…

PK:AS:03 — Determines the scope of the engagement or management audit (contents of engagement letter, client expectation, limitations on scope, timing, sign-offs)

Baseline question: Did the candidate explain the requirement for a review engagement as outlined in the CICA General Review Standards?

Performance Level

Solution Key

0. NR/Inc.

Did not attempt or insufficient response to evaluate, OR incorrect.

1. Substantially below

Identified:

A review engagement, not an audit, is required.

2. Below

Discussed:

That review engagement procedures are guided by CICA General Review Standards

 

Other

3. Meets

Discussed AND explained:

The CICA General Review Standards

The need and process for collection of evidence, and the role of the client’s staff

The type of report that will be issued

 

Other

4. Exceeds

Discussed AND explained the available data and information AND made a recommendation supported by the analysis, including the following:

The possibility of scope limitations as this is the first engagement

Additional information, if any, that will be provided regarding compliance issues

 

Other

Continued…

PR:ET:01 — Applies professional ethical standards (understands and follows the word and spirit of CGA- Canada Code of Ethical Principles and Rules of Conduct, takes action in response to situations which are contrary to the ethical code of the profession)

Baseline question: Did the candidate explain that the accounting profession does not consider it ethically appropriate to set fees based on future benefit accrued to the client due to financial information presented?

Performance Level

Solution Key

0. NR/Inc.

Did not attempt or insufficient response to evaluate, OR incorrect.

1. Substantially below

Restated the facts of the case, OR stated that there was an issue related to fees without elaborating on the issue or identifying it as an ethical issue:

An issue of fees and payment practices

2. Below

Identified the ethical issues as follows:

An issue of fees and payment practices

CGAs are bound by CEPROC.

 

Other

3. Meets

Identified AND explained the ethical issue(s):

It is acceptable to provide certain types of work, but not others, on a contingency basis.

The type of fee structure(s) permitted for each type of work

That the review engagement could not be accepted on a contingency fee basis

 

Other

4. Exceeds

Identified AND explained the ethical issue, AND recommended a realistic solution, such as the following:

A different fee structure be used for the review engagement

Potential self-interest threat exists (CGA willing to accept both assurance and non-assurance work for financial benefit).

Recommend separate group within the firm do the consulting review versus the assurance work; however, a separate group is not essential.

Potential for a self-review threat exists.

 

Other

Continued…

PK:FA:02 — Evaluates, interprets, and advises on accounting policies and procedures in accordance with professional standards (standards for not-for-profit, public and private corporations, and the public sector)

Baseline question: Did the candidate explain the implications of changing depreciation methods and/or rates?

Performance Level

Solution Key

0. NR/Inc.

Did not attempt or insufficient response to evaluate, OR incorrect.

1. Substantially below

Identified:

Tax depreciation method and rates are allowed for financial reporting.

2. Below

Discussed:

Reduced compliance costs in using the same depreciation rates for tax and financial reporting

Depreciation method and rates should be based on the matching principle.

The need for conservatism

 

Other

3. Meets

Discussed AND Explained:

Depreciation method and rates should be based on the matching principle.

While tax depreciation rates are generally higher than accounting depreciation rates, they do not always result in reporting of lower income and lower net book value of assets. This is because the actual amount of tax depreciation taken may be less than the maximum allowed because of other tax planning priorities, for example, not having enough taxable income to use the extra tax depreciation amount.

The impact of change in depreciation on net income and on asset balances

 

Other

4. Exceeds

Discussed, explained, AND advised client of:

Depreciation method and rates should be based on the matching principle.

While tax depreciation rates are generally higher than accounting depreciation rates, they do not always result in reporting of lower income and lower net book value of assets. This is because the actual amount of tax depreciation taken may be less than the maximum allowed because of other tax planning priorities, for example, not having enough taxable income to use the extra tax depreciation amount.

The impact of change in depreciation on net income and on asset balances

Change in depreciation policy could impact the review of last year’s financial statements.

 

Other

Continued…

PK:FA:05 — Interprets and advises on the organization’s reporting obligations (determining appropriate basis of accounting, determining required reporting to shareholders and to government and regulatory agencies)

Baseline question: Did the candidate explain the need to restate previous year’s expense to make the financial statements comparable?

Performance Level

Solution Key

0. NR/Inc.

Did not attempt or insufficient response to evaluate, OR incorrect.

1. Substantially below

Identified:

Depreciation expense can be changed at any time.

2. Below

Discussed:

Depreciation expense can be changed at any time with note disclosure regarding the change.

 

Other

3. Meets

Discussed AND explained:

If depreciation policy changed, previous year’s depreciation expense changed to make the financial statements comparable over time

 

Other

4. Exceeds

Discussed, explained AND advised client that:

If depreciation policy changed, previous year’s depreciation expense changed to make the financial statements comparable over time. This should be more attractive to the bank since banks prefer borrowers who can report a smoother series of reported earnings.

 

Other

Continued…

PK:AS:08 — Identifies, evaluates, and advises on internal control systems, and communicates weaknesses to the appropriate level of the organization (financial approval authority, credit control, segregation of duties, evaluation of fraud risk factors)

Baseline question: Did the candidate explain how corrective action for the internal control weakness may be undertaken?

Performance Level

Solution Key

0. NR/Inc.

Did not attempt or insufficient response to evaluate, OR incorrect.

1. Substantially below

Stated that internal control is important but did not elaborate.

2. Below

Identified why internal control is important for Modeste:

It could increase purchasing costs.

It could result in the wrong kind of inventory and excess inventory.

Other

3. Meets

Identified AND explained the general plan to address the internal control weakness:

Utilize pre-numbered purchase orders or establish a tracking procedure with Excel.

Inform all affected parties (purchaser, shipper, and accounts payable clerk) so that operations run smoother.

Specifics can be discussed once engagement begins.

Other

4. Exceeds

Identified, explained, AND discussed the steps required to have sound internal control system AND incorporated information from the case to support the discussion, including the following:

The need for the chief buying agent to authorize all buying

Information not readily shared with others

Information needed to ensure inventory received

Information needed to ensure wrong inventory not received

Information needed to ensure invoice amount is correct

Other

Continued…

PK:AS:04 — Evaluates risks and business issues (nature of organization, control environment) to determine their impact on the engagement or management audit (extent, materiality, nature, and timing of engagement)

Baseline question: Did the candidate explain the potential of higher risk due to internal control weaknesses, and its impact on the review engagement?

Performance Level

Solution Key

0. NR/Inc.

Did not attempt or insufficient response to evaluate, OR incorrect.

1. Substantially below

Identified:

Risk of weak internal controls, but did not connect to review engagement

2. Below

Discussed:

Risk of weak internal controls, but did not connect to review engagement

Turned down review engagement

 

Other

3. Meets

Discussed AND explained:

The implications of weaknesses detected in the internal control system could increase the scope of the engagement.

Higher risk does not preclude accepting review engagements.

 

Other

4. Exceeds

Discussed, explained, AND advised client:

The implications of weaknesses detected in the internal control system could increase the scope of the engagement.

Higher risk does not preclude accepting review engagements.

What engagement will not do (not designed to detect fraud)

 

Other

Continued…

PROFESSIONAL QUALITIES AND SKILLS

PR:CM:03 — Communicates information in a timely, clear, and concise manner (explains quantitative and qualitative information in language adapted to various stakeholders)

Baseline question: Did the candidate present a letter written to the client in good format at a level appropriate for understanding?

Performance Level

Solution Key

0.

NR/Inc.

Failed to address the competency.

1. Substantially below

Answer was hard to follow.

2. Below

Answer was understandable (logical), although assessor needed to make many assumptions.

3.

Meets

Answer was understandable (logical) and written in a clear and concise manner, such that the assessor needed to make few assumptions.

4.

Exceeds

Answer was understandable (logical) and written in a clear and concise manner, such that the assessor needed to make no assumptions.

PR:CM:02 — Prepares information in formats appropriate for specific purposes (audit reports, memos, management letters, consulting reports, financial reports)

Baseline question: Did the candidate communicate the issues identified in the case to the appropriate people in a timely, clear, and concise manner?

Performance Level

Suggested Key

0. NR/Inc.

Failed to address the competency.

1. Substantially below

In the requested format (for example, memo) and had 0 characteristics.

2.Below

In the requested format and had 1 key characteristic.

3. Meets

In the requested format and had 2 characteristics.

4. Exceeds

In the requested format and had 3 key characteristics. Key characteristics:

Appropriate tone

Appropriate language

Well-organized

Continued…

PR:SE:03 — Applies professional skepticism (maintains an inquisitive mind that is vigilant for potential misstatements, considers where problems are likely to arise and monitors these areas)

Baseline question: Did the candidate identify the need to be aware of potential misstatement due to the contingent fee structure?

Performance Level

Solution Key

0.

NR/Inc.

Failed to address the competency.

1.

Substantially below

Restated facts from case.

2.Below

Stated that there is a possibility for misstatement.

3.

Meets

Stated AND identified that there is a possibility for misstatement and related it to the proposed fee structure.

4.

Exceeds

Stated AND identified that there is a possibility for misstatement, related it to the proposed fee structure, AND proposed an audit program that would provide the necessary level of assurance.

PR:IA:03 — Evaluates implications and assesses the appropriateness of solutions beyond the immediate or short term (considers potential impact of decisions on other systems and processes, such as internal controls, impact on other departments, or other functional areas)

Baseline question: Did the candidate discuss both short-term and long-term implications?

Performance Level

Solution Key

0. NR/Inc.

Failed to address the competency.

1. Substantially below

Demonstrated a limited understanding of the long-term implications.

2.Below

Identified both some short-term and long-term implications, including two or fewer of the following:

The effects of changing the depreciation policy

The effect of the restatement of prior year financial statements

The effect of the changes on internal control procedures

3. Meets

Identified AND discussed both short-term and long-term implications, including the all of following:

The effects of changing the depreciation policy

The effect of the restatement of prior year financial statements

The effect of the changes on internal control procedures

4. Exceeds

Identified and discussed both short-term and long-term implications AND made a recommendation.

Continued…

PR:PS:02 — Collects, selects, verifies, and evaluates information relevant to the problem

Baseline question: Did the candidate analyze issues using relevant information given in the case?

Performance Level

Solution Key

0.

NR/Inc.

Failed to address the competency.

1.

Substantially below

Cited specific information from the case OR analyzed irrelevant information.

2.Below

Analyzed irrelevant information AND omitted to analyze one of the major issues in the case.

3.

Meets

Analyzed the major issues in the case using relevant information in his/her discussion of the issue(s).

4.

Exceeds

Analyzed the major issues in the case using relevant information in discussion of the issue(s) AND discussed potential long-term implications beyond those explicitly raised by the case.

LD:OE:02 — Designs, evaluates, and reports on internal control systems to ensure organizational effectiveness.

Baseline question: Did the candidate advise on appropriate internal controls systems at Modeste?

Performance Level

Solution Key

0. NR/Inc.

Failed to address the competency.

1. Substantially below

Cited specific information from the case related to internal controls OR analyzed irrelevant information.

2.Below

Advised on one of the two internal control issues in the case.

3. Meets

Advised on both internal control issues in the case:

To reduce price discrepancy, have pre-numbered POs.

To ensure materials received have been ordered, match the delivery to the pre-numbered PO.

4. Exceeds

Further advised that having internal controls will help operations run smoother, and may increase profits in the long term.

PR:SF:01 — Anticipates and meets the needs and expectations of internal and external stakeholders (develops a sound understanding of the organization and its business environment, determines what information is needed by various stakeholders, seeks feedback from various stakeholders, provides relevant and timely information for decision making)

Baseline question: Did the candidate identify the needs of all stakeholders when preparing the letter for Modeste?

Performance Level

Solution Key

0. NR/Inc.

Failed to address the competency.

1. Substantially below

Restated facts from the case.

2. Below

Identified one or two stakeholders but not all.

3. Meets

Identified relevant stakeholders AND analyzed the facts against the needs of those stakeholders.

4. Exceeds

Identified relevant stakeholders, analyzed the facts against the needs of those stakeholders, AND made a recommendation with the needs of the stakeholders in mind.