In this article, you will learn Unit 1 of the CPA Canada’s Core 1 module. If you’re new to Core 1, I recommend reading the CPA Core 1 Module guide for introduction on the module and blueprint for the exam. I suggest downloading the Core 1 syllabus here.
Core 1 – Unit 1: Summary
Core 1 module is 8-weeks long, each week with a corresponding unit covering various technical topics and assignments. Unit 1 contains the first set of technical readings and assignments.
- 1: Technicals
- 1.1 Financial Reporting
- Accounting Principles, Assumptions and Concepts
- The Conceptual Framework
- Accounting Standards
- CPA Canada Handbook
- Revenue — ASPE
- Revenue — IFRS
- Revenue — Specific Applications
- Inventory
- Property, Plant, and Equipment
- Current Liabilities
- Investment Property
- 1.2 Assurance
- Assurance and Audit Defined
- The Regulatory Framework for Assurance
- Client Acceptance and Continuance
- Planning — Introduction to Audit Planning
- Planning — Risk Assessment
- Planning — Going Concern Considerations
- Planning — Fraud and Other Risk Considerations
- Planning — Approach and Strategy Considerations
- Planning — Materiality
- 2: Assignments
- 2.1 Practice case: Power Plan Inc (PPI)
- 2.1 Integrated problem (IP) #1
Unit 1: Technicals
Financial Reporting (FR)
Accounting Principles, Assumptions and Concepts
This topic contains basic information about accounting principles and concepts.
How can it be tested? The most common way of testing this chapter is asking you about the elements of F/S. For example, you can be asked to compare different classes of assets, such as assets vs income, liabilities vs expenses, and different equity items. You would quote sections from the Handbook to answer this. A case may ask you to prepare F/S adjustments and their impact on equity. An issue may also ask you to perform an analysis on GAAP vs cash basis of accounting (cash-based vs accrual-based accounting). This will require you to discuss the comparability, timeliness and understandability of the reporting framework. Measurement is also a common topic tested here, which requires you to assess different methods of measurement, such as fair value vs cost.
The Conceptual Framework & Accounting Standards
Accounting standards are the commonly accepted way of reporting financial accounting information in Canada. There are three common accounting standards: ASPE, IFRS and ASNPO (Accounting Standards for Not-for-Profit Organizations). There is also PSA (public sector accounting), but these are not usually tested in Core 1.
How can it be tested? You may get a Core 1 case where it doesn’t explicitly state which framework the company reports under, but may provide details such as the company is public (IFRS) or private (typically ASPE), that will lead you to analyze the appropriate framework to use. You would be required provide a recommendation on whether a private company should adopt ASPE or IFRS. This would require you to consider the company’s resources, usefulness to investors and creditors, and use of decision making. An issue may also require you to compare different FR issues under the two frameworks.
CPA Canada Handbook
This topic covers the basic of the CPA Canada Handbook (HB). Become familiar with the structure of the HB. Each standard begins with paragraphs that discuss the objective and scope of the standard, followed by definitions of key terms used within the standard.
How can it be tested? The most common way the HB is tested is through assessing under corresponding frameworks such as IFRS, ASPE, and ASNPO. Financial reporting (FR) issues will require criteria for definition, recognition, measurement assessment, and so on, that will require you to reference and locate the applicable standard. The handbook can be accessed in Knotia and during the CPA exams.
Revenue — ASPE
Revenue recognition is a very popular topic tested in Core 1. Revenue recognition is the process of recording the revenue that a business earns. It’s about recognizing sales at the time when a company truly earns it, rather than when the money is received. Under ASPE, this is part of section 3400.
How can it be tested? The most common way this is tested is through recognition and measurement rules. For example, for the sale of goods or services to a customer, you may be asked to determine when revenue can be recorded. In this case, you would discuss the three major HB criteria: performance achievement, collection, and the amount of consideration. For measurement, you can be asked to evaluate the percentage of completion method vs the completed contract method and which one is more appropriate using case facts. Revenue may also be tested in the form of interest, royalties, right of return, and various other scenarios.
Revenue — IFRS
Similar to above, this is revenue recognition topic, but this time under IFRS standard. This is covered under IFRS 15.
How can it be tested? The most common way this is tested is through recognition and measurement rules. Typically, IFRS 15 is tested through revenue transactions related to multiple deliverables / distinct performance obligations. For recognition, you would evaluate recognition using the five-step model of HB criteria. For measurement, you would allocate the transaction price, and assessing if revenue is satisfied over time or at a point in time using case facts. It is also common to see measurement tested through discount offers and loyalty programs.
Revenue — Specific Applications
This topic deals with how exactly revenue can be applied. In both ASPE and IFRS Revenue sections, non-routine or complex applications are common given the complexity of revenue recognition process.
How can it be tested? There are 15 common ways you can be tested on revenue. For example, may be asked to determine gross vs net reporting for principle-agent arrangements, consignment arrangements, long-term contracts, bill-and-hold, loyalty points, and so on. For measurement, you can be asked to determine how right of return, rebates and volume discounts to be recorded. Using case facts, calculate this and recommend AJE.
Inventory
Inventory financial reporting is about tracking and valuing the goods a company has on hand, which can be products waiting to be sold or materials to create those products. Inventory is covered under ASPE 3031 and IAS 23.
How can it be tested? The most common way you’ll get tested is through definition and measurement rules. For example, the AO may ask whether an item is an inventory vs PPE. In this case, discuss the definition using the HB. For measurement, you can be asked what’s included in the initial cost and if the inventory is measured at lower of cost or NRV. Using case facts, calculate this and recommend AJE.
Property, Plant, and Equipment
Financial reporting for Property, Plant, and Equipment (PPE) involves accounting for the tangible assets that a company uses to produce goods or offer services over the long term. PPE is covered under ASPE 3061 and IAS 16.
How can it be tested? The most common way this is tested is through definition and measurement rules. Definition can be applied through purchase of an asset, or through an additional major component. For measurement, you can be asked what the total capitalization should consist of (delivery, installation, etc.) and subsequent treatment for depreciation method.
Current Liabilities
Current liabilities are short-term financial obligations that a company needs to settle within one year or within its normal operating cycle. Current liabilities are covered under ASPE 1500, and many sections under IFRS including IFRS 9, IAS 32 and IAS 37.
How can it be tested? The most common way this is tested is through presentation and understanding the timing of economic resources for measurement. For example, you may be asked to reclass bank loans between current vs non-current or determine current measurement for unearned revenues and warranties.
Investment Property
Investment property is real estate assets purchased with the intention of earning returns through rental income or appreciation in value, rather than for use in daily business operations (like headquarters or manufacturing building). Investment Property is covered in IAS 40, and there is no specific guidance under ASPE.
How can it be tested? The most common way this is tested is through definition and measurement. For example, you may be asked to determine if a purchased property meets the characteristics of an investment property using the HB criteria. For measurement, you can be asked to determine the initial measurement at the purchase price plus any costs to prepare the location. You may also be asked to evaluate the choice of the fair value model vs the cost model for subsequent measurement.
Assurance (AS)
Assurance and Audit Defined
The focus of this topic is providing guidance on the purpose and types of engagements.
How can it be tested? Common way for this to be tested could be through a high-level comparison of an audit vs review engagement, and the differences in the level of assurance. Another common way material in this chapter can be tested is understanding the stages of an audit, the parties involved, and the level of communication. For example, this can include describing to management their responsibilities vs the auditor’s responsibilities. You may also be asked to describe the various components of an auditor’s report, including the critical area of the audit opinion and the different results.
The Regulatory Framework for Assurance
This section introduces the standards in the CPA Canada Handbook – Assurance (Canadian Standards on Quality Management, Canadian Auditing Standards, Other Canadian Standards, etc.). The most common section is Canadian Auditing Standards (CAS).
How can it be tested? The most common way this is tested is through various issues requiring criteria/technical discussion from the CAS. Another common way for this section to be tested would be on emerging issues, such as crypto-assets. The handbook can be accessed in Knotia and during the CPA exams as follows:
Client Acceptance and Continuance
This is the first stage of audit. This is the process of accepting a new client, or deciding to continue with an existing client. In Client Acceptance, the auditor decides if they should work with a new client, looking at things like honesty and risks. In Continuance, the auditor checks if they should keep working with a current client, seeing if anything major has changed. Both steps help make sure the auditor can do their job fairly and without any problems, keeping the audit trustworthy. Client Acceptable and Continuance is covered in CSQC1, CAS 210 and CAS 220.
How can it be tested? The most common way to be tested on this is to assess prior to an audit if the audit firm can take on the new company as a client. For example, you would be required to discuss and analyze using case facts the client integrity, the competence/resources of the engagement team, and independence issues. Independence is often a key topic to be tested, in relation to both parties as well as individual team members. Another way this chapter can be tested is through helping a company understand the initial steps of the audit, which would include acknowledgement from management on responsibilities, an engagement letter, etc.
Planning — Introduction to Audit Planning
This is the second stage of audit. It’s about creating an audit plan and audit strategy. In CPA Canada cases, we use the format RAMP to answer audit planning questions. RAMP means: Risk, Approach, Materiality, and Procedures.
How can it be tested? The most common way to test material from this chapter is through development of the audit strategy and audit plan. You can be asked to discuss the scope, timing or direction of an audit, or to review the appropriateness of the planning process thus far by reviewing another auditor’s work. This section introduces the audit planning memo: 1. Risk 2. Approach 3. Materiality 4. Procedures (remember acronym RAMP) which are assessed in detail in later chapters.
Planning — Risk Assessment
This is the continuation of audit planning topic above. This is the first part of RAMP, which is Risk assessment. The audit risk model and risks of material misstatement are covered in CAS 200 and CAS 315 accordingly.
How can it be tested? This is often tested as part of the audit planning memo (APM) question. You may be asked to prepare the risk assessment from scratch, or to assess the reasonability of the audit risk prepared by a junior staff member. For example, you will be discussing the impact of control weaknesses, financial reporting issues, covenants, etc. on the risk for the audit and how this impacts the accuracy of the financial statements. This is then used to determine an overall financial statement level (OFSL) of low, medium or high. Note that in most CPA cases, this will be high.
Planning — Going Concern Considerations
Going concern in audit refers to the idea that a company will keep operating for the foreseeable future, usually at least the next 12 months. Auditors look at company’s financial health, debts, income, and other factors to decide if there are any big worries about company closing down. If the auditor has concerns, they might note that there’s a “going concern issue,” which is a warning that the company might not be stable enough to keep going as it is. Going concern is covered in CAS 570.
How can it be tested? The most common way this is tested is in discussing the auditor’s responsibilities in the audit related to going concern, and the implications on the auditor’s report. This type of AO can often be implicit, and would require you to identify events or indicators of going concern, whether they be financial (adverse financial ratios, reliance on short-term financing, operating losses, etc.) or operating indicators (key management departures, labour issues, loss of market share, etc.). For example, if you determine a going concern is present, you may also be asked to discuss additional procedures, including assessing the appropriateness of management’s assumptions.
Planning — Fraud and Other Risk Considerations
Fraud in an audit refers to intentional deception that leads to false information in the F/S. It can be false revenue, hiding liabilities, or incorrect expenses to make a company look better than it really is. Auditors are looking for clues that there may be fraud, by checking records, talking to management and staff, and various other techniques. Fraud is covered in CAS 240.
How can it be tested? The most common way for this topic to be tested is to determine if there is a risk of fraud within a company. Note that this is often commonly an implicit AO, but that there will be several indicators signaling potential fraud. You will be required to describe the fraud triangle using case facts: incentives and pressures, rationalization and attitude, and opportunity. Additionally, it is common for you to have to describe how fraud risk affects the risk of material misstatement, and the auditor’s response to fraud (professional skepticism, additional procedures on key risk areas, communication of findings). A common example of fraud can be seen in cases is through Related Party Transactions.
Planning — Approach and Strategy Considerations
This is the second part of RAMP, which is Approach. The approach is covered in CAS 330.
How can it be tested? It’s often tested as part of the audit planning memo question. You may be asked to prepare the approach from scratch, or to assess the reasonability of the approach prepared by a junior staff member. The most common way for this to be tested is to determine which type of approach should be used: substantive and combined. This would include an assessment of the control risk and identifying any control weaknesses and strengths. Another way this chapter can be tested would be an assessment on opening balances (CAS 510), use of an export where you will need to discuss evaluating the appropriateness of management’s expert’s work, or using the work of internal audit (CAS 610).
Planning — Materiality
This is the third part of RAMP, which is Materiality. Materiality is covered in CAS 320.
How can it be tested? It is often tested as part of the audit planning memo process. You may be asked to determine materiality from scratch, or to assess the reasonability of materiality prepared by a junior staff member. As part of determining materiality, it’s important to identify the users (investors, creditors, owners, etc.) and discuss their objectives to identify a benchmark (normalized profit before tax, total assets, etc.). Another common way this can be tested is to determine how FR issues/adjustments impact the overall materiality and performance materiality.
IP#1
The IP (integrated problem) for unit 1 follows a manufacturing company of custom furniture reporting under ASPE. The company is founded by Lisa, who is starting to think about retirement, and also considering selling her business in the short-term.
To approach this problem, you are taking on the role of financial advisory services. You are being asked to review some financial reporting issues, which will require you to discuss criteria from the handbook. Because you are dealing with a furniture company that sells to customers, it’s important to watch out for any revenue recognition and classification / valuation of equipment.
An important takeaway from this IP is that there is a covenant compliance to consider. The impact of the covenant should be considered with each adjustment to the financial statements. The first week is unique as the IP also includes completing the workshop survey.
PC#1 “Power Plant Inc” (PPI)
Case Intro
Power Plant Inc. (PPI) follows a gardening company owned by two sisters, that provides services to both residential and commercial properties. For this case, you are representing a senior on the PPI review engagement.
Typically, the weekly PCs will have 5-6 AOs. For PPI, there are 6 AOs.
Common Triggers
The company currently operates in two types of properties. When dealing with different sectors or products, coupled with the increase in costs the industry/PPI has faced, this can be a common trigger that profitability may need to be reviewed for each of the segments.
Due to the financial stress PPI is under, they have terminated their full-time accountant and replaced them with a part-time bookkeeper that does not have a strong technical knowledge. This is typically a trigger to keep an eye out for FR discussions, as there are likely to be errors with how they were prepared.
Because your role is a part of the review engagement, be on the lookout for Assurance related requests.
Handbook Sections
PPI does follow ASPE standards. The following sections should be reviewed:
- CAS 200 and CAS 315 – Audit Risk Model and Risks of Material Misstatement
- CAS 320 – Materiality
- CAS 330 – Approach
- ASPE 3063 – Impairment of Long-lived Assets
- ASPE 3400 – Revenue
- ASPE 3031 – Inventories
Watch-Outs
It’s always a good idea to track the current month the task is taking place, as well as the year-end so any adjustments can be accounted for in the correct period, and you can account for any proration.
Similarly, to the IP for this week, an important takeaway is that there is a covenant compliance to consider.
Common Mistakes
While most requireds you will find within the first page of the case, this is not always the case. For this PC, the covenant is mentioned in a note on page 2, so it’s important for candidates to read through the entire case first before allocating time to each AO and completing their plan.
Time-Savers
As you are reading the case, it’s a good idea to identify / highlight background information that could be applicable to qualitative AOs, to ensure you do not have to reread the case. For example, in PPI, there were several facts in the first page that were useful for the risk assessment required.
To save time on FR AOs, consider what is the issue at hand. For example, if the issue is valuation, it is not required to discuss definition criteria. It’s critical to assess if the issue is classification (definition), or recognition, or valuation, so the necessary information can be discussed. You can also be brief with your issue statement to keep it concise (1-2 sentences).
For FR and Assurance AOs, ensure you are comfortable with how to use the Handbook, and where to find the appropriate sections. This will ensure you are able to access criteria quickly and can focus your allotted time on the discussion components.
Extra resources
Extra Core 1 study resources are available at Core 1 Review course.
