Assignment_2 Individual

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Sheridan College *

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4200D

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Accounting

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Apr 3, 2024

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There are 2 parts to this individual assignment. Part 1 – read the Maple Leaf Airport (MLA) case provided. Answer the 5 requireds using the information and appendices provided. Answer in a new word document (use the following naming convention LastName_FirstName_Assignment2_Part1). Your response for Part 1 should be no more than 2,500 words. Part 2 – read the scenario provided. Address the specific requireds. Answer in a second new word document (using the following naming convention LastName_FirstName_Assignment2_Part2). Your response for Part 2 should be no more than 2,500 words.

Part 1: (60%) Maple Leaf Airport (MLA) Case You, CPA, are an internal auditor with Maple Leaf Airport (MLA). MLA, located in Maple Leaf City, has undergone significant expansion during fiscal 2023, including the construction of a new terminal building to allow it to start servicing international routes. Given it operates on land leased from the Canadian government, MLA is subject to regulation related to both environmental issues and which airlines it is permitted to do business with. Details on the Land Use Rules are provided in Appendix I. It is February 13, 2024, and you are beginning to prepare for the December 31, 2023, annual external audit of the financial statements in accordance with International Financial Reporting Standards. “ We need to address the key accounting issues before the audit firm arrives,” the director of internal audit, Carol LeBlanc, explains. “Therefore, I would like you to prepare a memo on the treatment of the accounting matters I have identified in Appendix II . Required 1: There are three accounting issues which are to be discussed in the case. You should use the following approach to discussing an accounting issue: Issue = should include the accounting treatment the company is currently following and what you will be analyzing. GAAP = identify the key GAAP criteria which will be used to support your discussion. Analysis = your interpretation of the GAAP criteria and using case facts to analyze. Recommendation = your recommended accounting treatment – what they should be doing, as well as the impact on user objectives if any. “The chief financial officer (CFO), Zach Mostar, also mentioned that during his review of earnings, he became concerned with the revenue figures from our parking lot,” Carol continues. “He did not notice a decrease in car traffic, but revenue has significantly declined. Upon further investigation, he discovered that fraud had occurred. I have provided the background on our parking revenue process and an analysis of the current-year revenue figures in Appendix III. Please provide the CFO with some insight into what may have happened and how we can improve our controls over parking revenue to prevent something similar from happening in the future . Please also explain what analytical procedures MLA staff can perform as detective controls to help them identify, on a more timely basis, any anomalies in parking revenue . Required 2: Address the control weaknesses (discuss three) in the parking revenue process. Use the WIR framework (weakness = clearly explain the issue/control design flaw using case facts; implication = the financial or other impact/why the company should care; and recommendation = what control should be implemented to prevent an issue in the future/be specific. Required 3: Discuss three analytical procedures which could be performed to address the objective of the user (to perform as detective controls to help them identify any anomalies in parking revenue. “ Further, our external auditors have asked for our assistance in completing audit procedures over additions to capital assets related to our new international terminal, and procedures over our landing fee revenue. Please design procedures over the additions to capital assets, keeping in mind the relevant risks . For landing fee revenue, given the high volume of flights on an annual basis, an analytical procedure is likely the most appropriate. Please perform that analysis . Required 4:

provide the audit procedures (4 good ones) for the new terminal building. When developing substantive procedures use the RAP framework: Risk – what the risk of an overstatement or understatement is and why. Assertion – the key assertion(s). Procedure: a complete procedure which includes what the starting point is, what evidence we need, how we will review it, and how it connects back to the GL. Required 5: Prepare the substantive analytics (2 good ones) over the landing fee revenue. Show your calculations, support your assumptions/inputs, and interpret your results.

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APPENDIX I LAND USE RULES The Canadian government requires Maple Leaf Airport (MLA) to be in compliance with the following regulatory rules as a condition for using the land leased for airport operations. MLA complied with all of these regulations in 2023. 1. Environmental Impacts The impact of carbon dioxide emissions on the Maple Leaf City region from departing and arriving flights must be limited to 1,000 metric tonnes per annum. Each additional metric tonne is subject to a $10,000 fine. When a jet airplane lands and then takes off, it generates a total of 100 kilograms of carbon dioxide impact, on average, on the local surrounding area (1,000 kilograms equals 1 metric tonne). 2. Canadian Airline Facilitation M L A must not engage a foreign airline to service more than 5% of the volume of a given route, calculated based on number of passengers travelling the route. For example, if total passenger demand for a route from Maple Leaf City to Singapore is 100,000 passengers per year, foreign-based airlines may not service more than 5,000 passengers. Each percentage in excess of 5% is subject to a $15,000 fine per route. 3. Noise Pollution Given proximity to residential communities, MLA must cease airport operations at 11:00 p.m. local time on a daily basis and refrain from beginning airport operations until the following morning at 6:00 a.m. Each flight that takes off or lands during the hours of limitation will be subject to a $2,500 fine. Non-compliance with these rules will result in fines to the airport, as specified above. M L A is expected to commit to the highest standards of ethical business conduct and service to its stakeholders, including customers, employees, tenants, suppliers, neighbours, and the city.

APPENDIX II ACCOUNTING ISSUES — YEAR ENDED DECEMBER 31, 2023 New International Terminal During the year, MLA constructed a new terminal to allow the airport to offer flights to international destinations. As a result of these activities, MLA accounting staff has capitalized $46,907,000 in attributable costs, as outlined below. Cost Component Amount Description Land preparation $ 350,000 Preparing the land upon which the terminal would be built, such that it was within code for airport operations, fuel storage, etc. Professional fees $ 600,000 Architectural and engineering fees Advertising and promotion activities $ 78,000 Advertising in local newspapers to educate the public on how their airport improvement fees were being spent Staff time for working on the project $ 383,000 Employee salaries and benefits attributable to the property, allocated using timesheets. Includes $100,000 for the fair value of share-based payments with a three-year vesting period Interest costs $ 140,000 Interest costs related to borrowings used to help finance operations as a result of the strain on cash flow caused by construction of the terminal Building costs $45,328,00 0 Costs of materials and construction labour to build the terminal Training costs $ 28,000 Salary and benefits of the terminal manager for time spent training employees on new systems On November 1, 2023, the terminal was substantially complete, and MLA began servicing international routes. Events after December 31, 2023 On January 21, 2023, 10 jetbridges for the new international terminal were lost in a fire. The fire was due to faulty electrical work. The cost of reconstructing these jetbridges, minus what the insurance company will cover, will be $8.4 million.

APPENDIX II At year-end, we accrued $250,000 in architecture fees for the new international terminal; however, due to out-of-scope billings, the architecture firm has since submitted an invoice totalling $400,000.

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APPENDIX II (continued) ACCOUNTING ISSUES — YEAR ENDED DECEMBER 31, 2023 Investment in Regula Regional Airport During the year, MLA invested $15 million in Regula Regional Airport (Regula), which is located in Genesis, a small Canadian town. MLA’s investment includes a 35% ownership of common shares outstanding as at December 31, 2023, with an option to purchase an additional 18% at their fair value at any time. The remaining shareholders, who are unrelated, collectively own 65% of the airport, but individually own less than 5% each. Two of five directors on the Regula board are MLA executives, and upon its investment, MLA was provided with the power to appoint the Regula CEO and COO. The investment is currently recorded at cost on the balance sheet.

APPENDIX III PARKING REVENUE Process When customers drive into the parking lot, they are provided with a ticket that is date-stamped. Customers must retain this ticket so that the attendant can determine how long a customer has been parked and charge the appropriate fee when the customer leaves. Cars also drive over a sensor that keeps track of how many cars have entered the lot, the output of which is automatically exported to a report that is saved directly on the accounting department’s server. A customer who loses a ticket is charged a $35 lost-ticket fee. Both the parking fee and the lost- ticket fee can be settled by credit card or cash. At the end of a shift, the parking lot attendant counts all of the cash in the till and puts it and all customer parking tickets in an envelope that is held in a locked drawer in the parking kiosk. The envelope is submitted to accounting on a weekly basis. There is always a small $100 float in the till to provide change for customers. The attendant also writes down how many lost ticket charges were issued and includes that note in the envelope. The parking attendants are unionized, and the union contract notes that an attendant must be employed during all operating hours. This prevents the airport from adopting automated customer self-service machines for the parking lot. Analysis 2023 2022 Parking fee (per day) $ 25 $ 25 Cars entering lot 231,418 219,582 Credit card revenue $17,356,400 $15,590,300 Cash revenue $ 3,905,200 $ 6,282,000 Number of lost-ticket charges 28,927 1,321

CURRENT DEALS AND PROPOSED AGREEMENT Landing Fee Statistics Statistics for the year ended December 31, 2022 Landing fee revenue (domestic only) $42,574,000 Number of landings 7,969 Statistics for the year ended December 31, 2023 Landing fee revenue (domestic and international) $45,639,300 Note: Landing fees were increased by 5% as at January 1, 2023, in line with inflation. Although the statistics on the number of planes landed is not yet available for 2023, the airport does not expect a significant fluctuation in domestic flights from 2022. Accepted International Arrangements as of November 1, 2023 The following international flights are currently being provided by multiple Canadian airlines in to and out of Maple Leaf Airport: Route Total Passenger Arrivals per Year Landings in Maple Leaf City per Year Shanghai –Maple Leaf City 75,000 250 Tokyo – Maple Leaf City 100,000 345 Singapore – Maple Leaf City 92,500 300 Prior to the addition of these international flights, MLA’s carbon dioxide output was approximately 905 metric tonnes per year. 9

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Part 2 (40%): Study Toolbox You have been asked to help an audit junior create a “study toolbox ”. The study toolbox will help them to prepare for the final exam. Your task is to create study notes for the audit junior – focusing on the various business cycles and processes specified below. You are to answer this question in a SEPARATE word document – save your file with the following naming convention: LastName_FirstName_StudyToolBox. You are to make notes to answer the following questions. You can organize your notes in any format you like (in your word document). Your “study toolbox” can be no more than 3,000 words. Focus on chapters 10 (revenue process), 11 (purchases process), 12 (HR process), 13 (inventory process). For each process/cycle , answer the following questions: a) Identify 3 key reports and explain how they are used in the company (by employees/management) . b) For the 3 key reports discussed above, explain how the auditor can use these reports in their audit testing . To answer this question remember to think about what risks may exist in the account(s) and what the key assertions are. For each process/cycle , given the information you have discussed in a & b complete the following: c) Design two control tests. For a control test you are testing an attribute. You will want to have the following subheadings: The objective of the control, the risk (i.e. what could go wrong), and the audit test (how will the auditor test the attribute). d) Design two substantive procedures. For a substantive procedure you are testing a dollar amount. You will want to use the RAP framework of risk, assertion, procedure. 10