You have been asked, as a member of a small firm to review the December 31 year-

Question

You have been asked, as a member of a small firm to review the December 31 year-end financial statements of a small (R2 million revenues) company in East London. The company has applied for a long-term loan from the bank. You are interested to note as you begin your review of the company's records that a principal stockholder is your former college roommate.

Should these items be disclosed in your report? why or why not? if you disclose, how should your disclosure be phrased? Should you disclose any other facts to the company, to your employer or in your report? Should the audit have been conducted differently? In your answers try to keep in mind some of the fundamental qualitative principles underlying financial reporting.

Explanation / Answer

The fact that a principal stockholder in the company is my former college roommate should be disclosed. It should disclosed as there is a conflict of interest.

The disclosure should be phrased as below:

"As a reviewer of the financial statements, I would like to bring to the notice of the memebers of the company that a principal stakeholder of your company is a related party to me as former college roommate."

The above fact should also be brought to the notice of my employer.

In such a case, audit should have done by any employee of the firm to avoid biased opinion on financial statements.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.