McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins:
- Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.
- Should comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion.
- Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole.
- Should, if the inventories are material, qualify her opinion.
Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts?
- A property, plant, and equipment cutoff error near year-end has a more significant effect on net income.
- Relatively few transactions occur in property, plant, and equipment during the year.
- The assets involved with property, plant, and equipment ordinarily have relatively longer lives.
- Property, plant, and equipment accounts typically have a higher dollar value.
In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28,20X4, may affect the company's financial statements.
The following material events or transactions have come to her attention:
On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.
On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.
On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.
d. On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.
e. On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.
For each of the subsequent events, indicate whether they should result in:
Adjustment—an adjusting entry as of 20X3.
Possible Disclosure—Consider note disclosure as of 20X3.
In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items:
January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.
January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.
January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.
On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.
On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.
1. For each of the subsequent events, indicate whether they should result in:
Adjustment—an adjusting entry as of 20X3.
Consider Disclosure—consideration of note disclosure as of 20X3.
Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.