You are the audit manager in the audit of the financial statements of Midwest Grain Storage, Inc., a new client. The company’s records show that, as of the balance sheet date, approximately 15 million bushels of various grains are in storage for the Commodity Credit Corporation, an agency of the U.S. government.
In your review of the audit senior’s working papers, you ascertain the following facts:
a. All grain is stored under a Uniform Grain Storage Agreement, which holds Midwest responsible for the quantity and quality of the grain.
b. Losses due to shrinkage, spoilage, and so forth are inherent in the storage of grain. Mid- west’s losses, however, have been negligible due to the excellence of its storage facilities.
c. Midwest carries a warehouseman’s bond covering approximately 20 percent of the value of the stored grain.
In the loss contingencies section of the working papers, the senior auditor has made the following notation: “I propose recommending to Midwest’s controller that the contingent liability for grain spoilage and shrinkage be disclosed in a note to the financial statements.”
Do you concur with the senior’s proposal? Explain.