You Are Auditing a Company That Owns Twenty Percent of the Voting

question 61

Essay

You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case?

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Definitions:

Net Income

The profit resulting after all expenses, taxes, and costs have been deducted from total revenues.

Interest Expense

The cost incurred by an entity for borrowed funds, which can include costs related to bonds, loans, and lines of credit.

Inventory Turnover Ratio

A financial metric indicating how many times a company's inventory is sold and replaced over a specific period.

Return on Equity

A measure of financial performance calculated by dividing net income by shareholders' equity, indicating how well a company uses investments to generate earnings growth.