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4520 Assignment 2

2283 words - 10 pages

ADMS 4520
Assignment # 2
Muhammad Choudhary
Student # 211085552
Section C
Haran Alagarajah
Student# 211337797
Section A
Handed into: Patricia Farrell
Submitted on: October 2nd, 2013

Case: 2-1
To: Fabio & Fox Chartered Accountants
Introduction:
Wonder Amusements Limited (WAL) is a company that was incorporated as an amusement park and golf courses. Recently WAL invested into a sports franchise which has caused the relocation of parts of the business.
Objective:
A meeting with the chief executive officer (Leo Titan) has shed some light on possible accounting and audit practises that need to be looked at. There are notes that was taken during the meeting with Leo and ...view middle of the document...

This further adds to a possible audit issue of misrepresented financial statements because there is an increased pressure to lower expenditures and to increase cash to please the lenders. The 3rd issue coming from the review of documents is the decision not to consolidate Northern Sports Limited (NSL) until they turn a profit. This ties into the earlier issue of misrepresented financial statements as NSL should be included in consolidated format. This is because WAL can exert significant influence and control over NSL. Since WAL owns 75% of NSL control exists. Furthermore since WAL is the owner of the arena they get a say in who gets to use the arena and in turn exert significant influence (also by owning 75% they can use their share to swing votes in their favour). In this situation the owners of WAL are all from the same family so the 75% owned of NSL is owned by the same family. This means significant influence is present.Since control and significant influence exist the investment in NSL needs to be consolidated according to IFRS 10. This means that Leo cannot wait until NSL turns a profit to consolidate, rather consolidation is currently required. The last issue here is many of the shareholders have expressed concern on Leo and his growth strategy. By looking at the above issue and this issue Leo's actions provide grounds for concern and should be looked at.
The second step in this assessment includes a look at possible accounting and audit implications pertaining to the notes obtained during a meeting with Leo. The issues are as follows:
Note 1:
The main issue here is the two holes being relocated will be moved in a subsequent year while the expenses associated with it are capitalized. The idea here is there is 2 potential treatments to these costs and they are expensing and capitalizing. In this situation capitalization is chosen but on the golf course itself. Expensing means charging an expense to an item because it did not add anything of value to an asset, rather it was an expense to get it to its intended state. Capitalizing therefore is charging an item to its capital account because it added to the asset. In this situation the golf course is being relocated and a road is being built. Capitalizing the golf course was chosen and it could be a feasible option. The reason being the golf course is being relocated which could potentially prolong its life or add a different look to it (all signs of improvement to the course). The road could also be capitalized here because costs were incurred to get the arena ready which the road connects too. Overall capitalization is the appropriate accounting method to use in this issue. Both accounts (golf course, road) can be capitalized so a suggestion is to pro rate an amount to each.
Note 2:
Since WAL bought all shares of this amusement park it now must consolidate its financial statements with the amusement park acquired. In this situation 4.25 million was used to make the...

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