The statement of financial position (balance sheet) of Trident Company reports assets of $5,500,000. Lisa Kimpton advises you that a major accounting firm has audited the statements and attested that they were prepared in accordance with generally accepted accounting principles. She tells you that she can buy the total owner’s interest in the business for only $3,800,000 and is seriously considering the opportunity. She says that the auditor’s unqualified opinion validates the $5,500,000 value of the assets. Lisa believes she would be foolish to pass up the opportunity to purchase the assets at a price of only $3,800,000.
a. What part of the accounting equation is Lisa failing to consider?
b. Comment on Lisa’s misconceptions regarding the auditor’s role in providing information that is useful in making investment decisions.