How to Write a Comp_MG-Final

8/12/2019 How to Write a Comp_MG-Final

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PASS | Professional AccountingSupplementary School

Professional Accounting Supplementary School (PASS)

How to Write a Comp

2014 UFE Program


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PASS | Professional AccountingSupplementary SchoolProfessional AccountingSupplementary School

Agenda

Analysis of the comp and PASS approach

Good Spring Farms Limited

Read and prepare an outline

Walkthrough the case to illustrate the process of preparing an outline Review sample response

How to write a comp 2


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Analysis of the comprehensive case

Typical role in case - Business Advisor/controller, but could be combined withaccounting/audit

Typical length of case

1 to 2 pages of introduction approx 5-8 exhibits

about 12 to 20 pages in length

Will combine a number (at least 4, max 6) of technical competencies

plus pervasive



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Analysis of the comprehensive case contd

All requireds may be in main body of question which is 1 to 2 pages or most requiredsmay be in the exhibitstypically approx. 5 to 7 requireds

Since 2003, quants usually appear in at least 1 or 2 primary indicators, while in recent

years, quants appear in 45 primary indicators

Required/issues will be intertwined - integration is essential

Ranking is also essential



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Approach to writing a compStep 1: Read main body of question

Write down on outline:

Key factors about the company (extraneous information)

Required

i. All or almost all requireds may be provided in main body of question

ii. Most specific required may be in exhibits Factors or obj. important to client/risks

Role

Consider types of quants required

What decisions have to be made?



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Approach to writing a compStep 1: Read main body of question contd

Write down on exam paper:

Margin notes

Highlight or/and underline key information

Spend approximately 10 - 20 minutes on Step 1

Before beginning Step 2, put each required on a separate outline page.

There may only be one or two broad requireds in the main body to put down.



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Approach to writing a compStep 2: Read remainder of case & complete

outlineQualitative Information

a. Determine if there are further requireds/clarificationof required, factors or obj.important to client, extraneous information

b. Determine which required qualitative information relates to

(i) Insert issues/facts based on qualitative information underneath appropriaterequired (in the outline)

(ii) Keep notes in margin





outlineQualitative Information contdIn cases where only one or two broad requireds provided in main body, with mostrequireds expected to be in exhibits, may wish to put down anticipated requireds, asproceeding thru case and complete step 2b for these requireds if you believe that a

required is likely to come up later in case, based on information providede.g. upon seeing an accounting issue, anticipate accounting required and noterequireds and issues/facts, even before explicit accounting reqdcomes up

Alternatively, only put down requireds when they come upwill mean getting thru the

case much quicker and then you will have to go back and fill in requireds (when you getto step 3a)





outlineQualitative Information contd

c. Keep level of detail minimal

d. Cross reference

e. Note if there are any further decisions to be made based on required/informationprovided





outlineQuantitative schedules

Determine what quantitative schedules you will perform, based on required, i.e.

NPV

Cash flows CM etc



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Approach to writing a compStep 3: After reading the entire case

a. Determine which issue unused /extraneous information relates to

b. Look at each required and clue in to PASS techniques that would be helpful inanalysis, i.e.

Numerical methods Financial accounting depth

Assurance

c. Ranking



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Approach to writing a compStep 3: After reading the entire case contd

Before ranking consider the following:

i. The information available/work required - both qual and quants

ii. Which competencies are being tested Even if not asked for directly, consider whether Governance, Strategy and

Risk Management (especially risks and general business issues) andTaxation is relevant

iii. Whether each indicator (associated with the competency) is primary versussecondary



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Approach to writing a compStep 3: After reading the entire case contd

Rank and allocate time taking into consideration amount of work and whethercompetencies are primary versus secondary

d. Integration:

Recognize how requireds/issues are intertwined Integration / Decision tree

Total approximate time spent planning: 70 - 105 minutes



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Approach to writing a compStep 4: Begin writing contd

Don't re-read the whole case

Watch for late changes

Make sure to conclude - 3 types of conclusions Within a required / issue (i.e. conclude on a quantitative schedule / conclude on a

qualitative adjustment, issue etc.)

Conclude on the entire required / issue

Overall conclusion (integrates issues, ties requireds / issues together)

Will be critical for pervasive!



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Approach to writing a compWhat to include in the outline

For each required, write down:


QualitativePro / Con points to discuss

Qualitative points/issues you want todiscuss including: Salient facts Biases Objectives

Key success factors etc

QuantitativeWrite down whatschedule(s) B/E

Normalized income Cash Flow Adjust B/S & I/S to FMV Valuation etc.

Write down which items to include inquant schedule Adjustments Items to include in cash flows etc


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Approach to writing a compWhat to include in the outline contd

Follow the process for each issue / required

Put one required on each page

Clue in to PASS techniques that would be helpful



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Common techniques to use in a compEvaluation of proposals or/and agreements

Consider all possible advantages and disadvantages (usually qualitative)

May provide information necessary for quants (eg. cash flow, breakeven etc)

Consider risk

Look for definitions

Look for factors not incorporated into agreement



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Common techniques to use in a compAnalysis of financial statements

Review both balance sheet and income statement

Before examining specific balances:

Consider bias - Are there over/under aggressive policies or incorrect accountingtreatments which over/understate f/s

Consider limitations of GAAP - even if f/s are in accordance with GAAP - FMV maybe more relevant

Make sure you understand what makes the business profitable



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Before examining specific balances contd:

Consider impact of related party transactions

measurement may not be accurate;

transaction may not be legitimate - may only be carried out to distort the f/s

Financial statements may require adjustment

Both qualitative discussions and quantitative adjustments should be dealt with(assuming quantitative information is available)

Analyze financial statements after adjustments



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Balance sheet

Consider key items:

Focus on large assets: be explicit, especially if grown

point out the size of the asset in relation to total assets or other assets



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Balance sheet contd

Cash & cash equivalents - liquidity

If cash decreased - consider why?

Did other assets increase? If yes, what type of assets?

If no, is cash being used to keep operation going?

Interpret decrease



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Balance sheet contd

Investments and/or other redundant assets - are they decreasing?

A/R - trend from previous years relative to sales trend

Inventory - trend from previous years relative to sales trend

Soft assets

are they substantial relative to overall b/s?

do they really have value?

consider bias



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Balance sheet contd

Unusual - non standard asset

New assets not on prior years statement

Assets resulting from related party transactions

Is accounts payable growing - question why - may indicate CF problem



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Balance sheet contd

Debt - is debt growing and why?

how much is due in short term?

compare repayment requirements with cash flows also consider whether there are investments or other assets which could easily be

liquidated to generate cash flows

Consider key ratios - debt to equity; working capital; return on assets/investment;turnovers etc.



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Income statement

Always normalize by removing non-recurring items

Consider contribution margin, gross margin, net margin etc. - compare with previous

year (or similar company or industry if info available)

Consider trend in bottom line (after normalizing)

Look at component of sales and expenses

Consider seasonality if relevant



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Final points

Consider possibility of going concern (in conjunction with qualitative information) ifrelevant

Historical losses (usually growing) Little cash

Increasing debt

Poor ratios (especially working capital / debt to equity) etc.



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Final points contd

Use micro information to interpret F/S

financial information in notes;

financial information on divisional / plant / product line basis; non-financial information to explain F/S



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Supplementary SchoolProfessional Accounting

Supplementary School


Final points contd

Indicate if you are missing essential information, e.g.

Do you have sufficient information on policies

Missing consolidated F/S/ Missing individual company F/S

In analyzing B/S and I/S, dont look at individual fluctuations in isolation.

Try to see the bigger picture!



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Professional Accounting


Common techniques to use in a compQuantitative analysis

What you should do

Explain why you are performing the analysis

Make assumptions in performing the calculation / Review client assumptions

Draw conclusions (i.e. Division / product is not profitable)

Analyze the results

Make constructive recommendations based on analysis and conclusion



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Types of common quantitative techniques

Projected cash flows and cash flow analysis

Discounted cash flows

GAAP adj. to f/s and restatement of f/s - to GAAP or FMV

Ratio analysis

Contribution margin analysis / Gross margin analysis / analysis of divisional F/S

Break-even analysis



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Types of common quantitative techniques contd

Valuation analysis

Capacity of operations calculations

Other management accounting analysis

absorption costing

incremental costing direct costing

allocation of costs etc.


General points to consider in comps that may


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General points to consider in comps that maynot tie in with individual requireds

Risk analysis

Limitations of analysis

Potential conflict of interest

Key success factors

Big picture issue

Some of the above points will impact the Governance, Strategy and Risk ManagementCompetency;

Others will impact the Pervasive Competency



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Good Spring Farms Limited


Good Spring

FarmsLimited


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Approach to writing a compStep 1: Read main body of question

Write down on outline:

Key factors about the company (extraneous information)

Required

i. All or almost all requireds may be provided in main body of question

ii. Most specific required may be in exhibits Factors or obj. important to client/risks

Role


What decisions have to be made?



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Supplementary School How to write a comp 36

eqds

Key facts

- Inc. 2 owners- Sells eggs, meat & by-products


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Risk

Key facts

- Inc. 2 owners- Sells eggs, meat & by-products

eqd

Obj CF

See if viable

eqds

- Virus pressure from bank- GSF in distress

- Risk bookkeeper left

Objectives

Dont want to sell motivated tokeep

- Oct 1, 2014


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Requireds

1. Should they renew certification with COPA? Or MOO?

COPA premium prices/ COPA first automated tracking

Address certification needs

2. Review F/Snever had a review or audit Might be time to start capitalizing ostriches - Accounting

3. 3 year forecastForecast & other relevant issues

4. Evidence of organic certification

5. Prepare review engagement planning memosig areas of risk & procedures



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Step 1 contd

Role:

CAconsulting and review engagement1sttime review


3 yr forecast Adj. F/Smaybe re-compute covenants

Decisions

1. COPA vs MOO?

2. Conclude on viability for bank

3. Should they accept loan of $350k from father?

4. Conclude on certification needs



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Setting up the pages for the outline



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Setting up pages for the outline contd



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Possible going concern- re-compute covenants

If not GC


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Finance capacity?- conCon - must

ForecastCon hard toverify

Same as COPALess restrictivethan COPA

Less than COPA Forecast ?

Reviewvs audit


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Reliable?Not good cant integrate

Expensive.Reliable?

Trackinventory

See if necessary - capacity


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Integrate -good

Good - tie to acctingIs thissufficient?

Easier tocontrolinventory

What is installation cost for AIS?

Goodsupport


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ForecastForecast

Forecast


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Forecast

Forecast

Forecast

Accounting accrue/Forecast


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Allow. rev rec /Assur. proc

Procedure amortizationForecast - equipment


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Acctng debt vs equity

Acctng shd be debt

Forecast

Forecast - 2013


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Capacity

Amort diff?

Forecast

Forecast


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Accrue

A h t iti


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Approach to writing a compStep 3: After reading the entire case

a. Determine which issue unused /extraneous information relates to

b. Look at each required and clue in to PASS techniques that would be helpful inanalysis

c. Ranking and time allocation


A i I


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Accounting Issues

Clue into:

Financial accounting depth technique

Ostrich comment Focus on (a) policies and (b) F/S missing inv., cert fees on f/s, 3 yrs given

Try to adjust for as many as possible given time constraint

Re-compute covenant

45 min

PM

COPA vs MOO


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Clue into:

Do Pro/Con mustexplainwhyfor each point

Look elsewhere in case for any points Focus on comparing between 2 options

See if you can do any quants to back up qual

Integrate decision into cash flow

Conclude

45 mins

MDM

Review


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Clue into:

Review engagement careful on procedures! (not audit!)

Assurance depth lecture Overview 1Sttime review, risks Procedures link to accounting issues, HowandWhy

Concludewhether to accept engagement

30 mins

Assurance

3yr Forecast


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3yr Forecast

Clue into:

Do forecast for 3 yrs Consider capacity constraints Consider different types of revenues eggs, meat, by-products Include various expenses operating, financing, investing Assumptions and conclusions important Integration with qualitative decisions, i.e. COPA vs MOO/AIS vs MICRO

Conclusions

45 mins

Finance


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Evidence of Organic Certification

Clue into:

Know alternative reports Know the details around the different reports, i.e. assurance, purpose of report etc. Give some procedures Always discuss limitations (things that are hard or impossible to do) Recommend

30 mins

Assurance

Step 3: After finishing reading comp


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Step 3: After finishing reading comp

1. Go back and fill in any missing pieces of the puzzle (unused information). Alsolook back at Step 1 to remind yourself of any key points to pick up

2. Rank requireds and do a time budget (see above)

Above issues - 195 minutes

Reading and planning - 105 minutes

3. Consider which competencies are being tested and what are the Primary

(and Secondary Indicators)


Step 3: After finishing reading comp contd


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4. Recognize how issues are intertwined (Integration)

Do the decisions that impact the cash flow first:

COPA vs. MOO and the computer systems decision

Integrate the quants into the cash flow

Also integrate accounting issues with the review procedures




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Step 3: After finishing reading comp cont d

5. Consider appropriate techniques from PASS sessions

Analysis of F/S

FinancialActg. Depth

Audit overview (risk) and procedures

6. Ensure that all decisions from Step 1 are answered and the big picture is

looked at



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Good Spring Farm Ltd.

Review of sample response



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How to Write a Comp_MG-Final