The following events occurred in independent cases, but in each instance the event happened after the close of the fiscal year under audit but before all members of the audit team had left the office of the auditee. For each case, state what impact, if any, you would expect on the financial statements (and notes). The balance sheet date in each instance is December 31, 20X1.
1. On December 31, the commodities handled by the company had been traded in the open market for $1.40 per pound. This price had prevailed for two weeks, following an official market report that predicted vastly enlarged supplies; however, no purchases were made at $1.40. The price throughout the preceding year, and several prior years, had been about $2. On January 18, 20X2, the price returned to $2, following disclosure of an error in the official calculations of the prior December—correction of which destroyed the expectations of excessive supplies. Inventory at December 31, 20X1, had been valued on a lower-of-cost-or-net-realizable-value basis.
2. On February 1, 20X2, the board of directors adopted a resolution accepting an investment banker’s offer to guarantee the marketing of $100 million of preferred shares.
3. On January 22, 20X2, one of the auditee’s three major plants burned down, a $50 million loss that was covered to $40 million by insurance.
4. The auditee in this case is an open-end-type investment company. In January, 20X2, a new management took control. By February 20X2 it had sold 90% of the investments carried at December 31, 20X1, and had purchased substantially more speculative ones.
5. This company has a wholly owned but not consolidated subsidiary producing oil in a foreign country. A serious rebellion began in that country on January 18, 20X2, and continued beyond the completion of your audit work. There has been extensive coverage of the fighting here.
6. The auditee, Comtois Corp., sells property management software systems. Shortly before its December 31, 20X1, year-end, Comtois’ president finalized a large sale to a provincial ministry. The contract has been completed and all the terms agreed to by the assistant deputy minister, but the minister herself is the only one authorized to sign the contract because of the large dollar amount involved. As of the last day of audit fieldwork, March 3, 20X2, Comtois has not yet received the signed contract because the minister has not been available. The president wants to recognize the revenue in Comtois’ 20X1 fiscal year anyway so that the sales people and managers involved can be paid a bonus this year based on it. The auditee’s stated accounting policy for revenue recognition on these types of sales, established five years earlier, is to recognize revenue when the sales contract is signed.
7. During its fiscal year ending December 31, 20X1, Noriker Inc. issued common shares to its vice-president of marketing. At the date of issuing these shares, the company also provided the vice-president with a non-interest-bearing loan of $50,000 to purchase the shares. While reviewing the minutes of all the Noriker board of directors meetings during the audit fieldwork, Noriker’s auditor notes that in a meeting on February 12, 20X2, the Noriker board agreed to forgive this loan, effective on that day.