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As a result of highly profitable operations over a number of

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As a result of highly profitable operations over a number of years, Eastern Manufacturing Corporation accumulated a substantial investment portfolio. In the audit of the financial statements for the year ended December 31, 20X0, the following information came to the attention of the corporation's independent auditor (CPA):
1. The manufacturing operations of the corporation resulted in an operating loss for the year.
2. In 20X0, the corporation placed the securities making up the investment portfolio with a financial institution that will serve as custodian of the securities. Formerly, the securities were kept in the corporation's safe deposit box in the local bank.
3. On December 22, 20X0, the corporation sold and then repurchased on the same day a number of securities that had appreciated greatly in value.
Management stated that the purpose of the sale and repurchase was to establish a higher cost and book value for the securities and to avoid the reporting of a loss for the year.

Questions
A. Under what conditions would the CPA accept a confirmation of the securities on hand from the custodian in lieu of inspecting and counting the securities?
B. What disclosure, if any, of the sale and repurchase of the securities would the CPA recommend for the financial statements?

Solution Preview

As a result of highly profitable operations over a number of years, Eastern Manufacturing Corporation accumulated a substantial investment portfolio. In the audit of the financial statements for the year ended December 31, 20X0, the following information came to the attention of the corporation's independent auditor (CPA):
1. The manufacturing operations of the corporation resulted in an operating loss for the year.
2. In 20X0, the corporation placed the securities making up the investment portfolio with a financial institution that will serve as custodian of the securities. Formerly, the securities were kept in the corporation's safe deposit box in the local bank.
3. On December 22, 20X0, the corporation sold and then repurchased on the same day a number of securities that had appreciated greatly ...

Solution Summary

As a result of highly profitable operations over a number of years, Eastern Manufacturing Corporation accumulated a substantial investment portfolio. In the audit of the financial statements for the year ended December 31, 20X0, the following information came to the attention of the corporation's independent auditor (CPA):
1. The manufacturing operations of the corporation resulted in an operating loss for the year.
2. In 20X0, the corporation placed the securities making up the investment portfolio with a financial institution that will serve as custodian of the securities. Formerly, the securities were kept in the corporation's safe deposit box in the local bank.
3. On December 22, 20X0, the corporation sold and then repurchased on the same day a number of securities that had appreciated greatly in value.
Management stated that the purpose of the sale and repurchase was to establish a higher cost and book value for the securities and to avoid the reporting of a loss for the year.

Questions
A. Under what conditions would the CPA accept a confirmation of the securities on hand from the custodian in lieu of inspecting and counting the securities?
B. What disclosure, if any, of the sale and repurchase of the securities would the CPA recommend for the financial statements?

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