You are auditing the financial records of a company and reviewing the property, plant, and equipment records. Included in the assets are two buildings and numerous machines in each building. One of the buildings is used to manufacture components of toys; the other is used for assembly and packing, using the manufactured components as well as others purchased from suppliers. You see that the company has changed from the straight-line to the double-declining-balance depreciation method at the beginning of the year. You also discover that a $90,000 repair was added to the cost of the building in the previous year. You decide to ask the CFO about these calculations and she replies, “We decided to change the depreciation method because toys have such short lives and get obsolete so fast.
You know how kids always want the latest fad. And that is partly why we are also going to recognize an asset impairment of $150,000 this year. And, as for that $90,000, those repairs should make the building last longer. But, anyway, the amount wasn’t material to our depreciation calculations.” As you walk back to your office, you recall from earlier in the audit that the company uses LIFO for its inventory and that income before income taxes has been around $1 million for each of the last several years.
Required
From financial reporting and ethical perspectives, discuss the issues raised by this situation.