Question: You are the CA appointed as the new auditor of

You are the CA appointed as the new auditor of Growth Limited (GL), a private company, for the next three years. The requirement for an audit is specified in GL’s debt covenant with the bank. This is the first year that an audit will be completed.
As part of an ongoing expansion program, GL added two new sizes to its line of fish- crate products. The president of GL is pleased with the continuing expansion program. Annual sales are $ 1,800,000, the highest level in GL’s history and a real achievement for a firm of its size. The president attributes the increase in sales to the exacting standards of quality incorporated in its new products and made the following comments.
“We have never amortized or tested goodwill for impairment since goodwill is being built up in our business, not used. In fact, I can never see it going down in value since our business is continuing to grow. This year for the first time we acquired another company that provides additional products to add to our line. That increased our goodwill even more than we have now.”
“We also wrote off the deferred tax balance this year because it doesn’t mean anything. In fact, our banker adds the accumulated deferred tax balance to retained earnings when he reviews our annual financing proposals. I just couldn’t think of any reason why we should pay you to calculate deferred taxes when no one uses them.”

Discuss the president’s comments.

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  • CreatedMarch 13, 2015
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