Auditors-Are-Us LLC, audited the financial statements of CAPITAL INDUSTRIES, a private company, for the year ended...

 

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Auditors-Are-Us LLC, audited the financial statements of CAPITAL INDUSTRIES, a private company, for the year ended December 31, 2020. Materiality threshold was $750,000. The following issues were encountered during the audit: 1. CAPITAL INDUSTRIES is a defendant in a lawsuit alleging environmental pollution. This is adequately disclosed in the Notes to the Financial Statements but no provision for liability was recorded by Management. The auditors Proposed Adjusting Journal Entry for $2,000,000 was rejected by Management. 2. Management erroneously understated Income Tax Expense by $1,200,000. The auditors' Proposed Adjusting Journal Entry was accepted. This was a matter that involved especially challenging, subjective and complex judgements by the auditors. 3. Management revealed to the auditors that it was discontinuing a division - XYZ Products - a 100% wholly owned subsidiary in 2021. This division accounted for 30 % of CAPITAL INDUSTRIES' Revenues in 2020. CAPITAL INDUSTRIES's Net Income is $10,000,000 in 2020. It had outstanding weighted average common shares of 400,000 and fully diluted shares of 600,000 during 2020. REQUIREMENT: Write a memorandum describing how each of the above issues should be addressed in the Independent Auditors' Report which is to be issued on March 10, 2021. Auditors-Are-Us LLC, audited the financial statements of CAPITAL INDUSTRIES, a private company, for the year ended December 31, 2020. Materiality threshold was $750,000. The following issues were encountered during the audit: 1. CAPITAL INDUSTRIES is a defendant in a lawsuit alleging environmental pollution. This is adequately disclosed in the Notes to the Financial Statements but no provision for liability was recorded by Management. The auditors Proposed Adjusting Journal Entry for $2,000,000 was rejected by Management. 2. Management erroneously understated Income Tax Expense by $1,200,000. The auditors' Proposed Adjusting Journal Entry was accepted. This was a matter that involved especially challenging, subjective and complex judgements by the auditors. 3. Management revealed to the auditors that it was discontinuing a division - XYZ Products - a 100% wholly owned subsidiary in 2021. This division accounted for 30 % of CAPITAL INDUSTRIES' Revenues in 2020. CAPITAL INDUSTRIES's Net Income is $10,000,000 in 2020. It had outstanding weighted average common shares of 400,000 and fully diluted shares of 600,000 during 2020. REQUIREMENT: Write a memorandum describing how each of the above issues should be addressed in the Independent Auditors' Report which is to be issued on March 10, 2021.

Answer rating: 100% (QA)

The materiality thresholds in audits refer to refer to the benchmark used to obtain reasonable ... View the full answer