Case: Financial Audit and Predecessor Auditor

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Sample Case 1: Mead Motors purchases an automobile for its new car inventory from Generous Motors, which finances this transaction through its financial subsidiary, Generous Motors Credit Company (GMCC). Mead pays no funds to Generous Motors or GMCC until it sells the automobile. Mead must then repay the balance of the loan plus interest to GMCC. How should Mead report the acquisition and repayment transactions in its Statement of Cash Flows? Sample Case 1 Solution:

Problem Identification: How should a company report, if at all, cash and non-cash transactions owed to an entity’s financial subsidiary? Keywords: Cash flows; financ* subsidiaries; operating income. Conclusion: Per ASC 230-10-50-5), Mead should exclude transactions that involve no cash payments or receipts. However, per 230-10-45-17, it should record cash payments to GMCC for repayments of principle (and interest thereon) due to suppliers or their subsidiaries as operating cash (out) flows. Sample Case 2: In year 1, Joe Josephs, CPA, reviewed Lander Company’s financial statements. However, in year 2, the Lander Company hired Tom Holstrum, CPA, to audit its financial statements. Should Tom meet with Joe, and would Joe be considered as a predecessor auditor? Sample Case 2 Solution:

Problem Identification: Is a CPA who reviewed prior period financial statements considered as a predecessor auditor? Keywords: Review, predecessor auditor.
Conclusion: AU-C 510.05 defines a predecessor auditor and AU-C 210.A27 provides guidance as to discussion with the predecessor auditor. However, a CPAs performing compilations and reviews are not predecessor auditors. Nonetheless, Tom may still wish to meet with him to discuss “problem” encountered during this review engagement
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