Your client, the Neighbourhood Paper Company (NPC), has a fiscal year-end of December 31. NPC needs to borrow money from the bank and believes current value financial statements that report the appreciated value of its assets would be helpful. A loan is needed for working capital.

NPC owns two paper-recycling processors. Old paper is chemically processed, reduced to a wet mass, and then pressed out into thick, semi-finished paper mats. The mats are sold to customers who use them for packing material. Recycling processors are fairly complex pieces of integrated machinery and are built on a customized basis by a few specialized engineering companies. NPC has owned one of the processors for five years. It was appraised last year at $135,000 by a qualified engineering appraiser. The second processor was purchased last month for $125,000—its appraised value—and $10,000 was spent in bringing certain maintenance up to date. Both processors have identical throughput production capabilities. 

The other major asset is a nine-hectare plot of land NPC bought four years ago when management thought the plant would be moved. The land was purchased for $195,000 and was appraised by a qualified appraiser at $250,000 only 20 months after the purchase date. The nine hectares are located near a rapidly expanding industrial area. 

Since the recycling processors were appraised/purchased so recently, management does not want to bear the expense of new appraisals this year. No plans have been made to obtain a new appraisal on the land. NPC, however, is a profitable operation. The unaudited income statement for the current year (historical-cost basis) shows net income of $46,000.

Required:

a. What practice standards are applicable to the engagement to review and report on the current value balance sheet?

b. What primary auditing procedures should you apply in addition to those necessary for the audit of the historical-cost financial statements?

c. Will any additional disclosures in footnotes be necessary?

d. Are there any evidential problems in the NPC situation that might prevent your rendering a report on the current value balance sheet?