I want case-note in O/C/R format. Observation(Audit issue), Criteria(GAAP or CAS standard with quote) and Recommendation: what should the auditor do? In this case, only use quotes from CASs 200, 210 and 700.

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Kam and Mike have been best friends since high school. While at university, Kam studied business, and Mike studied environmental engineering, but they both ended up finding jobs with Waterfalls Inc., a large 100-year-old public company in the paper and packaging industry. After a few years spent working their way up Waterfalls' corporate ladder, both Kam and Mike are doing quite well. Often, though, when they meet for lunch, the two of them reminisce about all the ideas they had had years before for businesses they could start up. Kam's aunt, Zhang, is a very successful entrepreneur in the recycled-paper industry, and Kam had always hoped to follow her path. One day while golfing with Georgina, Waterfalls' chief financial officer (CFO), Kam learns that Waterfalls' board has decided to sell off the poorly performing manufacturing division, StyreneTech Inc., Waterfalls' 100%-owned subsidiary producing polystyrene-foam packaging products for the food services industry. According to Georgina, StyreneTech's poor performance is due to changes in demand for polystyrene-foam packaging; environmental regulations favouring other materials; and a major fraud in which a purchasing manager was diverting shipments of ethylene raw material to another factory, of which he was part owner. Georgina hints to Kam that Waterfalls' board would favour a management buyout "to avoid having a lot of venture capitalists sniffing around." Kam tells Mike about this right away, and the wheels start turning. Mike meets with StyreneTech's operations manager and, from their conversation, sees a huge opportunity to take advantage of the move toward more environmentally friendly practices by converting StyreneTech's production over to new biomass-based materials, which are biodegradable and made from renewable resources. This would address the environmental concerns and costs that have been dragging StyreneTech's performance down. Once Kam gets his Aunt Zhang interested in the investment, things move quickly. Kam and Mike start looking into the financial side of buying out the StyreneTech business. A large investment from Zhang is needed to come up with the amount Waterfalls wants for the StyreneTech shares. Since Waterfalls owns 100% of StyreneTech, it must present its shareholders with audited consolidated financial statements (i.e., statements that include the accounts of StyreneTech). Waterfalls' auditors, Grand & Quatre, Public Accountants (G&Q), provide an opinion that Waterfalls' consolidated financial statements were fairly presented at its last fiscal year-end. Georgina gives Kam a copy of StyreneTech's most recent standalone-entity financial statements and tells him that while these financial statements have been "reviewed for accuracy" by Waterfalls internal auditor, they are only needed for tax purposes, so Waterfalls does not pay to have G&Q audit them. Zhang, however, demands audited financial statements for StyreneTech before she will invest. Kam took just a couple of accounting courses in business school, and Mike does not know anything about financial statements at all, so they are Kam and Mike have been best friends since high school. While at university, Kam studied business, and Mike studied environmental engineering, but they both ended up finding jobs with Waterfalls Inc., a large 100-year-old public company in the paper and packaging industry. After a few years spent working their way up Waterfalls' corporate ladder, both Kam and Mike are doing quite well. Often, though, when they meet for lunch, the two of them reminisce about all the ideas they had had years before for businesses they could start up. Kam's aunt, Zhang, is a very successful entrepreneur in the recycled-paper industry, and Kam had always hoped to follow her path. One day while golfing with Georgina, Waterfalls' chief financial officer (CFO), Kam learns that Waterfalls' board has decided to sell off the poorly performing manufacturing division, StyreneTech Inc., Waterfalls' 100%-owned subsidiary producing polystyrene-foam packaging products for the food services industry. According to Georgina, StyreneTech's poor performance is due to changes in demand for polystyrene-foam packaging; environmental regulations favouring other materials; and a major fraud in which a purchasing manager was diverting shipments of ethylene raw material to another factory, of which he was part owner. Georgina hints to Kam that Waterfalls' board would favour a management buyout "to avoid having a lot of venture capitalists sniffing around." Kam tells Mike about this right away, and the wheels start turning. Mike meets with StyreneTech's operations manager and, from their conversation, sees a huge opportunity to take advantage of the move toward more environmentally friendly practices by converting StyreneTech's production over to new biomass-based materials, which are biodegradable and made from renewable resources. This would address the environmental concerns and costs that have been dragging StyreneTech's performance down. Once Kam gets his Aunt Zhang interested in the investment, things move quickly. Kam and Mike start looking into the financial side of buying out the StyreneTech business. A large investment from Zhang is needed to come up with the amount Waterfalls wants for the StyreneTech shares. Since Waterfalls owns 100% of StyreneTech, it must present its shareholders with audited consolidated financial statements (i.e., statements that include the accounts of StyreneTech). Waterfalls' auditors, Grand & Quatre, Public Accountants (G&Q), provide an opinion that Waterfalls' consolidated financial statements were fairly presented at its last fiscal year-end. Georgina gives Kam a copy of StyreneTech's most recent standalone-entity financial statements and tells him that while these financial statements have been "reviewed for accuracy" by Waterfalls internal auditor, they are only needed for tax purposes, so Waterfalls does not pay to have G&Q audit them. Zhang, however, demands audited financial statements for StyreneTech before she will invest. Kam took just a couple of accounting courses in business school, and Mike does not know anything about financial statements at all, so they are

Answer rating: 100% (QA)

Observation Audit Issue The audit issue in this case is the requirement for audited financial statements for StyreneTech before Zhang Kam and Mike pro... View the full answer