This is the first year that you have audited Hurst & Johnson Corporation. You discovered that the company is carrying its property, plant, and equipment at appraisal values and determines depreciation on the basis of these values. This is considered a very large scope-limitation, and you have not been able to form an opinion on the financial statements taken as a whole.
- Discuss the ethical issues involved with this situation.
- Explain how you should handle this situation.
- Explain what type of report you should issue and why.
This is a serious scope limitation because property, plant, and equipment are supposed to be measured at cost (See Codification Topic 360, US GAAP Standards). On the other hand appraisal value is the value of the company based on a projection of future cash flows that the company will receive from property, plant, and equipment during its present and future operations.
The ethical issues involved with this situation is that if the charging of depreciation is not in accordance with the GAAP it can have a substantial effect on the income of the firm. Inflating or reducing the income is not ethical. Similarly, the appraisal value of property, plant, ...
Appraisal value issue is explained in a structured manner in this response. The answer includes references used.