Question

You, CA, are the senior in charge of an audit of Proctor Industries (PI), a public company in the business of selling plumbing parts wholesale. It is now November 3, 20X5—five weeks after PI’s year- end of September 30, 20X5, and one week before your firm has been asked to discuss the financial statements for PI, including any significant accounting issues, with PI’s audit committee.
PI’s unconsolidated annual sales approximate $ 36 million. It operates through six regional branches with approximately equal sales volumes at each branch.
PI has a 60% interest in Minor Inc., a company located in the United Kingdom. Minor Inc. also has a September 30 year- end and is audited by a firm of chartered accountants in the United Kingdom.
You are at the client’s premises reviewing the year- end working papers for Proctor Industries, and you note the following items:
1. PI’s unconsolidated net income before income taxes is normally about $ 2 million.
2. The allowance for doubtful accounts in PI is $ 200,000. Based on the work performed in this section of the audit, the audit assistant concluded that the allowance should be at least $ 250,000, and could be as high as $ 350,000.
3. You have contacted the auditors for Minor Inc. (MI) to obtain its financial statements. However, they are unable to provide you with the audited financial statements since the president of MI refused to sign the management representation letter. He disagrees with the revenue recognition policy insisted on by the auditors of MI and intends to obtain opinions from other audit firms on this issue. The financial statements, under the policy supported by the auditors, show a net loss of $ 320,000 for the year. MI’s current policy for revenue recognition is when items are produced, based on the support that there is a ready market for MI’s supplies, which are currently in short supply. PI’s revenue recognition policy is when goods are shipped to the customer.
4. There is a new item on PI’s SFP called “Investments.” The working papers indicate that this represents a cash payment in June 20X5 of $ 100,000 for all the common shares of Chemicals Inc. (CI). This company has an August 31 year- end. Although CI has previously never been audited, PI requested, and you have completed, an audit of CI for its August 31, 20X5 year-end. The audited financial statements for CI appear in Exhibit C. CI manufactures household cleaning products. The equipment used in the manufacturing process is not complex and is inexpensive to replace. CI has earned large profits in the past, mainly from government contracts. This year, the financial statements show an after-tax profit of $ 100,000.
5. An extract of the agreement to purchase CI states that if the company earns more than $ 1 million per year in any of the next five years, the vendor may buy back the common shares for a price to be determined.
6. One of the legal letters for PI was returned with the following comment:
Chemicals Inc. may be liable for damages arising from the alleged dumping of hazardous chemicals from its Bedford plant into the nearby Black River. As of the current date, a statement of claim has been filed. CI denies these allegations.
The partner has asked you to prepare a memo on the above items for his use in discussions with the audit committee.

Required
Prepare the memo requested by thepartner.


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  • CreatedMarch 13, 2015
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