 Hello and welcome to this session in which we would look at a CPA exam task-based simulation that's coming right from the AICPA website. So this is released by the AICPA, it's listed on the website and the purpose is to get you familiar with the task-based simulation. I believe this simulation is a great illustration of how you would need to be prepared for the exams. So I'm going to go over the simulation and I hope I will show you how to approach these simulations. Now each simulation is different so you will not see the same one on the exam but knowing how to attack, how to approach the simulation will make it easier for you on the exam day. If you are preparing for the CPA exam, I strongly suggest you check out farhatlectures.com. I don't replace your CPA review course, most likely you have a CPA review course. I can be a useful addition, I can show you how to attack the simulation differently, I can show you how to solve the problems, I can show you how to understand certain topics differently and by doing so I can add to your understanding and add 10 to 15 points to your CPA exam. So I can help you understand your CPA review course which in turn you can pass the CPA exam. Take a look at my website if not for anything to see how well your university is doing on the CPA exam. I do have resources for other courses as well including other CPA section. If you haven't connected with me on LinkedIn please do so, like my YouTube, share it with others, please connect with me on Instagram, Facebook, Twitter and Reddit. So let's take a look at the simulation. First thing I want to tell you about this simulation, it doesn't require a lot of accounting knowledge. What it requires, it requires a little bit of paying attention to specific details and knowing where to look. So you're going to see this simulation, I can assure you if you give it to a year, one staff auditor, they can finish this in less than five minutes. I can assure you about this. Now, if you don't have actual experience in the real world, you may find this simulation intimidating but the point that I'm trying to make is I'm going to show you how to approach the simulation and hopefully it will help you solve it much, much easier. So let's take a look at what we are giving. Okay, the first thing you do is you read this paragraph here just to kind of get an idea about what the simulation is. So a CPA firm is preparing for the year six audit of Hiver or Heaver company, a calendar year, non-issure and audit staff member used the year five audit request list for Hiver as the basis for drafting year six request list. So we have a list. Okay, so what the staff did looked at last year and they basically did the same thing for this year, requested the documents that we need and this is usually what happened at the beginning of the audit. Additional client information was obtained during the audit, planning, meeting with the client, that's fine. As the audit senior for this engagement, it's your responsibility to review and revise the year six request list for Hiver as needed, use the additional client information in the exhibit above to revise the draft request list, correcting any errors and removing any appropriate or unnecessary items, giving the overall contacts and purpose of the list. Ensure that the year six list is appropriate given the information provided. Materiality for year six financial statement audit is 55,000. You don't have to read this, hopefully you know this. So this is one type of simulations where you are giving a statement and you need to determine whether the statement is correct, you keep it, you delete it, it should not be there or it should be something else. So now you have an idea what the simulation is about. It should take you two to three minutes to kind of get, let's say three minutes to read this paragraph and get an overall idea what they're asking me. That's fine. What should you do next? If I was in your shoes, the next thing I will do is I will take a look at the exhibits real quick now, real quick. So I'm going to look at the minutes of special meetings. I'm going to scan it real quick. I'm going to say, well, the agenda item is loan to shareholders. I would stop here. I'll just say that if I want to know anything about loans to shareholders, I'll take a look at minutes of special meeting. That's all what I would do. That's all what I would do now. It's loans to shareholders. Email from the CFO. Let me take a look at this email real quick. We agreed that the terms of the purchase of our office in Edgewater industrial estate was closing date. So it has to do with the purchase of our office in Edgewater industrial estate. That's all what I need to know for now. And I have competitive trial balance and there's it's a competitive trial balance here six and year five. And that's all what I have to do now. Just look. I know it's a competitive. Don't look at any numbers. There's a lot of numbers. Most of them you don't need. Just know that you have those three exhibits. It should take you a minute to look at those three exhibits. So on your mind, every time there's something about the loan, you will go to the minutes of special meeting. Every time there's about that purchase of the estate of the estate and Edgewater, I will go to the email. Anything has to do with specific account, I'll go to the competitive trial balance. Now I'm ready to answer the question. So it will take you a minute, maybe two minutes depending on how many exhibits you have. Notice I did not go and read the exhibit in the tales. I just wanted to know what is the exhibit about. So if I need it, I will go there. The first statement that says Edgewater industrial estate lease agreement. Well, do I need the lease agreement? Well, where did I see something about the Edgewater industrial estate? Well, it's in this email from the CFO and it says we purchase the Edgewater industrial estate. Would it not lease it? Well, real quick, I'm going to say, well, this is not right. We don't need the lease agreement. We either have to delete it or if we have a purchase, something to do with the purchase, there is right here the option. Edgewater industrial estate purchase contract. We purchased it. We need that contract. If we purchased it and we're doing an audit, show us the contract, right? So that's done. That's it. So it has nothing to do with your accounting knowledge. It has to do with your common knowledge, common sense. What are they asking me? They're saying they want the lease agreement. No, there's no lease. We purchase the estate. Where is the information coming from? From the email from the CFO. I'm done. Second, furniture and fixture purchase documentation. Well, I don't go to the email for the CFO. It's about the industrial estate purchase. I don't go to the minutes of special meeting. It has to do with the loan to shareholders. I'll go to the competitive balance sheet and I need to look at the furniture and fixture purchase documentation. They're telling me we need this documentation. Let's see. So what I need to do now is look at the furniture and fixture account. Furniture and fixture account, account number 1605. Year five was 201500. Year six was 201500. There's no purchase of fixture and fixture and fixture. I'm done. It took me a second to find out, maybe less than a minute to find out. There shouldn't be anything here. Delete the stacks. They did not buy any fixture and furniture. That's it. New motor vehicle purchase agreement. They're saying we purchase a new motor vehicle agreement. Well, I'm not going to go to the minutes of the special meeting. I'm not going to go to the email from the CFO. Where do I need to go? I need to go ahead and examine again the vehicle account on the comparative balance sheet. So I'm going to go to the comparative balance sheet and they should have a vehicle account. The vehicle account. Year five. They had a 36500 worth of vehicles. Not worth. The vehicle account was 36500. Year six was zero. Hold on a second. You're telling me new motor vehicle purchase agreement. Definitely I did not purchase anything. If anything, I sold the vehicle. If anything, I sold the vehicle. So new motor vehicle, that's incorrect. The original one is incorrect. Should I delete or should there is a better option? Documentation supporting of the sale. It seems I sold it. It seems I sold it. I will go with this one. Documentation supporting the scrapping of the motor vehicle. Hold on a second. Could they have scrapped it rather than sold it? Good. New motor vehicle lease agreement. I definitely not this one. So really now the competition is between those two. Documentation of the sale and documentation of the, did I scrap it or did I sold it? Well, what do I need to do next? Now, if that's the case, I need to go back to the comparative balance sheet. I want to see if there's any gain or loss on a sale of a vehicle. If I sold the vehicle, if I sold it, I should have a gain or a loss. Let's see. Let me go down. I'm looking in my trial balance and you should know that the gain and the losses goes toward the end. And notice here, gain on a sale of motor vehicle. So I sold the motor vehicle. Easy. Done. So now I figured, I confirmed my answer because between scrapping and the sale, it's tricky, but I will go with the sale now since I saw the gain. Documentation supporting the issuance of 50,000 shares at 30 cents per share common stock. Well, that's easy. The source I need to go is the comparative balance sheet. And immediately, this is basically accounting 101. I need to find out whether they issued new shares of common stock. I need to go to the comparative balance sheet first to see whether I should delete this statement, keep it, or I need to fix it. So I need to go to the equity section. And it should be, and you should know how a trial balance is prepared. This is accounting 101. Assets goes first. Then if I'm looking for liabilities, then equity. So the equities are 3,000, right? The 3,000 numbers. Common stock retained earning dividend. I need to examine those two accounts. Account number 3,000. Account number 3,001. Common stock year five was 10,000. Now it's 15,000. Definitely we issued new stocks. Definitely. And additional paid in capital was 100,000. It went up to 110. So definitely, definitely in total, we issued an additional stocks and the amount was $15,000. $5,000 common stock and 10,000 additional paid in capital went from 100 to 110,000, 10,000 to 15,000. So the first thing I need to know is if I, how many shares did I issue of stocks? Well, you need to know that's again, accounting 101. Here we are talking about accounting 101. Here's what I would do. I'm going to snip it for you to kind of do the computation. But this is, if you're sitting for the CPA exam, you need to know how common stock work. Because again, I teach this information. So this is really accounting 101 accounting information, but what they're trying to do, trying to make sure you understand how it works. So there we go. Here we go. Let me just change the pen here. Make it smaller. Let's do a red pen. Okay. So this is plus 5,000. This is plus 10,000. Definitely we increase common stock by 15. Again, how many, first, how many shares did we issue? It looks like the par value per share is 10 pennies. Well, you need to know that if you take the number of shares, whatever the number of shares were times the 10 pennies, it should give us the additional 5,000. So it's the first thing we need to know. Well, if we did this computation, we know that the number of shares issued were 50,000. The number of shares issued, because if we take the number of shares issues times the par value, this should give you the common stock. So we know 50,000 shares were issued times par value of 10 cent. That's gave us the 5,000. It means the remaining $10,000, it means the 50,000 shares were sold at an additional 20 cent per share. Okay, because 50,000 times 20 cent per share is the additional paid in capital, what I called APIC, additional paid in capital. It means the shares were issued at 30 pennies. So we issued 50,000 shares at 30 pennies. 10 cent was for the common stock. Okay, 10 cents was for the common stock and 0.2 was for the APIC additional paid in capital. Now, so let's go back to the statement. Again, it took me a few minutes to explain it to you, but it should not take you that long on the exam as long as you have a good understanding of this. So documentation supporting the issuings of 50,000 shares at 30 cent per share. This looks like a good statement to me, but let me see if there's something else. Let's see 50, they said delete, I should not delete. Definitely delete is not an option here. Okay, documentation, I did not issue 150,000. So I can eliminate those three immediately. It says 150,000. Documentation supporting 50,000 shares at 10 pennies, that's the common stock, or 50,000 shares at 20 pennies, that's additional paid in capital. Those two together, those two together is the original statement. We issued 50,000 shares at 30 cent per share. This is what we can say. So the statement is correct. So this statement is correct. We don't need to do anything with that statement. Once again, it should be straight forward. You should be able to answer these questions as long as you know what they're asking about. Here, management review of third-party loan interest rate. Well, what did we say about the loan? We said there's a minutes of special meeting and there's something about the loan. Okay, so let's take a look at what we are told here. Copy. The special board meeting has been called for the purpose of approving a new loan to shareholder. Management routinely provided loans to shareholder when requested in prior period. There's a current loan balance outstanding. To aim more, the outstanding balance for year six will be 25,000. The loan will be fully repaid by July 31st, year seven. Jay Hyver made the request, the management for a loan of 225. The monthly loan repayment will commence on January 1st, over 20 month period. There will be equal installment. The loan will be interest free. The loan will be approved. Okay. So what they're telling us here is the management, let me go back to the original statement, management review of third loan interest rate. That's not true. That's the management review, not the third party. It's for, if you remember, for Jay Hyver and that's the answer. The last one is account 6,900 expense balances, expense analysis. So let's go to the trial balance. Let me go back here and grab it. 6,900. 6,900. First of all, it's not, it's not, I would not say that's a major account, but let's see what other options do we have. Let's see what other options do we have. Delete the text, not necessary. Let's see what we have. Expense 6806. 6806 did not change. There's no expense analysis here. Here what they're asking us to do is look at the account that we need really more information about to analyze. Well, 6806 I will not choose because it did not change. Account number 7115. 7115, I would say that's a small change. Like for example, 7115 and 6,900, basically there's small changes. If I have to choose the 6,900, there's no reason not to choose 7115. Account number 7,500. Wow, repair and expense went from 14,500 to 137. As an auditor, I would say I need to take a look at this account. And this is how I'll approach this simulation on the exam. They notice most of the questions has nothing to do with accounting. Most of them has to do with, do you know where the information is located? So that's why when students ask me, how do I prepare for the simulation? If you understand the trial balance and the trial balance is something that has you learned in accounting 101. You need to know how a trial balance is structured. You need to know that you have two years. What are the changes from one year to the other? Are they important or not? Are they large or not? And here they're telling you that, you know, materiality is 55,000. Therefore, the repair expense was way higher than 55,000. That's why you should ignore the other accounts. So knowing this information, basic information, so really there's no, there's no really any accounting serious, any serious accounting information here. Do you know how to read the information properly? Where to look for the information? Again, at the end of this recording, I'm going to remind you to visit farhatlectures.com. Again, I don't replace your CPA review course. I can explain the material differently. And by doing so, I can help you do better on the exam. Don't shortchange yourself. One month of subscription. Give it a try. Good luck. Study hard and stay safe.