Question: You have been engaged to audit the financial statements of

You have been engaged to audit the financial statements of Hardy Hardware Distributors Inc., as of December 31. In your review of the corporate nonfinancial records, you have found that Hardy Hardware owns 15 percent of the outstanding voting common stock of Hardy Products Corporation. Upon further investigation, you learn that Hardy Products Corporation manufactures a line of hardware goods, 90 percent of which is sold to Hardy Hardware. James L.
Hardy, president of Hardy Hardware, has supplied you objective evidence that he personally owns 30 percent of the Hardy Products voting stock and the remaining 70 percent is owned by Juana Hardy Lewis, his sister and president of Hardy Products. Hardy also owns 20 percent of the voting common stock of Hardy Hardware Distributors, another 20 percent is held by an estate of which Hardy and Lewis are beneficiaries, and the remaining 60 percent is publicly held. The stock is listed on the American Stock Exchange. Hardy Hardware consistently has reported operating profits higher than the industry average. Hardy Products Corporation, however, has a net return on sales of only 1 percent.
The Hardy Products investment always has been reported at cost and no dividends have been paid by the company. During the course of your conversations with the Hardy sib-lings, you learn that you were appointed as auditor because they had a heated disagreement with the former auditors over the issues of accounting for the Hardy Products investment and the prices at which goods have been sold to Hardy Hardware.

Discuss the following.
a. Identify the issues in this situation as they relate to
(1) Conflicts of interest and
(2) Controlling influences among individuals and corporations.
b. Should the investment in Hardy Products Corporation be accounted for using the equity method?
c. What evidence should the auditor seek with regard to the prices paid by Hardy Hard-ware for products purchased from Hardy Products Corporation?
d. What information would you consider necessary for adequate disclosure in the financial statements of Hardy Hardware Distributors? Instructions for Discussion Cases 10.59– 10.61 These cases are designed to be similar to the ones in the chapter. They give the problem, and your assignment is to write the audit approach portion of the case organized around these sections: Objectives. Express the objective in terms of the facts supposedly asserted in financial records, accounts, and statements.
Control. Write a brief explanation of control considerations, especially the kinds of manipulations that could arise from the situation described in the case.
Tests of controls. Write some procedures for getting evidence about existing controls, especially procedures that could discover management manipulations. If there are no controls to test, there are no procedures to perform; go on then to the next section. A procedure should instruct someone about the source(s) of evidence to tap and the work to do.
Audit of balance. Write some procedures for getting evidence about the existence, completeness, valuation, rights, and disclosure assertions identified in your objectives section.
Discovery summary. Write a short statement about the discovery you expect to accomplish with your procedures

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