1. You have been asked by a long-term friend to fill a vacancy on the five-person...

1. You have been asked by a long-term friend to fill a vacancy on the five-person board of trustees for a small private company. The company’s principal asset is a banana plantation located on a remote South Pacific island. Your friend is the sole manager of the company which was organized as a trust for the benefit of her and her two brothers, who are also members of the trust’s board. The only other trustee director is the company’s long-time chief accountant.

Before making your decision, you made inquiries about the company’s financial reporting practices. You learned the following:

• The company’s annual financial statements were not audited by an independent certified public accountant. The trustees believed the benefits of audited financial statements were not worth the cost.

• The company’s fiscal period ran from January 1 to December 31.

• A full set of semiannual financial statements was prepared each year for the six-month period ending June 30. Like the annual financial report, they were available approximately two to three months after the close of the accounting period.

How might the information you learned about the financial reporting practices influence your decision to join the board of trustees?

Solutions

Expert Solution

The company as detailed in the question operates in the form of a trust which has majority of trustees as the family members and the only other than family person is their longtime chief accountant.

This small private limited company has a banana plantation as its major asset which is located at a remote location.

Decision to join to the board or not is based on the information learnt about the financial reporting practices, which is as discussed below (along with the analysis) –

The company’s annual financial statements were not audited by an independent certified public accountant. The trustees believed the benefits of audited financial statements were not worth the cost.

Analysis: An independent audit of the financial statements provides an assurance as to the True & Fair nature of the books of accounts. Also, it supports whether the financial statements are free from any material misstatement or not. Thus, it is one of the key criterion to base the decision as to join the board or not, since becoming the board member will make me the accountable and responsible person for the operations going on in the company.

The company’s fiscal period ran from January 1 to December 31.

Analysis: The period of the financial statements is immaterial to base the decision of joining the board. Thus, it will have no influence.

A full set of semiannual financial statements was prepared each year for the six-month period ending June 30. Like the annual financial report, they were available approximately two to three months after the close of the accounting period.

Analysis: This is actually a good practice to prepare half-yearly financial statements. However time frame of 2-3 months is somewhat on a higher side, which can be reduced. So, it may influence but is not a materialistic factor.

Conclusion: Basis the discussion above, non audit of financial statements is a critical point to take into consideration while other two are immaterial. It might be a possibility that something fishy is going on in the organization and thus it is advised to not to join the board of trustees.

ekkarill92 answered 4 months ago

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