Auditor & Management Reports

The final selection of assignments from theIntermediate Accountingcourse text involves explaining auditor's reports and management's reports. You will also consider an ethical question regarding quarterly expenses, and apply compound interest techniques.

Complete the following cases in theIntermediate Accountingcourse text:

• C6-1, "Auditors Report"
• C6-2, "Management's Report"
• C6-9, "Ethics and Quarterly Expenses"

Also, complete the following exercise in theIntermediate Accountingcourse text, located in the "Time Value of Money Module" on page M29:

• EM-11, "Series of Compound Interest Techniques"

C6-1 Auditors Report Meyer Company is considering being audited for the first time. Mary Thomas, its president, has asked your advice. She says: \"I understand that after an audit the certified public accountant issues a report that expresses some opinions, and that one type of report is 'unqualified.' What exactly is involved in an audit, what opinions does the auditor express, and what paragraphs are included in an unqualified audit report?\" Required: Prepare a written response to the president of Meyer Company. C6-2 Management's Report CMA Adapted The subject of management reports has been prominent the past few years. A management report is included in the annual report to shareholders. This report should not be confused with management's discussion and analysis of operations and financial condition that also is relatively new to the annual report. The management report is included in the annual report to shareholders as a result of the urging of a number of groups and organizations. Consequently, the form and content of the annual report to shareholders continues to evolve as management attempts to present additional information that will be useful to readers. Required: 1. Explain the general purposes of the management report. 2. Identify five subject areas or topics which have been recommended for inclusion in the management report. 3. Explain why the content of the management report influences the activities of the external auditor during the audit engagement? C6-9 Ethics and Quarterly Expenses It is March 2011, and you have just been hired by the Tallas Company to be its accountant. Tallas is a small corporation that does a seasonal business of selling snow removal equipment, with most of its sales to selling snow removal equipment, with most of its sales to retailers occurring in the last two quarters of the calendar year. Production is particularly heavy during the second quarter, in preparation for these sales. During the first quarter, production is slowest, so this is when Tallas does the majority of its repairs and maintenance on its production equipment. You are in the process of preparing Tallas Company's 2011 first quarter interim report. After preparing a preliminary income statement, which shows a modest #30,000 profit, you begin to prepare a preliminary balance sheet. In reviewing the asset accounts in the general ledger, you notice an account entitled Miscellaneous Factory Assets in the amount of $140,000. Since this a large amount relative to the other assets and you are unclear how to classify this asset, you ask the controller for an explanation. The controller replies, \"Oh that. Just include Property, Plant, and Equipment. That is the amount we spent on repairs and maintenance during the first quarter. If we expensed all of it now, we would show a loss for the first quarter. Instead, we record the amount as an asset, wait to see how the second quarter results are, and then expense some of it so we can show a reasonable profit. The remainder we expense during our busy season of the third and fourth quarters. We have been doing this for years. It makes all of our quarterly income statements look better. Besides, it makes no differience, since our total yearly income is the same regardless of when we report repairs and maintenance expense during the four quarters.\" Required: From financial reporting and ethical perspectives, when do you think Tallas Company should report its quarterly repairs and maintenance expense? EM-11 Series of Compound Interest Techniques The following are several situations involving compound interest. Required: Using the appropriate table, solve each of the following: 1. Hope Dearborn invests $40,000 on January 1, 2010 in a savings account that earns interest of 8% compounded semiannually. What will be the amount in the fund on December 31, 2015? 2. Ben Johnson receives a bonus of $5,000 each year on December 31. He starts depositing his bonus on December 31, 2010 in a savings account that earns interest of 12% compounded annually. What will be the amount in the fund on December 31, 2014 after he deposits his bonus on that date? 3. Ron Sewert owes $30,000 on a non-interest-bearing note due January 1, 2020. He offers to pay the amount on January 1, 2010 provided that it is discounted at 10% on a compound annual discount basis. What would he have to pay on January 1, 2010 under this assumption? 4. June Stickney purchased an annuity on January 1, 2010 which, at a 12% annual rate, would yield $6,000 each June and December for the next six years. What was the cost of the annuity to Stickney? 5. Five equal annual contributions are to be made to a fund, the first deposit on December 31, 2010. Determine the equal contributions that, if invested at 10% compounded annually, will produce a fund of $30,000 on December 31, 2015. 6. Beginning on December 31, 2011, six equal annual withdrawals are to be made. Determine the equal annual withdrawals if $11,000 is invested at 10% interest compounded annually on December 31, 2010