IC11.1 Auditing ClubLoop Corporation (CL) is a large owner, operator, and developer of golf courses and resorts. The company is privately owned by several wealthy individuals. During the current year, ac- cording to the draft financial statements, revenues increased by 7.2% and net operating income increased by 13% to $22.5 million. Net income dropped from $2.9 million to $822,000. The decrease was largely due to two events: a change in accounting policy and costs related to the settlement of a lawsuit. One of the company's objectives is to always ensure that capital resources are readily available to meet approved capital expenditures and to take advantage of growth opportunities. According to the draft year-end financial statements, the company has current assets of $12 million and current liabilities of $28 million, resulting in a working capital deficit. Included in the current liabilities are long-term debts that are currently due. The company is working with the financial institutions in question to renew or replace these facilities. CL has received unsolicited expressions of interest from several financial institu- tions concerning these facilities, and management believes that these facilities will be replaced-hopefully before the current financial statements are issued. The company owns most of the land on which CL's golf courses are developed. Currently, the com- pany follows a rigorous "weed and feed" program in order to keep the grass on the golf courses in top shape. The chemicals in these fertilizers, herbicides, and insecticides are felt by some people in the local community to be toxic to the environment. The company has met with several community groups and has agreed to study the issue further. In a current meeting of the board of directors, the CEO committed the company to spending $1 million to limit any potential damage. As at year end, none of this amount has yet been spent. There is a concern that the community groups are going to launch legal proceedings and the company feels that this move will help CL's position if there ends up being a lawsuit. Part of the money is for landscaping to limit the spread of the sprayed chemicals and part of it is for advertising to promote the company as a good corporate citizen. The company is currently developing new golf courses. All direct costs related to the acquisition, development, and construction of these properties, including interest and management costs, are capitalized. For one of the new locations, which was just purchased and developed in the current year, the company has run into a problem. After CL spent several million dollars on development, the planned golf course is being blocked by environmental groups. The costs to develop the land have been capitalized as previously mentioned, on the basis that they would be recoverable from future membership revenues. However, the company has now decided to sell the land to a real estate developer On July 1, the government tax department issued notices of assessment to the company regarding a dispute over the recognition of revenues. Although the outcome of an appeal of the assessment cannot be determined, the company believes that it will owe $8.7 million if its appeal is unsuccessful. Instructions Adopt the role of the company's auditor and prepare an analysis of the financial reporting issues. IC11.1 Auditing ClubLoop Corporation (CL) is a large owner, operator, and developer of golf courses and resorts. The company is privately owned by several wealthy individuals. During the current year, ac- cording to the draft financial statements, revenues increased by 7.2% and net operating income increased by 13% to $22.5 million. Net income dropped from $2.9 million to $822,000. The decrease was largely due to two events: a change in accounting policy and costs related to the settlement of a lawsuit. One of the company's objectives is to always ensure that capital resources are readily available to meet approved capital expenditures and to take advantage of growth opportunities. According to the draft year-end financial statements, the company has current assets of $12 million and current liabilities of $28 million, resulting in a working capital deficit. Included in the current liabilities are long-term debts that are currently due. The company is working with the financial institutions in question to renew or replace these facilities. CL has received unsolicited expressions of interest from several financial institu- tions concerning these facilities, and management believes that these facilities will be replaced-hopefully before the current financial statements are issued. The company owns most of the land on which CL's golf courses are developed. Currently, the com- pany follows a rigorous "weed and feed" program in order to keep the grass on the golf courses in top shape. The chemicals in these fertilizers, herbicides, and insecticides are felt by some people in the local community to be toxic to the environment. The company has met with several community groups and has agreed to study the issue further. In a current meeting of the board of directors, the CEO committed the company to spending $1 million to limit any potential damage. As at year end, none of this amount has yet been spent. There is a concern that the community groups are going to launch legal proceedings and the company feels that this move will help CL's position if there ends up being a lawsuit. Part of the money is for landscaping to limit the spread of the sprayed chemicals and part of it is for advertising to promote the company as a good corporate citizen. The company is currently developing new golf courses. All direct costs related to the acquisition, development, and construction of these properties, including interest and management costs, are capitalized. For one of the new locations, which was just purchased and developed in the current year, the company has run into a problem. After CL spent several million dollars on development, the planned golf course is being blocked by environmental groups. The costs to develop the land have been capitalized as previously mentioned, on the basis that they would be recoverable from future membership revenues. However, the company has now decided to sell the land to a real estate developer On July 1, the government tax department issued notices of assessment to the company regarding a dispute over the recognition of revenues. Although the outcome of an appeal of the assessment cannot be determined, the company believes that it will owe $8.7 million if its appeal is unsuccessful. Instructions Adopt the role of the company's auditor and prepare an analysis of the financial reporting issues