You have completed your audit of Khim Inc. and its consolidated subsidiaries for the year ended December 31, 2020, and are satisfied with the results of your examination. You have examined the financial statements of Khim for the past three years. The corporation follows IFRS and is now preparing its annual report to shareholders. The report will include the consolidated financial statements of Khim and its subsidiaries, and your auditor’s report. During your audit, the following matters came to your attention.
1. A vice-president who is also a shareholder resigned on December 31, 2020, after an argument with the president. The vice-president is soliciting proxies from shareholders and expects to obtain enough proxies to gain control of the board of directors so that a new president will be appointed. The president plans to have a note prepared that would include information on the upcoming proxy fight, management’s accomplishments over the years, and an appeal by management for the support of shareholders.
2. The corporation decided in 2020 to adopt the straight-line method of depreciation for plant equipment. The change had been adopted to better represent the pattern of benefit provided by these assets. The straight-line method will be used for new acquisitions and for previously acquired plant equipment that was being depreciated on an accelerated basis.
3. The Canada Revenue Agency is currently examining the corporation’s 2018 federal income tax return. It is questioning the amount of a deduction claimed by the corporation’s domestic subsidiary for a loss sustained in 2018. The examination is still in process, and any additional tax liability cannot be determined at this time. Management, along with the corporation’s tax lawyer, believe that there will be no substantial additional tax liability.
4. One of Khim’s wholly owned subsidiaries, Row Inc., has been involved in bribing customers to induce them to sign long-term contracts for future product deliveries. The matter has been investigated by the RCMP, and charges against Row’s vice-president of marketing and the controller are pending. Legal counsel for the subsidiary has been involved since the matter began in the middle of the current fiscal year. The RCMP took possession of Row’s correspondence files and some of the accounting records to establish its case. Khim Inc. has guarantees in place for Row’s bank loans because Row has experienced a series of losses in the past five years. Under the circumstances, if Row’s key employees are found guilty, the possibility of Row continuing as a going concern is extremely unlikely and the company will almost certainly go into bankruptcy. Although Khim is an unsecured creditor, as the parent company, it will want to remove itself from any future involvement with Row and would be willing to walk away from its investment. Consequently, the loss of reputation and other adverse consequences that could arise from convictions would be directed to the bankrupt company, Row Inc. Based on the evidence uncovered, Row’s legal counsel has concluded that the likelihood that the charges will hold up in court is extremely high. No accounting or legal action has yet been taken by Khim in the matter.
Instructions
a. Prepare the notes, if any, that you would suggest for each of the items.
b. For each item that you decided did not require note disclosure, explain your reasons for not making the disclosure.
