Questions On Accounting And Auditing Issues

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Introduction: After visiting the company, we found some accounting and auditing issues that come to our attention. So we prepared a memo for Mr. Kovacs as a result of our visit to make him be aware of these potential problems. Accounting issues: The owners of the company believe that WHCL will be poised to be a major player in the Canadian and the US heating and cooling markets in three years. However, after collecting information and auditing all the financial statement, we found that there is numerous issues need to be concerned for WHCL in recent years. 1. Covenants: We can notice that in the early fiscal 2000, WHCL increased its debt significantly, and the company had attached several covenants specifying that debt-to-equity ratio…show more content…
But this would certainly increase the audit risk. If the company has violated the covenants, the auditor should disclose that in the financial statement. Exhibit 1 Current Ratio Debt-To-Equity Ratio 1999 1347/895=1.505 1420/1257=1.12 2000 1446/1149=1.25 1974/1007=1.96 2. Warranty (Estimated Expense): In 1994, WHCL introduced a new model of gas furnace and these products are sold with ten-year warranties on parts and labor. Although this marketing strategy can attract more customers to buy their product, the increased long-term warranty claims will increase company’s warranty expense, and lower their future profit. The most serious accounting problem for WHCL is the warranty potential liability. The increasing liability concern is because WHCL sold a new model of gas furnace with 10-year warranties in 1994. So we need to consider how much repair costs should be reported in the 2000 financial statements. As we know, cost of repairing each furnace was $150, and there are 30 claims were made. So we need to record 30 x $150=$4500 in warranty expenses in 2000 financial statement. Another problem for us is the information we currently collect cannot let us make an accurate estimate. Apparently, WHCL don 't want to record too much costs in current period, but the fact is they require a large amount of accrual. If the estimate is low, then the costs we
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