The Auditor Is Reviewing the Current Tax Liability for a Client

question 42

Multiple Choice

The auditor is reviewing the current tax liability for a client in an industry where tax rates are anticipated to decrease because of near-certain Congressional action. In this case the auditor should:

• A) recalculate the tax liability under the proposed rate.
• B) recalculate the tax liability under both the current and proposed rate.
• C) review the appropriateness of the tax liability assuming the current rate.
• D) disclose the benefit of probable tax legislation on tax liability in the footnotes.

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Definitions:

Leveraged Buyouts (LBOs)

Transaction in which a firm’s publicly owned stock is acquired in a mostly debt-financed tender offer, and a privately owned, highly leveraged firm results. Often, the firm’s own management initiates the LBO.

Private Equity Groups

Firms that invest in private companies, often acquiring significant or controlling stakes, with the intention of improving performance and increasing value before eventually selling the investment for a profit.

Borrowed Money

Funds that have been obtained through loans or debt, which typically incur interest charges and are required to be repaid.

Competitive Strategy

Approaches that a company adopts to gain an edge over its competitors, such as cost leadership, differentiation, or focus strategies.