Required Raiders Oil Company had been a problem for its auditor, Stabler, CPA, for several years. The

 

Required

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Raiders Oil Company had been a problem for its auditor, Stabler, CPA, for several years. The company's stock was traded in the over-the-counter market, and management was concerned with keeping net income as high as possible to support the stock price. Each year, the controller would refuse to record any of Stabler's proposed entries if he could establish that they were not material. Accordingly, each year's net income was generally overstated by 5 to 10 percent, which Stabler accepted on the basis that it was not material. Of particular concern to Stabler was a $10 million investment in an oil venture in South America. However, he had been unsuccessful to date in proving to the controller's satisfaction that a loss should be recorded on this investment. During the current year's audit, Stabler discovered a report indicating that the South American oil venture was worthless and had been for two years. When he discussed this report with the controller, the controller suggested that the investment be written off in equal amounts over the next five years to prevent a significant effect in any year and to prevent embarrassment or liability to Stabler from disclosing that past financial statements were misstated. The controller stated that recognition of the loss in the current year would mean bankruptcy for Raiders Oil Company and certain liability for Stabler. Raiders Oil Company had been a problem for its auditor, Stabler, CPA, for several years. The company's stock was traded in the over-the-counter market, and management was concerned with keeping net income as high as possible to support the stock price. Each year, the controller would refuse to record any of Stabler's proposed entries if he could establish that they were not material. Accordingly, each year's net income was generally overstated by 5 to 10 percent, which Stabler accepted on the basis that it was not material. Of particular concern to Stabler was a $10 million investment in an oil venture in South America. However, he had been unsuccessful to date in proving to the controller's satisfaction that a loss should be recorded on this investment. During the current year's audit, Stabler discovered a report indicating that the South American oil venture was worthless and had been for two years. When he discussed this report with the controller, the controller suggested that the investment be written off in equal amounts over the next five years to prevent a significant effect in any year and to prevent embarrassment or liability to Stabler from disclosing that past financial statements were misstated. The controller stated that recognition of the loss in the current year would mean bankruptcy for Raiders Oil Company and certain liability for Stabler.

Answer rating: 100% (QA)

1 The case would be that the auditor was negligent in not advising the company to write off the investment in the year that it was discovered to be worthless The investors would argue that if the audi... View the full answer