You have been asked, as a member of a small Accounting 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. You are preparing your report and wonder about the following items:
? The company decided during the last month of the year to change their method of accounting for depreciation for this year’s financial statements. You do not believe that any adjustments were made to prior years’ reported results because of this change.
? You have been working at the bookkeeper’s desk while she is away on vacation. You pushed the desk blotter aside at one point and noticed underneath it a bill to the company from a local florist for R55. The bill is dated December, but you do not see it recorded anywhere in the company’s books. A number of other unopened envelopes are under the blotter, the contents of which cannot be judged from the outside.
? You read in yesterday’s newspaper that a local manufacturer is seriously contemplating a move to Atlanta. You know from your audit that they are an important customer of the company you are reviewing.
Required: 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 and cite them where relevant