TBL CASE 2023
OVERVIEW:
Role: auditor assess the accounting policies
Users of the financial statement/user need:
- Andrew: see how much he can
... [Show More] sell for
- Dan: see how much he should buy for/ wants fair representation
- Investors: fair representation
Bias: Since Andrew wants to maximize the total selling price he has the bias to maximize
net income and maximize net assets in order to overstate the value of the company and
receive the highest payment since the purchase price is dependent on both these items
(BV of net assets as of July 31, 1997 and 55% of net reported income after tax for July
31, 1998). This suggests that he will also attempt to lower taxes in order to show higher
net income after tax as well as defer revenues to the following year.
The president of TBL has the opposite bias to reduce earnings in 1998 in order to reduce
the purchase price that he would have to pay to acquire the business.
Potential conflict of interest: Considering TBL is the only interested party right now, we
are in a way representing both sides as we are the auditors for both TBL and CTE. We are
representing both sides to the potential acquisition. We are being asked to assist CTE in
how they can maximize the selling price and at the same time we are asked to audit TBL
in support of the sale. We would need to ensure that an engagement letter is explicit and
have both parties sign it so that they understand the nature of our audit and
recommendations.
By basing the purchase price on BV as opposed to FMV you aren’t reflecting the true
value of the assets. I recommend basing the purchase price on the FV as opposed to BV
because that better reflects the value of the assets and should be represented in the
purchase price.
Also the terms of the purchase contact are very vague and should be better defined in
order to ensure no misunderstandings occur throughout the acquisition. You should go
back and better define the terms.
ACCOUNTING ISSUES AT TBL:
Issue #1: How should the change in useful life be reflected on the financial statements?...
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