No need to solve part 1

No need to solve part 1. However, you will need part 1 info for part 2 requirements.

CASTRIES MERCHANDISING INC.

Part 2 To simulate a CPA Canada CFE Day 1 style case, this Part 2 simulation will facilitate as the extension to Part 1. That is, Part 2 will use case facts from Part 1 and provide new case facts that you should use in responding to the case requirements. 

You are to assume the same role as in Part 1 for Part 2. 

Using Part 1 and 2 case facts, respond to the below questions:

Required

1. Analyze the accounting issues for inventory and accrued liabilities (using the diamond approach). (20)
2. The following Statement of Operations and excerpts from the Statement of Financial Position have been restated with the required IFRS adjustments for inventory and accrued liabilities:

Castries Merchandising Inc.

Restated Excerpts from the Statement of Financial Position

For the year ended December 31

(In $EC) (audited)

Adjustment - Reserve

,987     283,987          284,902

Castries Merchandising Inc.

Restated Statement of Operations

For the year ended December 31

(In $EC) (audited)

 Adjustment - Provision             -1,102,909       -1,120,648

Gross Profit               19,396,112      20,872,342

 Wages and Other Benefits      8,015,822        8,331,007

                              15,675,326      16,134,366

Calculate the amount of tax that would be reassessed for CMI for 2016, 2017 and 2018. (3)

3. Project CMI’s statement of operations for the years 2019, 2020 and 2021 with the following assumptions: (22)

1. 1. Use the information obtained in the excerpts for the statement of operations 
   2. Sales to increase by Gabby’s estimate
   3. Use 58.8% of sales as cost of sales (before considering d. below) based on the 2015 results, which were not adjusted by Gabby
   4. Reverse the three adjusting entries Gabby recorded for each year for cost of sales, software costs and staff training as follows:
      1. 2019: No reversals to be made
      2. 2020: Reverse 2016’s adjusting entries
      3. 2021: Reverse both 2017 and 2018 adjusting entries
   5. All other expenses to increase by 3% per year
   6. Tax rate remains the same rate

4. Now that you have projected the Statement of Operations for the following 3 years in Question #3: (13)
   1. Overall, what impact may your analysis and findings have on CMI’s share price during and after the escrow period? 
   2. Aside from saving income taxes, what other motivation might the family have to reduce income from the previous periods (2016-2018)? Hint: you should examine the unadjusted Part 1 financials to the restated financials given above in Question #2 while considering the effect of your projections in Question #3.  

5. As Gabby is a member of the Ontario Institute of CPAs, what professional responsibilities might you have for reporting her professional conduct? (5)
6. What implications do the financial statement auditor’s actions have on the tax audit and other tax payers? (5)