Learning Objectives

Required:

1. 
   List the procedures the auditor would perform.
   
2. 
   Write the auditor’s opinion if disclosure of the problem is considered adequate.
   
3. 
   Write the auditor’s opinion if adequate disclosure is not made.
   

3. 
   Matters for the Attention of Partners
   

29. 
    Matters for Attention of Partners. Mneme Monos, a Greek manufacturer of computer chip memories, is being audited by you and you are to make a report to the partner in charge, Abderus Calliope, Soma Orkoton Logiston (SOL). The chief executive officer, Zephyrus Briareus, is determined to make Mneme Monos the number one memory maker and has set up contracts with several distributors around the world, largely on his own initiative.
    

An analysis of financial statements shows that sales have increased 50 percent, but profits have dropped 13 percent. Cost of goods sold as a percentage of sales has increased although there have been only minor increases in inventory due to increase in the cost of silicon. Accounts receivable have increased 60 percent over last year. Expenses are up as a result of research and development expenditures.
Required:
Write a brief Matters for Attention of Partners memo about Mneme Monos to your managing partner, Abderus Calliope, including a cover page.

CASES

29. 
    SEC Regulation, Tax, and Working Papers. Marshall and Wyatt, CPA, have been for several years the independent auditors of Interstate LDC Land Development Corporation of New Orleans, Louisiana. During these years, Interstate LDC prepared and filed its own annual income tax returns.
    

During 20X3, Interstate LDC requested Marshall and Wyatt to audit all the necessary financial statements of the corporation to be submitted to the US Securities and Exchange Commission (SEC) in connection with a multi-state public offering of one million shares of Interstate Land Development Corporation common stock. This public offering came under the provisions of the US Securities Act of 1933. The audit was performed carefully and the financial statements were fairly presented for the respective periods. These financial statements were included in the registration statement filed with the SEC.
While the registration statement was being processed by the SEC, but before the effective date, the US taxing authority, the Internal Revenue Service (IRS), obtained a federal court subpoena directing Marshall and Wyatt to turn over all of its working papers relating to Interstate LDC for the years 20X0–X2. Marshall and Wyatt initially refused to comply for two reasons. First, Marshall and Wyatt did not prepare Interstate LDC’s tax returns. Second, Marshall and Wyatt claimed that the working papers were confidential matters subject to the privileged communications rule. Subsequently, however, Marshall and Wyatt did relinquish the subpoenaed working papers. Upon receiving the subpoena, Wyatt called Dan Dunkirk, the chairman of Interstate LDC’s board of directors, and

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asked him about IRS investigation. Dunkirk responded, “I’m sure the IRS people are on a ‘fishing expedition’ and that they will not find any material deficiencies.”
A few days later Chairman Dunkirk received a written memorandum from the IRS stating that Interstate LDC had underpaid its taxes during the period under review. The memorandum revealed that Interstate LDC was being assessed $800,000, including penalties and interest for the three years. Dunkirk forwarded a copy of this memorandum to Marshall and Wyatt.
This $800,000 assessment was material relative to the financial statements as of December 31, 20X3. The amount for each year individually, exclusive of penalty and interest, was not material relative to each respective year.