1. Copyright FocusROI 2014 ASPE Common Presentation and Disclosure Deficiencies MARCUS GUENTHER CPA, CA, MBA FOCUSROI INC MGUENTHER@FOCUSROI.COM

2. Self-evaluation questions 1.Do our audit files specifically assess the RMM for financial statement presentation and disclosure and design the appropriate response? 2.Is a fully referenced copy of the final financial statements, including the notes to the FS included in the file showing where numbers came from with the appropriate audit evidence? 3.Does the firm have a step-by-step training program for all new senior staff on how to prepare financial statements and use the firm tools? 4.Does the firm have an up-to-date notes library and F/S template for the staff to use? 5.Does the firm use a disclosure checklist when preparing and/or reviewing the F/S? 6.Do all F/S (both audit and review) go through a final QC process before being released? 7.Have previous inspection or monitoring deficiencies been addressed? 2

3. How wrong are the F/S? Major deficiencySignificant deficiencyMinor deficiency Auditor’s report should have been qualified. Accounting policy note for estimation uncertainty missing. Typos in notes. Material related party transaction not disclosed. Note does not balance to amount on balance sheet. Note numbering is off by one number. FV of material free-standing derivative (FX contracts) not disclosed. Reconciliation of tax expense to statutory rate note missing (taxes payable method). Amortization rate for equipment is wrong in the accounting policy note. Callable debt or debt with covenant violations presented as long-term. Government remittances not disclosed separately. Interest on long-term debt was not disclosed separately from other interest. Capital leases accounted for as operating leases. Related party note did not describe measurement basis and nature of relationship. Cash and cash equivalents not defined. Revenue presented gross rather than net. Measurement uncertainty note omitted. Financing item presented under Investing activities on cash flow statement. 3

4. Who is responsible for ensure the F/S are fairly presented in accordance with GAAP? 4

5. Independent Auditor’s Report - CAS 700 Introductory paragraph…. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

6. Risk Sources Risk Effects Inherent Risks Sources and effects

7. Deficiencies – inspection findings Independent Auditor’s Report 7 DeficiencyComment Wrong auditor’s report – Pre-CAS 700 Auditor’s report versus “Independent auditor’s” report. Addressed to wrong addressee (users). Description of statements listed does not match the titles used on the statements or index. Incorrect modifications to auditor’s report. (i.e. Qualified opinion over pervasive and material matter.) Incorrect use of “Emphasis of Matter or Other Matter” paragraphs. Did not include place or name of firm below conclusion. CAS 700 has specific requirements for the format and wording of the report. Firms should stick to the exact wording. ANY modified reports should go through a thorough analysis and

8. Deficiencies – inspection findings 8 DeficiencyComment Related party transactions did not adequately describe the nature, extent or nature of related party transactions. Often descriptions are too vague Under s. 3840, an enterprise shall disclose: description of the relationship between the transacting parties, the measurement basis used, terms and conditions relating thereto. Did not disclose nature and extent of financial instruments, including credit risk, currency risk etc. S. 3856.53 requires an entity to disclose: the exposures to risk and how they arise, as well as any change in risk exposures from the previous period. Notes are generic and do not address entity specific risks. Best practice is to also discuss how the entity manages these risks.

9. Deficiencies – inspection findings 9 DeficiencyComment Debt due on demand, including related party debt is classified as long-term debt. As per s. 1510.13, “Non-current classification of debt is based on facts existing at the balance sheet date rather than on expectations regarding future refinancing or renegotiation”. If the creditor has the unilateral right to demand payment within one year at the B/S date, it must be classified as current debt unless that right has been waived. Government remittances were not separately disclosed. Required under s. 1510.15 on face or notes to f/s/ Practitioners not aware of requirement or definition of what constitutes a “Government remittance”.

10. Deficiencies – inspection findings 10 DeficiencyComment Income taxes accounting policy note was not included. Should disclose accounting policy note since there are alternative policy choices. When using the taxes payable method of accounting for income taxes, no reconciliation of the income tax rate/expense related to the income or loss for the period as disclosed. 3465.88b) requires “a reconciliation of the income tax rate or expense related to income or loss for the period…to the statutory income tax rate or the dollar amount that would result from its application, including the nature and amount of each significant reconciling item.”

11. Deficiencies – inspection findings 11 DeficiencyComment Revenue - Inadequate disclosure of revenue recognition policy, (i.e. did not describe policy for each material revenue type). S. 3400.31 requires entity to disclose revenue recognition policy for each material transaction stream. Revenue – accounting policy does not adequately describe how revenue is recognized. (i.e. too vague or generic). S. 3400.34 states the “objective of this disclosure is to assist the reader in understanding the sources of revenue and their effect on the financial statements”. Major categories of revenue not disclosed. S.3400.33 requires major categories of revenue to be disclosed on the face of the income statement or in the notes to the F/S.

12. Deficiencies – inspection findings 12 DeficiencyComment Inadequate disclosure of share capital, including the classification of preferred shares NOT issued in a tax planning arrangement. S. 3240 requires entity to classify preferred shares as equity or debt based on the characteristics. Guidance for shares issued in tax planning arrangement is under s.3856.23. When adopting ASPE or ASNFPOs, F/S did not present and opening balance sheet and follow guidance in s. 1500 or 1501. S.1500 or s.1501 are mandatory. Entity shall “prepare and present” an opening balance sheet at the date for transition.

13. FocusROI Services  In house and web based Training  Quality Control Monitoring  Small group Coaching www.focusroi.com 416 594 0005 info@focusroi.com

14. Please contact us for further information info@focusROI.com 416 594 0005 info@focusROI.com