In connection with your examination of the financial statements of Olars Manufacturing Corp. for the year ended December 31, your post-balance sheet audit procedures disclosed the following items:
1. January 3: The provincial government approved construction of an expressway. The plan will result in the expropriation of land owned by Olars Manufacturing Corp. Construction will begin late next year. No estimate of the expropriation award is available.
2. January 4: The funds for a $25,000 loan to the corporation made by Mr. Olars on July 15 were obtained by him with a loan on his personal life insurance policy. The loan was recorded in the loan payable to officers’ account. Mr. Olars’ source of the funds was not disclosed in the company records. The corporation pays the premiums on the life insurance policy, and Mrs. Olars, wife of the president, is the owner and beneficiary of the policy.
3. January 7: The mineral content of a shipment of ore en route on December 31 was determined to be 72%. The shipment was recorded at year-end at an estimated content of 50% by a debit to raw material inventory and a credit to accounts payable in the amount of $20,600. The final liability to the vendor is based on the actual mineral content of the shipment.
4. January 15: A series of personal disagreements have arisen between Mr. Olars, the president, and Mr. Tweedy, his brother-in-law, the treasurer. Mr. Tweedy resigned, effective immediately, under an agreement whereby the corporation would purchase his 10% share ownership at book value as of December 31. Payment is to be made in two equal amounts in cash on April 1 and October 1. In December the treasurer had obtained a divorce from Mr. Olars’ sister.
5. January 31: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off. On February 5 all the remaining workers went on strike. To date, the strike is unsettled.
6. February 10: A contract was signed whereby Mammoth Enterprises purchased from Olars Manufacturing all of the latter’s capital assets (including rights to receive the proceeds of any property expropriation), inventories, and the right to conduct business under the name “Olars Manufacturing Division.” The transfer’s effective date will be March 1. The sale price was $500,000, subject to adjustment after a physical inventory.
Important factors contributing to the decision to enter into the contract were the policy of the board of directors of Mammoth Industries to diversify the firm’s activities and the report of a survey conducted by an independent market appraisal firm, which revealed a declining market for Olars’ products.
Assume that the above items came to your attention prior to completion of your audit work on February 15. For each of the above items:
a. Give the audit procedures, if any that would have brought the item to your attention. Indicate other sources of information that may have revealed the item.
b. Discuss the disclosure that you would recommend for the item, listing all details. Indicate those, if any, that should not be disclosed. Give your reasons for recommending or not recommending disclosure of these.