Case Scenario:
You have completed your audit of Carter Corporation and its consolidated subsidiaries for the year ended December 31, 2004, and are satisfied with the results of your examination. You have examined the financial statements of Carter for the past three years. The corporation is now preparing its annual report to shareholders. The report will include the consolidated financial statements of Carter and its subsidiaries and your short-form auditor's report. During your audit, the following matters came to your attention.
1. The Internal Revenue Service, which is examining the corporation's 2002 federal income tax return, questions the amount of a deduction claimed by the corporation's domestic subsidiary for a loss sustained in 2002. The examination is still in process, and any additional tax liability is indeterminable at this time. The corporation's tax counsel believes that there will be no substantial additional tax liability.
2. A vice president who is also a stockholder resigned on December 31, 2004, after an argument with the president. The vice president is soliciting proxies from stockholders and expects to obtain sufficient proxies to gain control of the board of directors so that a new president will be appointed. The president plans to have a footnote prepared that would include information of the pending proxy fight, management's accomplishments over the years, and an appeal by management for the support of stockholders.
Required:
Question I: Prepare the footnotes, if any, that you would suggest for the foregoing listed items.
Question II: State your reasons for not making disclosure by footnote for each of the listed items for which you did not prepare a footnote.