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Chapter 2: 3BE (page 63)

Discuss whether the changes described in each of the cases below require recognition in the CPA鈥檚 audit report as to consistency. (Assume that the amounts are material).

  1. The company changed its inventory method to FIFO from weighted-average, which had been used in prior years.
  2. The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years.
  3. The estimated remaining useful life of plant property was reduced because of obsolescence.

Short Answer

Expert verified

  1. Yes

  2. No

  3. No

Step by step solution

01

Meaning of audit report

The auditor鈥檚 report is a document comprising the viewpoint of the auditor on in case a firm鈥檚 accounting statements are in accordance with the Generally Accepted Accounting Principles (GAAP) and are exempted from material misrepresentation.

02

Explanation for statement ‘a’

If the firm altered its process of valuing inventory, the consistency as well as the comparability, of the accounting statements have been affected by a variation in the process of applying the principles of accounting. The variation would need statement in the report of auditor in a descriptive paragraph.

03

Explanation for statement ‘b’

If the firm ended one of its two subsidiaries that was involved in its consolidated statements for previous years, no statement in relation to the requirements of consistency is required to be made in the CPA鈥檚 audit report. The comparability of the accounting statements has been affected by the business events, but there has been no alteration made in the principle or the process used. The transaction would possibly need informative exposure in the accounting statements.

04

Explanation for statement ‘c’

If the firm decreases the estimated residual life of plant property due to obsolescence, the comparability of the accounting statements has been afflicted. The variation is not a subject of consistency; it is an alteration in the accounting evaluate needed by changed conditions and includes no variation in principles of accounting used. The variation would reasonably be stated by an accounting statement note. If judged on in the CPA鈥檚 report, it would be a result of disclosure as opposed to consistency.

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Most popular questions from this chapter

Mogilny Company paid \(135,000 for a machine. The Accumulated Depreciation- Equipment account has a balance of \)46,500 at the present time. The company could sell the machine today for $150,000. The company president believes that the company has a 鈥渞ight to this gain.鈥� What does the president mean by this statement? Do you agree?

Question: (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the 鈥済round floor鈥� of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/party items.

You have told Uncle Carlos that, unless you can take a look at Neville鈥檚 financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville鈥檚 most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240.

The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available.

Instructions

Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful.

The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective and fundamentals that will be the basis for developing financial accounting and reporting standards. The objective identifies the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties.

The purpose of the statement on qualitative characteristics is to examine the characteristics that make accounting information useful. These characteristics or qualities of information are the ingredients that make information useful and the qualities to be sought when accounting choices are made.

Instructions

(a) Identify and discuss the benefits that can be expected to be derived from the FASB鈥檚 conceptual framework.

(b) What is the most important quality for accounting information as identified in the conceptual framework? Explain why it is the most important.

(c) Statement of Financial Accounting Concepts No.8 describes a number of key characteristics or qualities for accounting information. Briefly discuss the importance of any three of these qualities for financial reporting purposes.

Which of the following statements about the IASB and FASB conceptual frameworks is not correct?

(a) The IASB conceptual framework does not identify the element comprehensive income.

(b) The existing IASB and FASB conceptual frameworks are organized in similar ways.

(c) The FASB and IASB agree that the objective of financial reporting is to provide useful information to investors and creditors.

(d) IFRS does not allow use of fair value as a measurement basis.

Question: What are some of the costs of providing accounting information? What are some of the benefits of accounting information? Describe the cost-benefit factors that should be considered when new accounting standards are being proposed.
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