Financial Disclosures Required in Various Situations: Rem
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Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination of Rem's financial statements for the year ended December 31, 2007, Maggie Zeen, CPA, completed field work 2 weeks ago. Ms. Zeen now is evaluating the significance of the following items prior to preparing her auditor's report. Except as noted, none of these items have been disclosed in the financial statements or notes.
Situation: A major electronics firm has introduced a line of products that will compete directly with Rem's priamry line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor's line will be of comparable quality of field work. Ms. Zeen reat the announcement in the newspaper and discussed the situation by telephone with Rem executives. Rem will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs.
Discuss any additional disclosures in the financial statements and notes that the auditor should reccomment to the client. (The cumulative effect of the four items should not be considered).
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Solution Summary
The solution discusses types of subsequent events and whether disclosure is required in either the balance sheet, income statement, and/or the footnotes to the financial statement for Rem, Inc. There are a number of possible solutions to the problem depending upon the audit firm's decisions. The 596 word solution is cited and referenced for further reading.
Solution Preview
There are two types of subsequent events:
The first type consists of those events that provide additional evidence with respect to conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements. All information that becomes available prior to the issuance of the financial statements should be used by management in its evaluation of the conditions on which the estimates were based. The financial statements should be adjusted for any changes in estimates resulting from the use of such evidence.
http://www.pcaobus.org/standards/interim_standards/auditing_standards/au_560.html
The second type consists of those events that provide evidence with respect to conditions that did not exist at the date of the balance sheet being reported on but arose subsequent to that date. These events should not result in adjustment of the financial statements. Some of these events, however, may be of such a ...
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