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CFE Case Name: PonyUp (PU) ASSIGNMENT 2 TEMPLATE NAME:

Please insert your name(s). No name (s), no mark. In Assignment 1 you learned about the ‘big picture’ issues with accounting entities – we treat small owner-managed entities differently in a routine audit, and expect both a governance and IC system that STILL prevents and detects opportunity, pressure/incentive and rationalization and eliminates these in the entity where possible. The result of success, will be a tolerable level of avoidable risk of accounting fraud. In this assignment we will look at a few unique facts of this case to analyze the capability, competence, expertise of OWNER/TCWG to design, implement, monitor, oversee, evaluate and improve both a governance and IC system at PU. In addition, we analyze selected, specific facts that the CPA/External Auditor has already reported/documented for us in this case and how to search for relevant standards. This is another opportunity to improve the two types of narratives. Notice that unlike Assignment 1 we DO have specific case facts and the reason we do is that the CPA/External Auditor has documented them in his notes. You should remember this documentation too when you engage in the professional practice of a routine audit. It will assure you get your license, keep your license, stay out of court and out of jail because you will have a recorded trace you DID comply with professional standards and therefore have served the public interest AND upheld my profession’s reputation. Please use only this template all BOTH PonyUp (PU) and Team case assignments. This WORD version is the only format in which I will accept completed assignments. I will provide extensive feedback on your work for each assignment using the “Review, Track Changes, Show all Markup” function in WORD. The assignment is designed to guide your progression towards exploring/discovering relevant technical content and develop your skill at searching the Knotia database, and your ability to articulate your professional judgment by matching the issue in the case facts to the technical content in a brief written narrative. Please pay attention to how to cite a case fact AND cite technical content correctly. Both skills will be tested on your CFE and no marker will give you marks for cutting and pasting huge sections of technical content. You will get marks for the narrative. In part 1, reply to the questions asked. In part 2 I have selected quotes and the search term but it is your task to complete the search, copy/paste the RELEVANT section and complete the narrative allocating responsibility. HOW do I find correct CAS standards: In your own searches copy relevant content ONLY from the Handbook Pre-Auditor Reporting because the case facts say “the bank has approached your firm to conduct…” and you, as senior auditor have been asked by your firm to “prepare an audit planning memo”. Your firm has not yet accepted the engagement, which is the first audit for PU and being done because the bank asked PU for audited financial reports. Therefore, this is a pre-auditor report. Copy/paste your CAS from ONLY the pre-auditor report section of CAS. Irrespective of the search terms you use, EXCLUDE ROGC: 20Q..IFRS Conversions…, Crown Corporation Governance, Directors’ and Officers’ Indemnification…, IT Second edition, Pension Governance, Role in Pension Governance, Special Committees, . HOW do I allocate responsibility? You do this to create a checklist of activities the standards say benchmark good governance/IC. The case facts are actual performance. The gaps between what the standards say should be and the actual facts will be either governance or IC weaknesses which cause increased fraud risk. CAS by in large tells you what you, the External Auditor, must do during the routine audit in response to this risk. 1. Allocate responsibility for governance requires you use mandatory phrases. First PU is a small company with no BOD therefore you start with “OWNER/TCWG is responsible to fulfill…” do NOT deviate from this wording. Next you name the responsibility using either “governance” or “IC”. The entire sentence will read either “OWNER/TCWG is responsible to fulfill the governance duty of…” and name the duty stated in the standard OR “OWNER/TCWG is responsible to fulfill the IC duty of…” and you name the duty stated in the standard. (Use the copy/paste function in WORD to reduce the time this takes). 2. To distinguish governance duties you will find the standard uses one or more of these keywords “assure/ensure, assess/self-assess, evaluate, monitor, oversee”. You can use the find function in WORD to make sure you don’t miss the word matching in the standards to your allocation of responsibility. With no keywords present the standard must refer to IC. I have put these words in bold in the Narrative; I have put the search term(s) in red to help you identify the consistent structure of the narrative. 3. Begin narratives regarding the CPA/External Auditor with “CPA/External Auditor is responsible to…”. In these standards there is no distinction between governance and control activities but what a CPA/External auditor must do does differ when weaknesses are detected. Again, I have put the search terms in red to help you identify the consistent structure of the narrative. 4. Remember you must do one separate Narrative allocating responsibility for each and every subsection. Be detailed and use the vocabulary of the standards. 1

5. If there is NO standard relevant to the case quote with respect to the responsibility of the CPA/External auditor then the heading should read No relevant hits. 6. You must cite the section of the standard AND the subsection and follow the examples to do so correctly – do not invent new ways to cite the standards. I have underlined the correct form of a citation, please practice it. HOW do I write the Narrative - LINKS? You created the analytical tool in the Narrative allocating responsibility. The content you copy/pasted depended on the content of the quote as it related to the search term(s). The LINKS narrative provides evidence you are right in identifying either a governance or IC weakness or both. The goal of the second narrative is to communicate how the case facts did raise your professional skepticsm. 1. Begin each statement in LINK to case facts with “The case facts indicate …failures by the owners to fulfill …” The first blank names the failure as either governance or IC (remember governance is distinguished by the key words, state that key word after the word governance). You use the keyword in Narrative allocating responsibility to do so. 2. The next statement must relate the content of the case quote that raised your skepticism and alerted you to the weaknesses indicated by the case quote directly to the content of the relevant standard(s). You will benefit from doing each standard in order from columns 2 and 3 for OWNER/TCWG then move to column 4 for CPA/External Auditor. If you cannot link a standard to case quote content, then you have to delete the standard as irrelevant. This is evidence of your professional judgment. 3. Your search terms must appear in the LINKS narrative because this in fact, is the link you made between the case fact and the standard. 4. Do NOT mix up governance and IC (control activity) deficiencies together; keep them separate and do your analysis in an orderly way but be brief. 5. For CPA/External auditor start the LINK to case facts with “CPA/External Auditor, learning the facts of… PART 1: Create your original image on a PowerPoint slide of the relationship between capability, competence and expertise of the OWNER/TCWG or for larger companies of the BOD/TCWG based on what you have copy/pasted in A and B. Explain your image in, maximum, 100 words.

PART 2 Complete the narrative allocating responsibility and the narrative LINKS. 2

A

Direct quote(s) from the Case with citation

Section/subsection reference AND search term(s) used in CoCo: capability, competence with appropriate reference to section and subsection

“Pony-Up is bringing in a lot of cash, but it seems to go right back out again!...I know there are a lot of expenses in running a business, but there are so many that it is hard to keep up….” Page 109, paragraph 7

77 Having people with the necessary skills and capabilities starts with personnel selection. Human resource policies and practices in this area might include defining required competencies, using employment criteria, and performing background checks on candidates. 79 Training may focus on skills to support individual performance and interpersonal skills necessary to support group decision-making and learning. Both the individual and the organization have an interest in the development of competence, although the degree of responsibility assumed by each differs from organization to organization.

Section/subsection reference AND search term(s) used In ROGC: capability, competence with appropriate reference to section and subsection 12. What capabilities and competencies should Committee members possess? The qualifications for Committee members are not prescribed by a regulatory body. However, it would be prudent for all members to comprehend the issues and ramifications of compensation and human resource policy decisions and plan designs. At a minimum, members should: • have an understanding of compensation and other human resource issues, in addition to specific company or industry knowledge; •

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have at least one Committee member with compensation expertise, for example through prior experience as a CEO or human resource executive; be willing to learn and be committed to devoting the necessary time and attention to make thoughtful, educated decisions about compensation matters; have up-to-date knowledge of the strategic and technical aspects of performance measurement and compensation, including the pros and cons of various equity vehicles; have a general understanding of the proxy disclosure rules and other legal requirements affecting executive compensation; and

Section/subsection reference AND search term(s) used in CAS: capability, competence with appropriate reference to section and subsection A15.

Information regarding the competence, capabilities and objectivity of an auditor's expert may come from a variety of sources, such as: • • •

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A16.

A17.

Personal experience with previous work of that expert. Discussions with that expert. Discussions with other auditors or others who are familiar with that expert's work. Knowledge of that expert's qualifications, membership of a professional body or industry association, license to practice, or other forms of external recognition. Published papers or books written by that expert. The auditor's firm's quality control policies and procedures (see paragraphs A11-A13).

Matters relevant to evaluating the competence, capabilities and objectivity of the auditor's expert include whether that expert's work is subject to technical performance standards or other professional or industry requirements, for example, ethical standards and other membership requirements of a professional body or industry association, accreditation standards of a licensing body, or requirements imposed by law or regulation. Other matters that may be relevant include: • The relevance of the auditor's expert's competence to the matter for which that expert's work will be used, including any areas of specialty within

Narrative Allocation of Responsibility section by section, subsection by subsection. Narrative LINKS to case facts CoCo OWNER/TCWG is responsible to fulfill the requirement of hiring individuals that possess the necessary capabilities and are competent in the workplace, using training methods through human resources may help benefit the competence of employees. ROGC OWNER/TCWG is responsible to fulfill the requirement of obtaining committee members who meet all the points listed in the subsection including; having an understanding of compensation, be willing to learn and be committed, having up to date knowledge etc.

CAS CPA/External Auditor is responsible to obtain the information from the company through different methods and from a variety of sources including; Personal experience, discussions with the expert, discussions with other auditors, knowledge of the experts qualifications etc.

LINKS

The case facts indicate competence and capability failures by the owners to fulfill the requirements of creating an environment where employees and committee’s have the capabilities required in the workplace and are competent at work.

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be aware of emerging compensation trends and issues applicable to the company and its industry.

With the role of the Committee expanding into broader HR issues, Committee members should also have some familiarity with best practices in talent management, succession planning and leadership development. To help in addressing these matters, some Committees are adding directors with HR experience to their ranks, although they are still a small percentage of total directors. In addition, with the globalization of the business and economic marketplace, directors who have cross-border or international experience — or at least a global perspective — are valuable additions to most boards and Committees.

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Direct quote(s) from the Case with Section/subsection citation reference citation AND search term(s) used In CoCo: expertise with appropriate reference to section and subsection “Lori is the town veterinarian and runs her own practice.“

Commitment

Sarah manages a pet store called Animal Galaxy Inc. (Animal Galaxy), which specialized in premium foods and products for animals. She has a 20% stake in Animal Galaxy, with the remainder split equally between her brother and her sister-in-law, Megan. Megan is a co-owner in Animal Galaxy, she is not involved in its operations.

71 Clearly defined authority, responsibility and accountability help ensure that critical decisions are made by qualified individuals. They help create the expectation that if an individual does not feel able to solve a problem, he or she will find someone with the necessary knowledge, expertise and authority to effect coordination with others. This migration of decision-making may be formally

Section/subsection citation reference AND search term(s) used In ROGC expertise with appropriate reference to section and subsection ROGC, 20Q…CEO Succession 18. What is our role in coaching and developing the CEO? Most boards conduct annual CEO performance reviews. It is not yet a common practice, however, for boards to hold ongoing discussions with their CEO about his or her development, although this is one of the most important roles a board can play in mentoring a CEO. Successful development coaching discussions with the CEO depend upon the board having enough diversity among its members for it to have

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that expert's field. For example, a particular actuary may specialize in property and casualty insurance, but have limited expertise regarding pension calculations. The auditor's expert's competence with respect to relevant accounting and auditing requirements, for example, knowledge of assumptions and methods, including models where applicable, that are consistent with the applicable financial reporting framework.

CPA/External Auditor, learning the facts of the case of Pony Up must gather information from the various sources listed above to further determine the capabilities and competence of the owner and individuals in the company.

Whether unexpected events, changes in conditions, or the audit evidence obtained from the results of audit procedures indicate that it may be necessary to reconsider the initial evaluation of the competence, capabiliti es and objectivity of the auditor's expert as the audit progresses.

Section/subsection citation reference AND search term(s) used In CAS expertise with appropriate reference to section and subsection

Narrative Allocation of Responsibility section by section, subsection by subsection. Narrative LINKS to case facts

CAS 220: Assignment of Engagement Teams (Ref: Para. 14) A11. An engagement team includes a person using expertise in a specialized area of accounting or auditing, whether engaged or employed by the firm, if any, who performs audit procedures on the engagement. However, a person with such expertise is not a member of the engagement team if that person's involvement with the engagement is only consultation. Consultations are

CoCo OWNER/TCWG is responsible to fulfill the requirement that there is clearly defined authority and accountability held within the organization and that the owner is responsible for creating an environment where if they do not have the expertise to solve and issue they will find a separate person who has enough expertise in order to solve the issue.

She is a school teacher and teaches horse riding lessons in her free time. “… Things have been hectic so far, and the owners have not had a lot of time to focus on the operations.” Page 109, paragraph 1,2,3.

documented in the organization's authorization policies (for example, a bank may have a policy for certain loan decisions to be made by certain officers), or it may be established informally through commonly acknowledged norms of behaviour and shared values. Monitoring and Learning Commitment • Are our principles of integrity and ethical values shared and practised? • Are people rewarded fairly according to the organization's objectives and values? • Do we clearly understand what we are accountable for, and do we have a clear definition of our authority and responsibilities? • Are critical decisions made by people with the necessary expertise, knowledge and authority? • Are levels of trust sufficient to support the open flow of information and effective performance?

sufficient expertise to provide coaching on any significant issue the CEO is likely to encounter. 20Q…Governance Committee 7. What is the governance committee's role in building an effective board? The governance committee plays a central role in building and managing the board's effectiveness through its responsibility for attracting, evaluating, developing and retiring directors. Organizations and their needs change over time. The governance committee should develop a strategy to anticipate these changes and manage and adjust the board's composition as necessary so the board continues to have the collective expertise and chemistry it requires to carry out its responsibilities effectively. To build its board composition strategy, the governance committee needs to confirm:

addressed in paragraphs 18, A22 and A23. A12. When considering the appropriate competence and capabilities expected of the engagement team as a whole, the engagement partner may take into consideration such matters as the team's: • Understanding of, and practical experience with, audit engagements of a similar nature and complexity through appropriate training and participation. • Understanding of professional standards and applicable legal and regulatory requirements. • Technical expertise, including expertise with relevant information technology and specialized areas of accounting or auditing. • Knowledge of relevant industries in which the client operates. •

CAS CPA/External Auditor is responsible to have the expertise in a specialized area of accounting and is able to use their knowledge when performing audit procedures. The person with this expertise however, is not a member of the engagement team. Also the CPA/Auditor will have to possess the skills listed in the bullets in section A12.

Ability to apply professional judgment.

• the board's role in strategy and risk oversight for the organization;

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