ENTERPRISE TECHNOLOGY SYSTEMS INC.

It is August 15, 2019, and you, CPA, are called into the office of Patricia Gonsalves, a partner at Princess
& Gonsalves.

Patricia begins, “We have started our field work on the audit of Enterprise Technology Systems Inc. (ETS),
which operates across the country. ETS is primarily engaged in the sale of software and new and refurbished
hardware.

“During the audit, the staff person in charge of the engagement left the firm to pursue another opportunity.
I want you to look at the work done to date (Exhibit I) to identify additional procedures that need to be
performed and issues related to the procedures already done. Please also provide recommendations on any
accounting issues you identify in the June 30, 2019 year-end file.

“Although ETS has experienced losses in some years, management is expecting to be profitable going
forward due to the company’s new line of business selling refurbished servers. ETS has been trading on the
TSX-V (stock exchange for small venture companies) for about five years now and reports under
International Financial Reporting Standards (IFRS).

“Finally, the chief financial officer (CFO) implemented some new IT controls in an effort to make the
system more automated (Exhibit II). Please start preparing the Management Letter specifically for the IT
controls assessment. In a separate memo to me, please provide a brief summary of the affect of IT controls
on the audit.”

©CPA Canada Uniform Final Exam 2013 – Paper 3, Question #1

 EXHIBIT I

EXCERPTS FROM WORKING PAPER FILE

Cash

I have obtained copies of the bank reconciliation and the bank statement as at June 30, 2019.

ENTERPRISE TECHNOLOGY SYSTEMS INC.

BANK RECONCILIATION
As at June 30, 2019

Balance per bank statement $ 1,224,300 C

Less: outstanding cheques
Cheque # Cheque Date
101008 10/15/2018 (132,694)
112233 6/15/2019 (8,465)
112244 6/16/2019 (6,465)
*112266 6/16/2019 (88,729)
*112277 6/16/2019 (23,410)
112288 6/25/2019 (3,760)
112299 6/25/2019 (9,383)
*112310 6/25/2019 (145,891)
112321 6/25/2019 (7,503)

Bank balance per general ledger $ 798,000 ü

C Agreed to bank confirmation

* Vouched to copy of cancelled cheque
ü Agreed to balance sheet

CENTRAL ONTARIO BANK OF MONEY

Receipts Payments Date Balance

Opening balance 06/21/2019 $1,955,061
Payroll – commissions $196,771 06/24/2019 $1,758,290
Payroll – regular $566,792 06/24/2019 $1,191,498
Cheque 112166 $100,208 06/27/2019 $1,091,290
Frank’s Supermarket $54,233 06/27/2019 $1,145,523
Receiver General – GST/HST refund $78,777 06/28/2019 $1,224,300
Ending balance 06/30/2019 $1,224,300

@CPA Canada Uniform Final Exam 2013 – Paper 3, Question #1

 EXHIBIT I (continued)

EXCERPTS FROM WORKING PAPER FILE

Accounts Receivable

I reviewed the aged receivables and sent out confirmations as indicated below. I picked customers that,
according to management, would be quick to respond. All confirmations have been returned and no issues
were noted.

# of Days Outstanding

Balance per
Listing Balance per
Customer Name 0 – 30 31 – 45 46 – 60 61 – 90 90+ Confirmation Difference
Frank’s Supermarket 12,456 24,000 36,456 36,456 –
We Sell Good Stuff 50,000 18,000 68,000 68,000 –
Randall Stevens Inc. 765,999 765,999 No confirmation sent
Cupcake Girls 48,000 48,000 48,000 –
Twins Therapeutics 1,750,000 1,750,000 No confirmation sent
Kay Plumbing 280,868 135,678 416,546 416,546 –
9841236 Inc. 3,250,000 3,250,000 No confirmation sent
Farrow & DeJaegher 499,999 499,999 No confirmation sent
Tools Tools Tools 299,000 299,000 299,000 –
Total 6,559,322 349,000 135,678 42,000 48,000 7,134,000 ü

ü Agreed to balance sheet

Therefore, we have obtained comfort over the existence and valuation of accounts receivable. There is no
allowance for doubtful accounts at year end and this appears reasonable.

Inventory

ETS buys used or broken point-of-sale items (cash registers, bar code scanners, etc.), which it then
repairs and sells. Any item that requires significant work or new parts is scrapped. Inventory is
reclassified from parts to scrap in the accounting records when ETS determines that the problems are not
worth fixing.

@CPA Canada Uniform Final Exam 2013 – Paper 3, Question #1

 EXHIBIT I (continued)

EXCERPTS FROM WORKING PAPER FILE

I attended the inventory count on June 30, 2019, and completed test counts from sheet to floor with the
following results:
Units per Units per
ETS Total Cost Test Count Difference

Stationary scanners 2,007 $ 404,842 2,009 (2)

Broken registers 626 585,934 623 3
Refurbished servers 372 208,994 372 0
Portable scanners 452 214,411 452 0
Debit machines 194 236,187 194 0
Scrap 403 199,101 403 0

Total Inventory $1,849,469ü

ü Agreed to balance sheet

Given that my tests were relatively close to the figures provided, I concluded that there were no concerns
with the inventory. There were some piles of stuff that I didn’t count, but since they were not on the listing,
I assumed they were scrap items that had been written off.

Convertible Debt

ETS borrowed $4 million from PIC Investments (PIC) and recorded it as long-term debt on the balance
sheet. PIC can convert the debt into 10,000 ETS common shares at any time, which represents a minimal
shareholding of ETS. The debt was issued on January 1, 2019, and bears interest at 6%, payable annually.
The debt will mature on December 31, 2023. PIC was willing to provide the loan at 7% without the
conversion clause.

©CPA Canada Uniform Final Exam 2013 – Paper 3, Question #1

 EXHIBIT I (continued)

EXCERPTS FROM WORKING PAPER FILE

Deferred Income Taxes

Due to the profit generated this year, ETS has recognized an asset related to its existing loss carry forwards.

Schedule of estimated deferred tax assets (in thousands of dollars):

Net Loss Carry Estimated

Forward for Tax Deferred Tax Expiry
Purposes Assets at 29% Year
$5,003 $1,451 2020
7,170 2,079 2021
8,485 2,461 2037
1,597 463 2038

$22,255 $6,454

ETS provided me with the financial projection to support the deferred income tax balance. Management is
projecting a 21% annual increase in revenue. They stated that they believe a 3% improvement in gross
margin is sustainable. They also indicated that they would keep other expenses under control for the next
three years and, as a result, are projecting no increase in expenses. I took the following information from
their financial projection:

2018 2019 2020 2021 2022

(audited) (unaudited) (forecast) (forecast) (forecast)
Income (Loss) before tax
(in thousands of dollars) $ (1,665) $ 1,316 $ 5,286 $ 10,420 $ 17,047

New Line of Business

During the year, ETS started selling servers they had refurbished. This new line of business has proven to
be very popular and ETS has sold approximately 2,000 servers this year, with revenue totalling about $5
million. Included in the price of the server is a two-year maintenance plan provided by ETS. Similar
maintenance plans retail for $500. ETS records the entire revenue when servers are shipped to customers.

After delivery, ETS installs the servers and asks the customers to sign an approval form acknowledging
that the servers interface properly with their system. On average, ETS spends two weeks installing each
server and ensuring it interfaces properly with the customer’s system.

ETS requires payment within 30 days of shipment. Collection rates have been strong thus far.

@CPA Canada Uniform Final Exam 2013 – Paper 3, Question #1

 EXHIBIT II

SYSTEM NOTES PROVIDED BY CHIEF FINANCIAL OFFICER

Payroll

We used to have an entire team reconciling commissions paid to our sales staff based on their monthly sales,
but have now automated this process. We implemented a control to ensure that the 2% commission paid to
everyone matches the amounts calculated by the system. If the commission calculated does not match the
payroll system, the system will automatically suspend the payment until variances are explained.

Here is the May 2019 report. I haven’t had a chance to look into the variance.

Sales for the month $ 8,559,322

Commission rate 2%
Expected commission $ 171,186
Commission per payroll system $ 196,771
Variance $ 25,585

Result: Difference greater than zero. Do not process commission payment.

Purchasing

Only a few employees are authorized to sign cheques. We never found issues because all purchases have to
be approved, and accounts payable does a good job of tying invoices to shipping documents, but we used to
spend hours signing cheques and reviewing supporting documentation. Now accounts payable uploads all
approved invoices into the system and generates a report. I access the report through the system and indicate
“Yes” or “No” in the approved column. Once I enter “Yes,” my signature is printed automatically. If I enter
“No” in the approved column, the invoice goes unpaid until I change the status. I included an example
approval report below.

Company Date Amount Invoice # Approved Comment

Business Equipment Inc. 06/25/2019 145,891 A14a63 No Invoice not attached
We R Furniture 06/27/2019 4,651 B124T Yes
Broken Units 06/28/2019 1,762 123nht Yes
Train the Trainer 06/28/2019 9,414 BD1TH6573 Yes

@CPA Canada Uniform Final Exam 2013 – Paper 3, Question #1

 EXHIBIT II (continued)

SYSTEM NOTES PROVIDED BY CHIEF FINANCIAL OFFICER

Sales Process Description

We process sales on a system called Sell It. Once a customer places an order, the sales representative enters
the relevant information (customer name, address, item code, number of items, and discount, if applicable)
into the system. Then, the following automated checks are performed:

• The customer name is checked against the master list to determine if it is a new customer. If
new, the system generates an email asking the sales manager to approve the transaction and the
addition of the customer to the master list.
• If a discount is provided to the customer, the system notifies the sales manager and requests
their approval. The controller has also started reviewing every discount in detail at month end
and has been noticing an unusually high volume of discounts.
• If the sale pushes a customer over its approved credit limit, the system automatically denies the
sale. Credit limits are stored with the master customer list.

The master customer list is located on the server and its file path is detailed in the IT policy manual.

Once the sale has been approved, the system will send a message to the shipping department, which will get
the items ready for shipment.

After shipment occurs, a shipping number and date are added to the sales record and a notice is sent to the
sales representative. This allows the sales representative to inform the customer of the expected delivery
date.

Sales for shipped orders are run through batch invoicing every Friday, and until then the files are stored on
the server in a file folder called “Shipped but not invoiced.”

On Friday, the invoicing process extracts the data from the files and generates invoices and the necessary
accounting entries. The files are moved to the “Invoiced” folder. The system produces a report that lists the
time and date when a file was created or amended. However, the report is so long that we never look at it.

All sales staff are made aware of the location of all the folders on the server in case they need to review an
invoice.

At the end of the month, the new amounts recorded in the “Invoiced” folder are totalled to determine the
monthly sales for each sales representative. Sales commission is allocated to “Selling and marketing” for
financial statement presentation purposes.

@CPA Canada Uniform Final Exam 2013 – Paper 3, Question #1

 EXHIBIT II (continued)

SYSTEM NOTES PROVIDED BY CHIEF FINANCIAL OFFICER

One of the benefits of the system is that it lets us track employee performance and update personnel files
each month. We keep the master personnel files in the same directory as the master customer list. That way,
all the information our controller needs is in one place.

We strongly believe that all employees, from clerks to vice presidents, should be treated the same, so we
have provided all of our employees with the same server and system access. We ask them to only change
data they are responsible for.

@CPA Canada Uniform Final Exam 2013 – Paper 3, Question #1