QuestionsSolutionsCARE2002EN

It is necessary to describe both the gaap departure

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Unformatted text preview: ven if detailed disclosure would be harmful, this fact should be disclosed. (CICA 3290) In conclusion, the report should have a reservation for both a scope limitation and a GAAP departure. Implications on the wording of the audit report: The introductory paragraph is not changed The scope paragraph would start with “Except as explained in the following paragraph…” A reservation paragraph would be inserted stating that OPL may become liable, that management will not provide the information and that disclosure has not been made. It is necessary to describe both the GAAP departure and the scope limitation. The following is an example of a revised reservation paragraph. “Management has advised me that the company may become liable as a result of claims arising from certain alleged defects in a line of products sold during the past year. Management has also advised me that no significant claims have been asserted to date but, on the advice of counsel, has refused to identify the product or provide me with any further information regarding the matter because management believes that disclosure of the information is not in the company's best interests. As a result, I have been unable to obtain sufficient evidence to form an opinion with respect to the possible amount of such claims or possible claims. Furthermore, this matter has not been disclosed in the notes to the financial statements. In my opinion, Canadian generally accepted accounting principles require that such disclosure is made”. The opinion paragraph would be modified and refer to both the GAAP departure and scope limitation. The following is an example of a revised opinion paragraph. “In my opinion, except that disclosure has not been made with respect to the contingent liability referred to in the preceding paragraph and except for the effect of adjustments, if any, which I may 58 have determined to be necessary had I been able to obtain sufficient information regarding this matter, these financial statements present fairly, in all material respects, the financial position of the company as at July 31, 2002 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.” 59 DAY 2 SECTION A – TAXATION QUESTION 1 (12 Marks) Report on Proposed Remuneration Package for Gail Geru Home relocation loan: Gail will have a taxable benefit for each year the loan remains outstanding. The benefit will be calculated by multiplying the balance of the loan outstanding by a prescribed rate of interest for each quarter of the year. Since the loan is to buy a home, the prescribed rate used for this calculation will not be higher than the prescribed rate in effect at the time the loan is made. The loan is deemed to be a new loan every five years for purposes of this prescribed rate protection rule. Gail will be entitled to a “home relocation loan deduction” for each of the first five years the loan is outstanding. The loan results from a move of at least 40 kilometres by Gail to a new employment location in Canada. The deduction is claimed in Division C in arriving at taxable income. The deduction is limited to the imputed interest benefit on a $25,000 loan. Moving costs – reimbursement: Reimbursement of the costs incurred by Gail to move because of accepting employment at a place other than where the former home was located is not a taxable benefit. Salary: The salary will be included in Gail’s income for tax purposes in the calendar year in which she receives it. Automobile: Gail will have two benefits included in her income for tax purposes each year: a standby charge and an operating cost benefit. Standby charge Operating cost benefit 2/3 x $900 x 12 months $0.16 x 20,000 personal kms $ 7,200 3,200 $10,400 Life insurance coverage: Gail will have a taxable benefit equal to the premium paid by her employer for the life insurance coverage. Private health plans: The employer-paid premium for the private health plan, the dental plan, and the drug plan is not a taxable benefit. It is specifically excluded by law. 60 Bonus: The bonus will be included in Gail’s income for tax purposes in the calendar year in which she receives it and not the year in which it is earned. Allowance: The allowance does not appear to be for a specific use that would be excluded by s.6(1)(b) of the Income Tax Act such as a reasonable travel allowance. Therefore the monthly allowance of $600 will be included in Gail’s income for tax purposes in the calendar year in which it is received. Stock option: Gail will have a taxable benefit included in employment income equal to the amount by which the fair market value of the shares at the purchase date exceeds the price paid for the shares as stipulated in the option agreement. As the $10 exercise price is not less than the fair market value of the shares when the option was granted, the taxable benefit can be deferred and included in income in the year the shares are sold. If the o...
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