Essay on Balance Sheet and Pcl

Overview
PCL operated in a high-risk environment – selling collectibles and special edition plates. This means that we, auditor, will need to rely heavily on expert opinion in valuing inventory impairment. They are also planning to make an investment of $4,900,000 by acquiring shares of Guther Limited. Owners are thinking to turn public in the near future; IFRS might be required. Primary stakeholder is the Bank, RBC.

Analysis – Investment
The information given for the Investment issues is limited; due to this limitation we will separate the analysis into 2 categories – Cost method and Equity method.
If it turns out that PCL does not have a significant influence, usually significant influence is determined when the company has more than 20% of the shares of the other company, then a cost method is used. This treat investment by recording it at cost and according PE GAAP, revenue is only recognized when it is realized – when the shares are sold or dividend is declared. However, the value of the investment is subjected to the lower of cost or market rule. This means that at the end of year or when there is significant event that suggest impairment, an impairment test need to be carried out; the case have provided us data that suggest impairment is likely, a decline in the demand of porcelain collectibles.

On the other hand, if it turns out that PCL have a significant influence then the equity method is used. This method requires the partners to rely on the data provided by Bon&Jovi LLP since a consolidated income statement is needed. It also means that during the buyout all the asset of Guther Limited is valued at fair market value – an expert valuation might be needed in such a case to value the intangible asset “exclusive rights” (CAS 500 need to be reviewed for expert usage). As a group engagement partner the competency and independency of Bon&Jovi need to be assess; usually it means that the group engagement partner need to send in a team. The partner will be responsible for the direction, supervision and performance of the group audit engagement. In order to satisfy this requirement once the competency and independency of the group engagement partner has been established, the partner need to create a group audit plan. In this plan, the partner need to put emphasis on the impairment test that need to be done on Guther Limited inventory and Intangible asset “Exclusive rights to sell porcelain figurine”. Impairment test is appropriate because of the drastic change on the market trend.

Due to the limited information, it is almost impossible to suggest an appropriate accounting approach that Bon&Jovi need to follow. However, based on this information substantive approach is the most appropriate because of the expensive value of the inventory.

Analysis – Note receivables
Audit approach- substantive approach should be used here due to the high risk of material misstatement; the reasons for high risk are following.
1. management bias-The managements are planning to take PCL public and PCL is facing a significant amount of debt, so management might overstate note receivables to make the financial statement aggressive.
2. Internal control cannot be relied on- PCL is a private company held by three sisters who are also key management, so management can overide internal control easily and they have the bias to do so, which means the internal control of PCL cannot be relied on.
3. Change in accouting policy-the company may change its accounting policy this year and this increases inherent risk.

Assertion for note receivables- assertion about note receivables are existense, right and obligation, completeness, vluation and allocation. Firstly, Risk assessment procedures should be performed first, the conclusion of high risk of material misstatemnt can be made due to reasons explained in audit approach part. Secondly, the

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