QuestionsSolutionsCARE2002EN

Last year spi went public spi accounted for 80 of the

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Unformatted text preview: rofessional staff of eight. A significant client of Box & Co. was Special Products Inc. (“SPI”). In the past four years, SPI has grown 4000% as demand for its products had increased when it obtained orders from large retail chains such as Wall Mert and House Depot. Last year SPI went public. SPI accounted for 80% of the firm’s 2001 billings and 65% of its professional staff utilization. Recently, Jack Box retired as a partner to accept an executive position with SPI. The remaining partners agreed to purchase his partnership interest over the next five years. Box retains the right to vote on partnership issues relating to the firm’s bank indebtedness until he has been fully repaid. At the time the accounting firm was formed a separate corporation was established to provide management type services to the firm. The partners’ spouses held the shares of the management company. The intention of the management company was for income splitting. When SPI went public, the management corporation used some of their surplus cash to purchase SPI shares as a temporary investment. 37 Question 11 (7 marks) (13 minutes) Sheryl Know, CA, obtained her chartered accountancy designation in 1993. She immediately began teaching introductory financial and management accounting courses full time at Northland College. In the fall of 2002, Sheryl decided to rent a small office and commence a public accounting practice. The following highlights some of her activities: • In an effort to reduce overhead costs, Sheryl did not attend any professional development courses. Sheryl was of the view that as she had taught accounting, her “technical skills were sharp”; • Sheryl compiled the financial statements and corporate return for her father’s company. Sheryl attached a standard Notice to Reader to the corporate statements; • Sheryl met with a client in the fall of 2002. This client had not filed their individual tax returns for the last 3 years (1999 – 2001). Sheryl completed the last three years of returns and billed the client $3,000 for professional services rendered. Sheryl felt that this was the amount that a national accounting firm would have charged. The client was very disappointed with the billing amount. They were especially unhappy as the filed return was subsequently re-assessed as a result of the use of incorrect capital gains inclusion rates. Sheryl called the client because the client was slow in paying their account and did not request that Sheryl complete their 2002 return. Sheryl told the client “I have limited office space, make sure that you retain what I sent you because I am going to get rid of my back up documents for calculating adjusted cost base.” A few weeks later, the office caretaker found sheets of the tax working papers blowing around the garbage dumpster. • Sheryl appeared in an advertisement for a local wedding photographer. The advertisement had a picture of Sheryl and her testimonial that read, “As a professional accountant and a former professor, I can spot the best. Having carefully checked out all the competition in town – I can say with confidence that Jack Pikture is the best photographer in town.” • Sheryl was retained to complete a Review Engagement Report on the financial statements of TNT Inc. a private corporation. Sheryl encountered some serious problems pertaining to the capitalization of costs. Sheryl initially told the client that although their treatment was incorrect, it could likely be supported by the new Handbook section on Differential Reporting. On further consideration, Sheryl decided that she would only issue a Notice to Reader on the statements. The Institute of Chartered Accountants employs you, CA, in their department that deals with professional conduct and reports to the Professional Conduct Committee. The Committee has asked you, CA, to review the actions taken by Sheryl and to prepare a memorandum that discusses the possible breaches of professional conduct along with some further analysis as to what the appropriate conduct would have been. Required: Assume the role of CA and prepare the memorandum requested. 38 TABLE I A FORMULA FOR CALCULATING THE PRESENT VALUE OF REDUCTIONS IN TAX PAYABLE DUE TO CAPITAL COST ALLOWANCE Investment Cost ( x Rate of Return Marginal Rate of Income tax + x Rate of Capital Cost Allowance )( Rate of Capital Cost Allowance x x ( 1 + Rate of Return 1 + Rate of Return 2 ) ) MAXIMUM CAPITAL COST ALLOWANCE RATES FOR SELECTED CLASSES Class 1 ................................................ 4% Class 3 ................................................ 5% Class 8 ................................................ 20% Class 9 ................................................ 25% Class 10 .............................................. 30% Class 10.1 ........................................... 30% Class 12 .............................................. 100% Class 13 .............................................. original...
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