You
have completed your audit of Khim Inc. and its consolidated subsidiaries for
the year ended December 31, 2011, and are satisfied with the results of your
examination. You have examined the financial statements of Khim for the past
three years. The corporation follows IFRS and is now preparing its annual
report to shareholders. The report will include the consolidated financial
statements of Khim and its subsidiaries, and your short-form auditor’s report.
During your audit, the following matters came to your attention.
1.
A vice-president who is also a shareholder resigned on December 31, 2011, after
an argument with the president. The vice-president is soliciting proxies from
shareholders and expects to obtain sufficient proxies to gain control of the
board of directors so that a new president will be appointed. The president
plans to have a note prepared that would include information of the pending
proxy fight, management’s accomplishments over the years, and an appeal by
management for the support of shareholders.
2.
The corporation decides in 2011 to adopt the straight-line method of
depreciation for plant equipment. The straight-line method will be used for new
acquisitions and for previously acquired plant equipment that was being depreciated
on an accelerated basis.
3.
The Canada Revenue Agency is currently examining the corporation’s 2009 federal
income tax return and is questioning the amount of a deduction claimed by the
corporation’s domestic subsidiary for a loss sustained in 2009. The examination
is still in process, and any additional tax liability is indeterminable at this
time. The corporation’s tax counsel believes that there will be no substantial
additional tax liability.
Instructions
(a)
Prepare the notes, if any, that you would suggest for each of the items.
(b)
For each item that you decided did not require note disclosure, explain your
reasons for not making the disclosure.
(AICPA
adapted)
(a) The auditor might recommend the
following notes be appended to the financial statements in regard to item 2 and
item 3.
Note A. In 2011 depreciation of plant assets is calculated by
the straight-line method. In prior years amortization was calculated using an
accelerated method. The new method of depreciation was adopted in recognition
of . . . (state justification for the change of depreciation method) . . . and has been
applied prospectively effective January 1, 2011. The change in accounting
estimate has not affected prior year comparative amounts.
Other Observations
1 The change in method of calculating
depreciation for all capital assets represents a change in accounting estimate
and as such is accounted for on a prospective basis.
2. Accordingly, the new method should be reflected
in the current-year financial statements, and the financial statements included
for comparative purposes should not be restated.
Note B. The Canada Revenue Agency (CRA) is examining the
federal income tax return, filed by the Corporation’s domestic subsidiary for
the year 2009. The CRA has questioned the amount of a deduction claimed for a
loss sustained by the subsidiary in 2009. The examination by the CRA has not
progressed to the point that would indicate the extent of the subsidiary’s
liability. The Company believes that they will not be subject to any
substantial consolidated income tax liability with respect to this matter.
(b) Item 1. Non-accounting matters such as management changes and
pending proxy fights are not disclosed unless such information is needed for the
proper interpretation of the financial statements. The president should be
informed that notes are an integral part of the financial statements and as
such should be limited to information that relates to the financial statements.
Furthermore, there is no certainty that a proxy fight will materialize and,
hence, in view of the uncertainty no reason for note disclosure. Disclosure of
events that have no relevance to those matters essential to proper
interpretation of the financial statements frequently creates doubt as to the
reasons for disclosure and inferences drawn could be misleading. Information
about the pending proxy fight might be included in the president’s letter to
the shareholders, which is usually an integral part of a company’s annual report.
