Terri Harrison, CPA, has discussed various reporting considerations with three of the enti...

Terri Harrison, CPA, has discussed various reporting considerations with three of the entities she audits. The three entities presented the following situations and asked how they would affect the audit report.

a. One of the entities has changed its depreciation method on its machinery from straight line to double declining balance. Both Harrison and the entity agree that the new depreciation method better reflects the usage of the machinery in the manufacturing process. The entity agrees with Harrison that the change is material but claims that it needs disclosure only in the “Summary of Significant Accounting Policies” footnote to the financial statements, not in Harrison’s report.

b. The second entity has a loan agreement that restricts the amount of cash dividends that can be paid and requires the maintenance of a particular current ratio. The entity is in compliance with the terms of the agreement, and it is not likely that there will be a violation in the foreseeable future. The entity believes there is no need to mention the restriction in the financial statements because such mention might mislead the readers.

c. The third entity correctly accounted for the acquisition of a majority-owned domestic subsidiary when that transaction occurred but did not properly present the minority interest in retained earnings or net income of the subsidiary in the consolidated financial statements. The entity agrees with Harrison that the minority interest presented in the consolidated financial statements is materially misstated but takes the position that the minority shareholders of the subsidiary should look to that subsidiary’s financial statements for information concerning their interest therein.

Required:

Each of the situations presented relates to one of the four generally accepted auditing standards of reporting. Identify and describe the applicable generally accepted auditing standard of reporting in each situation, and discuss how the particular entity’s situation relates to the standard.

(AICPA, adapted)