In: Accounting
The following events occurred during 2018 for various audit clients of your firm. Consider each event to be independent and the effect of each event to be material.
A manufacturing company recognized a loss on the sale of investments.
An automobile manufacturer sold all of the assets related to its financing component. The operations of the financing business is considered a component of the entity.
A company changed its depreciation method from the double-declining-balance method to the straight-line method.
Due to obsolescence, a company engaged in the manufacture of high-technology products incurred a loss on the write-down of inventory.
One of your clients discovered that 2017’s depreciation expense was overstated. The error occurred because of a miscalculation of depreciation for the office building.
A cosmetics company decided to discontinue the manufacture of a line of women’s lipstick. Other cosmetic lines will be continued. A loss was incurred on the sale of assets related to the lipstick product line. The operations of the discontinued line is not considered a component of the entity.
Required:
Discuss the 2018 financial statement presentation of each of the above events. Do not consider earnings per share disclosures
A. Loss on sale of investment is not main activity of manufacturing company but the loss is significant so it has a material effect on financial statement We as an auditor should ensure that
1. The Loss is measured accurately
2. The loss is disclosed in financial statement appropriately ie Loss from activities other than ordinary activities.
We will include the matter in auditor report by stating the event in “Emphasis on other matter paragraph”.
B. The automobile manufacturer sold its component we will as an auditor will check
1. Whether it’s discontinuity of operations of financing business ie the cash flows from business will be discontinued totally or not. it is not clear that liabilities were settled or not. Also The process may be cover more than one accounting periods so the disposal of component may be in progress at the end of reporting period.
2. If it’s discontinuing operations, it will have special treatment in financial statement
3 The sell price will be compared with cost and profit and loss on disposal will be reported accordingly.
4.If the event is an indication of entity ‘s disability to continue as a going concern The fact should be highlighted.
C. Changing the method of depreciation is changing in accounting policy as per rules it can be done to improve the reliability of FS or because of regulatory requirements.
1. The change will be retrospective and entity has to disclose the impact of change on all prior period FS and cooperatives unless it’s impracatical.
2 The entity has to disclose the reasons of change the impact of change in FS.
D.It is a loss from extra ordinary events it should be present as an extraordinary loss in financial statement. Also the inventory should be impaired accordingly.
E. The depreciation amount in this case is a prior period item.it should rectify as a commission error in current period or disclose as prior period item. If it has impact on current year figures of depreciation and building the impact should be disclosed and amount should be rectified.