DISCUSSION 1
Going Concern" Please respond to the following:
• From the e-Activity, analyze the auditor’s responsibility to determine if a company can continue as a going concern. From your analysis, propose at least two (2) key factors that the auditor should consider when determining an entity’s ability to continue as a going concern. Provide a rationale to support your proposal.
• From the case study, analyze the inquiry letter sent by C.R. Brown. Next, determine at least one (1) omission that you believe occurred within the letter, and suggest one (1) way to improve the letter so that Consolidated’s outside attorney may corroborate the information in the case. Provide a rationale to support your response.
*7-54 (Letter of Audit Inquiry, LO 4) Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 2011. On February 20, 2012, Cole asked the client to draft an inquiry letter to J. J. Young, Consolidated’s outside attorney, to corroborate the information furnished to Cole by management concerning pending and threatened litigation, claims, and assessments and unasserted claims and assessments. On March 6, 2012, C. R. Brown, Consolidated’s chief financial officer, gave Cole a draft of the inquiry letter for Cole’s review before mailing it to Young.
Exhibit 7.4
Letter of Audit Inquiry
Nature Sporting Goods Manufacturing Company
200 Pine Way, Kirkville, WI 53800 (608) 255–7820
January 10, 2012
John Barrington Barrington, Hunt, &Wibfly 1500 Park Place Milwaukee, WI 52719
In connection with an audit of our financial statements at December 31, 2011, and for the year then ended, management of the Com- pany has prepared and furnished to our auditors, Rittenberg&Schwieger, CPAs, Madison WI 53711, a description and evaluation of certain contingencies, including that set forth below involving matters with respect to which you have been engaged and to which you have devoted substantive attention on behalf of the Company in the form of legal consultation or representation. Management of the Company regards this contingency as material. Materiality for purposes of this letter includes items involving amounts exceeding $75,000 individually or in the aggregate.
PENDING OR THREATENED LITIGATION
The Company is being sued by General Materials for failure to pay amounts it claims are due it under a purchase agreement dated March 31, 2009. The suit was filed May 23, 2011, claiming we owe it $140,000 for material we purchased January 29, 2011. This material was defective, and we had received written approval from General Materials to destroy it, which we did. General Materials now claims that its management did not properly authorize the approval. The case has gone through the deposition stage and trial is set for April 19, 2012. We believe that General Materials’ claim is without merit and that we will prevail in the suit.
Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information, including an explanation of those matters as to which your views may differ from those stated and an identification of the omission of any pend- ing or threatened litigation, claims, and assessments, or a statement that the list of such matters is complete.
There are no unasserted claims of which we are currently aware. We understand that should you have formed a professional conclu- sion that we should disclose or consider disclosure concerning an unasserted possible claim or assessment, as a matter of profes- sional responsibility to us, you will so advise us and will consult with us concerning the question of such disclosure and the applicable requirements of relevant financial accounting standards. Please specifically confirm to our auditors that our understanding is correct.
RESPONSE
Your response should include matters that existed as of December 31, 2011, and during the period from that date to the effective date of your response. Please specifically identify the nature of and reasons for any limitation on your response.
Our auditors expect to have the audit completed on February 28, 2012, and would appreciate receiving your reply by that date with a specified effective date no earlier than February 23, 2012.
OTHER MATTERS
Please also indicate the amount we were indebted to you for services and expenses on December 31, 2011
Very truly yours,
Joleen Soyka
Controller Nature Sporting Goods Manufacturing Company
DISCUSSION 2
"Corporate Taxation" Please respond to the following:
• In recent news, large corporations, such as Apple Inc., were accused of avoiding U.S. taxes and stashing cash overseas. Imagine you are the President of the United States, and you are planning a briefing to Congress about this issue. Propose one strategy that you plan to recommend to Congress in order to address the tax avoidance situation
• Analyze the significant rules concerning the manner in which corporations treat the dividends that they are paying. Based on your analysis, recommend at least two (2) changes that you would make to the rules that would be fairer to either the corporation, the individuals receiving dividends, or to both. Support your recommendation with examples of such changes.