You are a partner in a national CPA firm. You are currently undergoing the 20X2 audit of your client, company A, specializes in mining and selling aggregate products (i.e., gravel and sand) to the construction industry. The Company has property in several states, which it mines throughout the year.

Several years ago, Company A purchased a property at a cost of $25 million. After several exploratory diggings, the Company concluded that the amount of aggregate underground could not support a recovery of the $25 million purchase price, so in 20X1, the Company wrote down the cost to an estimated fair value of $15 million, incurring a $10 million loss. You concurred with this treatment and issued an unqualified opinion on your audit of the Company’s 20X1 financial statements.

During your interim fieldwork on the audit of the Company’s 20X2 financial statements, you were reading the minutes of a Board meeting and noted that the Company is in negotiations to sell the property for $50 million to Company B, an investment company located in Miami, Florida. Company B is a client of your firm’s Miami office. You are surprised that a sales price of $50 million is being negotiated, considering your knowledge of the property, which you obtained during your 20X1 audit. However, the senior management of Company A is unwilling to discuss the proposed transaction with you, due to the highly sensitive nature of the transaction. Besides, senior management also indicated that the sales transaction is targeted to close in the first quarter of 20X3, so the sales will not have an impact on the Company’s 20X2 financial statements, which are currently under audit. Nevertheless, you are still concerned about the propriety of the proposed transaction.

REQUIRED:

1. Summarize the arguments for advising company B, through your Miami Office, that you consider the $50 million sales price to be grossly overstated.
2. Summarize the arguments for remaining silent and not offering any advice to company B on this matter.
3. Express your personal opinion as to the course of action you would take. Indicate which arguments most influenced your decision.