Category Archives: Case Analysis

How to pass CPA CFE 2019 Day 1

I found that many students are finding difficulty in passing CPA CFE day 1 exam. Even in 2018, well qualified CA from India and other countries could not get success in passing day 1 exam. Some have approach me to put one course exclusively for Day 1. I provide below in brief some important hints to pass this exam at first attempt.

Day 1 – Evaluating your soft / professional skills (4 hours)

The first day of the CFE is a Pass/Fail mark treated separately and distinctly from Day 2 or 3. You can pass or fail Day 1 regardless of how you do on Day 2 and Day 3. Similarly, if you fail Day 1, you need to re-do, and successfully complete Day 1 regardless of how you did in Day 2 or 3. Day 1 is linked to the Capstone 1 module with the case being directly tied to your Capstone 1 case. You are provided with the original Capstone 1 case (not your solution) and the updated information on your CFE case. Day 1 tests your soft/professional skills, at a senior management level discussion.  You are not expected to discuss accounting or other technical competencies in any great detail but focus on the ‘enabling competencies’.

Capstone 1 case is mainly focusing enabling competencies. Therefore report will focus enabling competencies in depth and technical up to level 1. Enabling competencies are, problems solving and professional judgement, leadership, ethical, communication and etc. (refer CPA competency map). Capstone one case is mainly related with problem solving issue.

  • Know your Capstone 1 case inside and out ahead of time
  • Broad thinking and integration of case facts
  • Assess the situation and what needs to be done (situation analysis)
  • Analyze the major issues
  • Conclude and provide useful advice (solution)
  • Ensure your communication is clear

Student should focus on big picture, prioritize issues, perform both quantitative and qualitative analysis, use appropriate tools for quantitative analysis, and provide your answer looking into internal and external environment of the company.

Students are required to prepare a report. See the format of report in detail. In situation analysis, provide present environment, assess the situation with tools like, Portal Five forces, PESTAL analysis and SWOT analysis.

In second part analyse various issues, prioritize it, provide financial analysis wherever required, and your recommendation to resolve the issue.

In conclusion, suggest best course of action based on your analysis.

Also ensure that you will watch for the time limit of 4 hours. Do not put more input in situation analysis, major part is main issues significantly affecting the decision, and brief conclusive summary.

Marker will assess your holistic approach to the case; answers may be more than one.

If anyone need any more information and like to go for coaching for Day 1 and or for full exam, please visit my website www.beyond.coach, cell: 16475056648, email: pcdesai1454@gmail.com. Beyond Accounting Coaching Services…Paresh Desai CPA-CGA, CMA (USA) FCMA(India)

 

 

 

 

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CFE MAY 2016/ SEPT 2016

Many students across Canada are thinking to appear in the final exam either in May or in September 2016 to get the designation of CPA. Some are repeater, some are for the first time, some are from either CGA or CMA.

The big question is how to get through this exam? Exam is not as easy as your earlier courses. It requires hard work to understand conceptual technical knowledge of all six competency area i.e. Financial Accounting, Management Accounting, Audit, Finance, Taxation, Strategy and Governance. Exam is evaluated on the basis of case analysis approach through depth and breadth of related competency. You should plan out your schedule of taking Capston1, Capston2 and CFE exam. You should also plan out your availability of time to cover all above courses.

Students should not jump out in writing case analysis directly. They must go through all important concepts related to technical subjects and ensure its accuracy through practice of related MCQ. Many students who failed in this exam are on account of lack of technical knowledge. Once if you are strong in technical concepts, it will be easier for you to write any case analysis effectively.

Students should also know the effective writing skill and approach to write the case analysis.
I am publishing one book exclusively for CFE shortly which contains all technical course concepts with lot of high value MCQ. On line lectures will also available for students to get confidence in the exam. For latest updates visit CFE CPA Tutor Home Page.

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CHARTERED PROFESSIONAL ACCOUNTANT

Some Excerpts from the CPA CANADA Website in Nutshell

A unique and very impressive designation for accountancy profession in Canada. Three big

accounting bodies CGA, CMA and CA has now merged into a single accounting entity for global

development of the profession in Canada.

Summary of course content:

1. CPA-PREP

2. CPA-PEP

3. CPA-CFE

A student either a under graduate or graduate in any discipline can select respective step 1 or 2

to start with the program. An under graduate student need to complete related modules in

CPA-PREP if he has not done in his earlier educational courses.

CPA- PEP consists of core 1, core 2 and any two of available four elective modules. Core 1 is

related with Financial Reporting and core 2 is related with Management Accounting.Four

elective module consists of Finance, Performance Accounting, Assurance and Taxation.

Assurance and Taxation are must for Public Accounting practice. Student need to pass all four

exams at the end of each module. Exam is related with about 25 % with MCQ and short

questions and 75 % with case analysis

CPA-CFE consists of three day exam and is must for all students to pass and get the designation

of CPA

Capstone one and Capstone 2 are a part for preparation for CFE

Day-1 include one case analysis of 4 hour duration based on enabling competencies related

with ethics , problem solving, leadership and communication skill.

Day-2 include 5 hour of one big case analysis in which student need to select core area of his

choice and need to provide response

Day-3 include 3 hour of exam consists of three short case analysis of a different nature

Student need to pass individually day 1 to day three exam

CFE exam is related with 25 % with MCQ and 75 % with case analysis

In short student should be competent enough in related technical course concepts and solving

MCQ to pass CPA

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Activity Base Costing

ACTIVITY-BASED COSTING

 Activity-based costing is a two-stage costing method that creates a cost pool for each major activity in an organization (such as setups required, purchase orders issued, and so on). Overhead costs are assigned to products and services on the basis of the number of iterations of each activity involved in manufacturing the product or providing the service.

 Activity-based costing (ABC) is a better, more accurate way of allocating overhead.

The steps to product costing are:

1.  Identify the cost object;

2.  Identify the direct costs associated with the cost object;

3.  Identify overhead costs;

4.  Select the cost allocation base for assigning overhead costs to the cost object;

5.  Develop the overhead rate per unit for allocating overhead to the cost object.

Activity-based costing refines steps #3 and #4 by dividing large heterogeneous cost pools into multiple smaller, homogeneous cost pools. ABC then attempts to select, as the cost allocation base for each overhead cost pool, a cost driver that best captures the cause and effect relationship between the cost object and the incurrence of overhead costs. Often, the best cost driver is a nonfinancial variable.

ABC can become quite elaborate. For example, it is often beneficial to employ a two-stage allocation process whereby overhead costs are allocated to intermediate cost pools in the first stage, and then allocated from these intermediate cost pools to products in the second stage. Why is this intermediate step useful? Because it allows the introduction of multiple cost drivers for a single overhead cost item.

ABC focuses on activities. A key assumption in activity-based costing is that overhead costs are caused by a variety of activities, and that different products utilize these activities in a non-homogeneous fashion. Usually, costing the activity is an intermediate step in the allocation of overhead costs to products, in order to obtain more accurate product cost information. Sometimes, however, the activity itself is the cost object of interest.

Activity base costing system is more useful where the proportion of fixed expenses are higher in total cost of manufacturing.

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CAPITAL INVESTMENT ALTERNATIVES

EVALUATION OF CAPITAL INVESTMENT ALTERNATIVES

Capital investment proposals are evaluated based on following financial tools.

Methods used include:

  • Net Present Value (NPV)
  • Internal Rate of Return (IRR)
  • Payback Period and Discounted Payback Period
  • Profitability Index (PI)

INTERNAL RATE OF RETURN

The IRR is the discount rate at which the PV of future benefits exactly equals the PV of the investment (in other words, a zero NPV)

  • All the relevant cash flows discussed in the  calculation of the NPV are also relevant here however the rate at which we are discounting the cash flows is unknown
  • The only way (even for a computer) is to substitute different discount rates into the equation until the resultant NPV comes to zero (this is known as trial and error)

NPV VS IRR

If the IRR is greater than the WACC, the project should be accepted.

  • This decision will always be compatible with the decision obtained from NPV analysis because a positive NPV automatically means that the IRR is greater than the WACC
  • A difficulty arises when comparing two mutually exclusive projects
  • There is an important and close relationship between NPV and IRR. The NPV is greater than zero if and only if the IRR is greater than the discount rate. This relationship implies that if a single proposed capital investment is considered in isolation, both NPV and IRR will provide the same answer to the question of whether or not the investment should be undertaken. However, NPV and IRR need not provide the same answer if projects that require different investments are compared. In conclusion, NPV and IRR need not rank projects equivalently, if the projects differ in size.
  • The project with the highest NPV may not have the highest IRR
  • Under such circumstances, the NPV is always the criteria to use

PAY BACK PERIOD

A simple approach to capital budgeting that is designed to tell you how many years it will take to recover the initial investment.

  • It is often used by financial managers as one of a set of investment screens, because it gives the manager an intuitive sense of the project’s risk.
  • The calculation can be performed without considering the time value of money or by considering time value (discounted payback).

PROFITABILITY INDEX (PI)

Another measure that can help in ranking the projects when several are involved is the profitability index (PI)

  • Uses exactly the same figures as are needed for the NPV and is calculated as the ratio of the PV of net cash benefits to the PV of the investment.
  • A ratio greater than 1.0 will always result when the NPV is positive
  • When the NPV is zero, the PI will be exactly 1.0

All three measurements (NPV, IRR and PI) will result in the same decision for a particular investment

 

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LONG TERM FINANCE

LONG TERM FINANCE

Ideal capital structure is composing of mixture of debt and equity finance. Debt is a cheaper source of finance as interest cost is tax deductible, while dividend on equity is taxable. However one cannot opt for exclusive debt finance on account of restriction by lenders and availability of sufficient amount of cash flow to service the debt.

Following are the pros and cons of various long term source of finance. For ideal capital structure one need to evaluate all these options before making the final selection.

COMMON SHARES

Advantages:

  • Right to vote
  • Right to transfer through sale of shares
  • Right of earning
  • Limited liability

Disadvantages:

  • Least priority in profit
  • High cost while floating in public
  • Dividend is not tax deductible

PREFERENCE SHARES

Preferred shares with redemption privileges are very similar to debt with a fixed payment each year- the accounting for such shares is to treat them as debt and not equity. Preference shares without redemption privilege are treated as equity.

Advantages:

  • Diviend can be differed for future years
  • Debt equity ratio may improve
  • No dilution of control on account of non-voting power
  • No charge on assets like bank loan

Dis-advantages:

  • In case of liquidity, last priority but before common shares
  • Return is limited and fixed
  • No voting right
  • Dividend is not tax deductible

 BANK LOAN

Advantages:

  • Easy form of finance, obtained quickly
  • Less costly compare to other finance as interest cost is tax deductible

Disadvantages:

  • Have to observe bank convent
  • Charge on assets by bank
  • Debt to equity ratio may go up

Bonds

Bonds will require regular cash outflows to pay the interest expense but this differs from a loan in that no principal repayments are required before the bond is due. The interest expense is deductible for tax purposes. It will increase debt equity ratio.

Fully Convertible bonds

The fully convertible debentures are comprised of two components: a financial liability with a contractual arrangement to deliver cash at a specified time and an equity instrument where the holder is to convert it into a fixed number of shares at the end of X years. For accounting purposes, it would be required to record the liability and equity components separately. This will impact the debt-to-equity ratio by the amount recorded under each component and could result in a breach of the debt covenant. It will also be required to clearly disclose the specific characteristics of the fully convertible debt in the financial statements.

 

 

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IT System and Audit Risk

IT System and Audit Risk

Audit risk has a direct co-relation with IT system in an organisation.  Whenever organisation is planning and implementing new IT system or upgrading the present one, control risk will increase on account of change in flow of activities. Following are the possible scenario where IT system needs improvement or an implementation of a new or revise version of the present system.

  • In case of merger
  • In case of expansion by issue of equity shares
  • In case of expansion in foreign subsidiaries
  • In NFPO( Not For Profit Organisation), where present system is a manual one or needs upgrade  due to problems in the existing system
  • In case of old and out dated present IT system

In all above situation, control risk will increase and as such audit risk will decrease. Auditor will require collecting more evidences with substantive testing.

Audit and IT Environment

Due diligence and care is required while performing an audit with IT environment in an organisation. All accounting transactions are processed now a day through computer program and as such it will be difficult for the auditor to track and verify the accuracy. Auditor can do audit around the computer and audit within the computer through certain techniques. He can verify input record and output records, can do analysis, perform reasonability check and or do computation on calculators. He can verify management policies and procedures. He can also check programing by entering sample transaction in his own software to ensure accuracy and reliability of financial data.

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Technical Knowledge & Case Writing

Technical Knowledge & Case Writing

 

Technical knowledge is very important part for PA exam. Many students do not have enough exposure to previous courses on account of long time gap. Also students found migrating from different countries and obtained exemption from courses studied in their countries. PA exam test the knowledge of students on main concepts they learned and passed out earlier. This knowledge is very important to solve MCQ (Multiple Choice Questions) and case analysis.

PA exam are evaluated on the basis of competencies identified by the student. They expect in depth analysis of the response along with professional approach. Points are allotted on the basis of identification, analysis, alternatives and relevant and effective recommendation. Students are required to identify direct and indirect (integrated) competencies in case analysis. Some time students are required to identify hidden competencies as well.

Effective writing is another important skill required to pass PA exam. Answer should be very well drafted, concise, clear and with easy to flow language. This requires lot of practice for physical writing. You need to have the professional skills (technical knowledge) so you are providing the “meat” for the discussion.  A wonderful write-up of a non-relevant issue is of no use to the reader. On the other hand, you need to be able to show your knowledge in a clear, coherent manner that the reader can understand and be able to use in his/her decision-making. A professional response integrates a discussion of the appropriate technical knowledge with a clearly communicated writing style. It is important to apply conceptual knowledge and exercise judgment. You will have to use your knowledge to solve practical problems. This means you will have to know what parts of that knowledge are relevant in a given situation. You also will need to be able to identify the problem from the facts provided.  You will have to consider alternatives, analyze them using your core knowledge and exercise your judgment in choosing one alternative.  Finally you must support your recommendation with a logical argument flowing from your analysis. Write your answer with proper heading and sub-headings; do not write case analysis like a story. There are many competencies that marker need to assess form your response, and therefore well-organized professional write up is the key to get success in the final exam.

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