Gourmet Products Inc Case Study

1125 WordsApr 9, 20155 Pages
Preparation of consolidated financial statements – adjustments and other issues Report to Ed Moore, CEO of Gourmet Products Inc. Prepared by Asif Majarani, Sr. Audit manager of Majarani Associates, CGAs Submitted October 31, 20X0 Summary Our firm has been engaged with GPI for compilation engagements for the past two years. For year ending September 30, 20X0, a preparation of consolidated financial statements are required due to acquisition of foreign subsidiary on August 15, 20X0. This report addresses issues surrounding the preparation of the consolidated statements for Gourmet Products Inc. (GPI) and Abruzzi Oils Inc., and provides suggested adjustments as well as recommendations on other issues. Since GPI is a publicly traded…show more content…
Under this method, any exchange gains or losses are deferred and included in OCI. Also, appropriate disclosure in financial statements should be included regarding presentation currency and functional currency used, as well as any exchange gains or losses recorded in OCI. Revaluation of land and building The revaluation of the land and building is inaccurately reported. Revalued amount should not increase the land and building accounts directly as these amounts are not realized. Adjustment: the increase in value should be credited to other comprehensive income less the loss that was recognized in the prior year. EUR 5K should be recorded as a gain on the income statement because it reverses the previously recognized loss. The remaining EUR 15K should be recorded in OCI and accumulated in equity under revaluation surplus. 150% markup of Abruzzi goods The transfer pricing of Abruzzi goods sold to GPI raises concerns. The markup of 150% seems unusually high with no explanation to support this decision. Due to the high markup cost, GPI would report a very low profit margin on the sales of these goods. Improper transfer pricing could provide an opportunity for GPI to income manipulation and income tax implications. The corporate tax rate in Italy is much lower than the tax rate in Canada so this may suggest potential tax avoidance by GPI. This issue has tax implications due to higher COS recorded in Canadian operations, thus decreasing the taxable income.

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