The Following Are Two Unrelated Situations

question 52

Essay

The following are two unrelated situations. For each situation outline possible deviations (if any) from a standard auditor's report that may be necessary and give reasons. State your assumptions.
A) Queen Lake Construction Ltd. uses an aggressive revenue recognition policy under the percentage of completion method for long-term construction contracts. Your review of this year's contracts indicates that several projects look as if they will be high in revenue for the first two years and then have negligible earnings for the next three years.
B) Maple Manufacturing Limited constructs furniture out of maple wood. The furniture is prized for its durability and craftsmanship. Last year, the company received a letter from a government agency advising that it had been found that Maple's factory was located on contaminated land that leached hazardous chemicals into the air. This was a preliminary letter stating that a full investigation into the health effects was underway. Management has stated that everything is okay and the investigation was terminated. However, the lawyer refused to sign the legal letter with respect to several lawsuits with regarding employee claims for long-term disability due to a nervous disorder that affected employees' ability to work. Neither the investigation nor the lawsuits are disclosed in the notes to the financial statements.

• A) Queen Lake Construction Ltd. uses an aggressive revenue recognition policy under the percentage of completion method for long-term construction contracts. Your review of this year's contracts indicates that several projects look as if they will be high in revenue for the first two years and then have negligible earnings for the next three years.
• B) Maple Manufacturing Limited constructs furniture out of maple wood. The furniture is prized for its durability and craftsmanship. Last year, the company received a letter from a government agency advising that it had been found that Maple's factory was located on contaminated land that leached hazardous chemicals into the air. This was a preliminary letter stating that a full investigation into the health effects was underway. Management has stated that everything is okay and the investigation was terminated. However, the lawyer refused to sign the legal letter with respect to several lawsuits with regarding employee claims for long-term disability due to a nervous disorder that affected employees' ability to work. Neither the investigation nor the lawsuits are disclosed in the notes to the financial statements.

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Definitions:

Equity-Financed

Pertains to the method of raising capital by selling company shares rather than borrowing funds.

Earnings Per Share

A company's net profit divided by the number of its shares outstanding, indicating how much money each share of stock earns.

Merger

The combination of two or more companies into a single entity, typically to achieve synergistic benefits, expand market reach, or gain efficiencies.

Purchase Accounting Method

An accounting method used in mergers and acquisitions to consolidate the financial statements of both companies, where the purchaser's statements incorporate the assets and liabilities of the acquired company at their fair market values.