Roscoe, a public accountant, has completed the examination of the financial statements of Excelsior Corporation as of and for the year ended December 31, 2012. Roscoe also examined and reported on the Excelsior financial statements for the prior year. Roscoe drafted the following auditor’s report for 2012:
We have audited the balance sheet and statements of income and retained earnings of Excelsior Corporation as of December 31, 2012.
MANAGEMENT’S RESPONSIBILITY
Management prepared the financial statements and is responsible for risk assessment and designing systems of internal control in response to those risks. It also selects and implements the accounting policies embedded in these financial statements.
AUDITOR RESPONSIBILITY
We were engaged to conduct an audit for the above- mentioned financial statements. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of misstatement.
We believe that our audit provides a reasonable basis for our opinion.
OPINION
In our opinion, the financial statements referred to above present fairly the financial position of Excelsior Corporation as of December 31, 2012, and the results of its operations for the year then ended in conformity with International Financial Reporting Standards, applied on a basis consistent with those of the preceding year.
(Signed)
Roscoe, Public Accountant
OTHER INFORMATION:
• Excelsior is presenting comparative financial statements.
• Excelsior does not wish to present a cash flow statement for either year.
• During 2012, Excelsior changed its method of accounting for long-term construction contracts, properly reflected the effect of the change in the current year’s financial statements, and restated the prior year’s statements. Roscoe is satisfied with Excelsior’s justification for making the change. The change is discussed in footnote 12.
• Roscoe was unable to perform normal accounts receivable confirmation procedures, but alternate procedures were used to satisfy Roscoe as to the existence of the receivables.
• Excelsior Corporation is the defendant in a lawsuit, the outcome of which is highly uncertain. If the case is settled in favour of the plaintiff, Excelsior will be required to pay a substantial amount of cash, which might require the sale of certain capital assets. The litigation and the possible effects have been properly disclosed in footnote 11.
• Excelsior issued debentures on January 31, 2012, in the amount of $10,000,000. The funds obtained from the issuance were used to finance the expansion of plant facilities. The debenture agreement restricts the payment of future cash dividends to earnings after December 31, 2013. Excelsior declined to disclose these essential data in the footnotes to the financial statements.
REQUIRED
a. Identify and explain any items included in “Other Information” that need not be part of the auditor’s report.
b. Explain the deficiencies in Roscoe’s auditor’s report as drafted.