Escolar Documentos
Profissional Documentos
Cultura Documentos
Investing activities represent the purchase and sale of land, buildings, equipment, and other
assets not generally held for resale. In addition, investing activities include the purchase and
sale of financial instruments not intended for trading purposes (discussed in chapter 18).
Financing activities include transactions and events whereby cash is obtained from or repaid
to creditors (debt financing) or owners (equity financing). Financing activities would
include, for example, acquiring debt, capital leases, issuing bonds, or issuing preferred or
common stock. Financing activities would also include payments to retire debt, reacquiring
stock (treasury stock), and the payment of dividends.
17-2. When auditing the investing and financing cycles auditors typically address the following
issues:
What assets are necessary to support the operations of the entity, and what are
managements long-range plans for growing the entitys asset base? Answering this
question assists the auditor in developing expectations of long-term assets needed to
support operations.
What assets were acquired, or disposed of, during the period? Answering this question
confirms the auditors expectations regarding assets needed to operate effectively. It also
assists the auditor in developing expectations of regarding financing activities.
How were newly acquired assets financed? Answering this question completes the audit
of the investing and financing cycles.
These cycles are often audited together due to the strong connection between asset
acquisition and the financing of those assets.
17-3. Investing activities are critical to a company in the hotel industry as facilities are the primary
productive asset. The location and quality of hotel facilities are directly related to revenues
and represent a substantial proportion of the asset side of the balance sheet. Due to the longterm nature of these assets they are usually financed with long-term mortgages.
Alternatively, buildings are only necessary to house the process of computer assembly and
often these facilities may be leased rather than purchased. A computer assembler may even
consider an operating lease rather than a capital lease. The core processes for the computer
assembler are marketing and purchasing and long-term assets are primarily a support
function.
Solutions Manual to Modern Auditing: Copyright
17-1
17-4.
a.
b.
The audit objectives for natural resources and intangible assets would be quite
similar to those for plant assets. The natural resource issues are almost identical and
the auditor needs to consider the issues associated with depletion of assets. With
respect to intangible assets, there are significant issues associated with the valuation
of intangibles at acquisition, the amortization of intangibles, and the impairment of
intangibles.
17-2
17-5.
a.
Following are several examples of analytical procedures and how they might be
used to identify potential misstatements.
Ratio
Fixed Asset Turnover
Total Asset Turnover
Depreciation Expense
as a Percent of
Property, Plant and
Equipment
Repair Expenses to
Net Sales
17-6.
17-7.
Audit Significance
An unexpected increase in fixed asset turnover may indicate
the failure to record or capitalize depreciable assets.
An unexpected increase in total asset turnover may indicate the
failure to record or capitalize depreciable assets.
An unexpected increase or decrease in the depreciation
expense as a percent of depreciable assets may indicate an
error in calculating depreciation.
An unexpected increase in repair and maintenance expense
may indicate the possibility that assets that should be
capitalized have been expensed.
b.
Inherent risk may be low for the existence assertion for plant assets as they are not
vulnerable to theft and they are easy to observe. However, inherent risk may be
moderate to high for issues of completeness associated with the recording of capital
leases, the existence of various capitalized expenditures, or with the accounting
estimate associated with depreciation expense.
c.
The same system of internal control that governs normal day to day expenditures
also applies to the acquisition of plant assets. Additional controls that might not
apply to routine expenditures include the fact that due to the size and long-term
implications of acquisitions of plant assets, they are normally subject to a capital
budgeting process and review by the board of directors (or committee of the board).
Depreciation policies and useful lives should be reviewed by a disclosure committee.
a.
In a first time audit, the auditor undertakes an investigation of the beginning balances
and the ownership of major units of plant currently in service. In a recurring
engagement, the auditor only has the responsibility for determining that the
beginning balances agree with the adjusted balances in the preceding year's working
papers.
b.
a.
Applying analytical procedures involves the use of ratios and other analytical
techniques. This test applies to all assertion categories except rights and obligations.
17-3
b.
c.
Examining title documents and lease contracts involves the scrutiny of these
documents for such information as ownership rights and contract terms. This test
relates primarily to the existence or occurrence, rights and obligations, valuation or
allocation, and presentation and disclosure assertions.
d.
Vouching plant asset additions involves testing from the accounting records to
supporting documentation. This test provides evidence for the existence or
occurrence, rights and obligations, and valuation or allocation assertions.
17-8. The procedures that may be useful to the auditor in determining whether all plant asset
retirements have been recorded are:
Analyze the miscellaneous revenue account for proceeds from sales of plant assets.
Investigate the disposition of facilities associated with discontinued product lines and
operations.
Trace retirement work orders and authorizations for retirements to the accounting
records.
Review insurance policies for termination or reductions of coverage.
Make inquiry of management as to retirements.
17-9
a.
b.
The auditor should evaluate whether the client has appropriately accounted for the
impairment of plant assets when there has been a material change in the way an asset
is used, or when there has been a material change in the business environment. The
evidence to evaluate impairment is based on an estimate of the undiscounted future
cash flows from the asset. Based on the criteria established in FASB 121, an auditor
should consider that the value of an asset is impaired when the undiscounted future
cash flows from an asset are less than the book value of the asset.
17-10. a.
The financing cycle includes transactions and events whereby cash is obtained from
or repaid to creditors (debt financing) or owners (equity financing). Financing
activities would include, for example, acquiring debt, capital leases, issuing bonds,
or issuing preferred or common stock. Financing activities would also include
17-4
payments to retire debt, reacquiring stock (treasury stock), and the payment of
dividends.
b.
The financing cycle interfaces with the expenditure cycle when cash is disbursed for
bond interest, the redemption of bonds, payment of cash dividends, and the purchase
of treasury stock.
17-12. a.
b.
17-5
Ratio
Free Cash Flow
Interest Bearing Debt
to Total Assets
Shareholders Equity
to Total Assets
Comparing Return on
Assets with the
Incremental Cost of
Debt
Current Portion of
Debt and Dividends to
Cash Flow from
Operations
Times Interest Earned
Interest Expense to
Interest Bearing Debt
Audit Significance
Negative free cash flows indicate the need for, and approximate
amount of, expected financing to prevent drawing down on
cash or investments.
Provides a reasonableness of the entitys proportion of debt
that may be compared with prior years experience or industry
data.
Provides a reasonableness of the entitys proportion of equity
that may be compared with prior years experience or industry
data.
If a company is able to generate a higher rate of return on
assets than its incremental cost of debt, this is a signal that an
entity may use debt financing to expand the assets and
earnings of the entity.
17-13. Control risk as also low as financing transactions receive considerable attention from senior
management and the board of directors that carefully monitor the acquisition and retirement
of debt.
17-14. The functions that relate to financing cycle transactions include:
Authorizing bonds and capital stock
Issuing bonds and capital stock
Paying bond interest and cash dividends
Redeeming and reacquiring bonds and capital stock
Recording financing transactions
17-15. Because of the nature and materiality most types of long-term debt transactions, inherent
risk is often moderate to high for all related account balance assertions. Based on
consideration of these factors and any relevant control risk assessments, an appropriate level
of detection risk is determined for each significant assertion related to long-term debt
balances. Many auditors follow a primarily substantive approach to long-term debt because
of the efficiency and effectiveness of using confirmations to audit a small population size.
17-6
17-16. The substantive tests that apply to the existence or occurrence and valuation or allocation
assertions for long-term debt balances are.
EO
VA
Verify accuracy of balances, schedules, and
X
subsidiary ledgers (perform initial procedures)
Perform analytical procedures.
X
X
Vouch entries in long term debt and related income X
X
statement accounts
Review authorizations and contracts
X
X
Confirm debt with lenders and bond trustees
X
X
Recalculate interest expense
X
17-17. a.
b.
c.
In vouching entries to long-term debt accounts, the direction of the substantive test is
from recorded entries to supporting documentation. This test pertains to the existence
or occurrence, completeness, rights and obligations, and valuation or allocation
assertions.
In confirming debt, the auditor has direct communication with lenders and bond
trustees and the responses are returned directly to the auditor. This test relates to four
assertions: existence or occurrence, completeness, rights and obligations, and
valuation or allocation.
In recalculating interest expense, the auditor re-performs the computations made by
the client. This test relates primarily to valuation or allocation.
17-18. Inherent risk for stockholders' equity balances should be low. However, the acceptable level
of detection risk for the existence or occurrence and completeness assertions for capital
stock are likely to be high when the company uses a registrar and transfer agent. For the
other assertions, detection risk may be moderate. Again, many auditors follow a primarily
substantive approach to auditing shareholders equity because of the efficiency and
effectiveness of using confirmations (registrar or transfer agent) to audit a small population
size.
17-19. The substantive tests that apply to the existence or occurrence and completeness assertions
for stockholders' equity balances are
EO
C
Perform analytical procedures
X
X
Vouch entries to capital stock accounts
X
Vouch entries to retained earnings
X
Review articles of incorporation and bylaws
X
Review authorizations and terms of stock issues
X
Confirm shares outstanding with registrar and transfer agent
X
X
Inspect stock certificate book
X
X
Inspect certificates of shares held in treasury
X
X
17-7
17-20. Following a several examples of analytical procedures and how they might be used to
identify potential misstatements in shareholders equity transactions.
Ratio
Return on common
stockholders equity
Equity to total liability
and equity
Dividend payout rate
Earnings per share
Sustainable growth
rate
Audit Significance
Provides a measure of the rate of return generated on the
common shareholders investment. Auditors should understand
the competitiveness factors that allow a company to obtain
unusually high returns.
Provides a reasonableness of the entitys proportion of equity
that may be compared with prior years experience or industry
data.
Auditors would normally expect low dividend payout rates for
high growth companies that need reinvested earnings to fund
investments in working capital and long-term assets.
Earnings per share is useful for comparisons with price per
share. This ratio can be compared with industry price earnings
ratios for reasonableness.
Provides an estimate of rate of sales growth that can be
obtained without changing the entitys profitability or financing
structure. The auditor should expect changes in the financing
structure when sales grow significantly faster than the
sustainable growth rate.
17-21. Various value-added services that the auditor might offer to a client related to the investing
and financing cycles include:
Benchmarking the return generated by investing activities against competitors.
Independent review of strategic plans for investing activities.
Explanation of the advantages and disadvantages of bank financing, mortgage financing,
lease financing, financing that may be available from insurance companies or other
entities, or various classes of preferred stock.
Many investments are accomplished through merger or acquisition. A CPA firm may
provide expertise in guiding a company through a merger or acquisition. This service
would include identifying possible acquisitions candidates, helping an entity evaluate the
potential benefits and risks associated with an acquisitions, as well as how to structure
the acquisition.
Comprehensive Questions
(Estimated time - 25 minutes)
17-22. The key internal controls related to Grant's property, equipment and related transactions that
Harris may consider in assessing control risk include the following:
Advance approval in accordance with management's criteria is required for property
and equipment transactions.
Approval authority for transactions above an established dollar value is required at a
higher level, such as the board of directors.
Property and equipment transactions are adequately documented.
Solutions Manual to Modern Auditing: Copyright
17-8
There are written policies covering capitalizing expenditures, classifying leases, and
determining estimated useful lives, salvage values, and methods of depreciation and
amortization.
There are written policies covering retirement procedures that include serially
numbered retirement work orders, stating reasons for retirement and bearing
appropriate approvals.
There are adequate policies and procedures to determine whether property and
equipment are received and properly recorded such as a system that matches
purchase orders, receiving reports and vendors' invoices.
There are adequate procedures to determine whether dispositions of property and
equipment are properly accounted for and proceeds, if any, are received in
accordance with management's authorization.
A property and equipment subsidiary ledger is maintained showing additions,
retirements, and depreciation, and the ledger is periodically reconciled.
Property and equipment is physically inspected and reconciled at reasonable
intervals with independently maintained property and equipment records.
An annual budget is prepared and monitored to forecast and control acquisitions and
retirements of property and equipment.
Reporting procedures assure prompt identification and analysis of variances between
authorized expenditures and actual costs.
Property and equipment is protected by adequate safeguards.
Property and equipment is insured in accordance with management's authorization.
Documents evidencing title and property rights are periodically compared with the
detailed property records.
The entity employs internal auditors to test whether the internal control structure
policies and procedures are operating effectively.
17-9
17-23. a.
Category
Initial
Procedures
Analytical
Procedures
Tests of
Details of
Transactions
Tests of
Details of
Balances
Tests of
Details of
Accounting
Estimates
Tests of
Details of
Presentation
and
Disclosure
The following matrix identifies the substantive tests pertaining to property, plant and
equipment and the audit objectives pertaining to each.
Substantive Test
1)
Obtain and understanding of the entity and its environment and determine:
a) The significance of plant assets, and changes in plant assets, to the entity.
b) Key economic drivers that influence the entitys acquisition of plant assets.
c) Industry standards for the extent to which the entity is capital intensive and the
impact of plant assets on earnings.
d) Understand the degree to which the company has used variable interest entities
and operating leases to finance assets.
2) Perform initial procedures on plant assets balances and records that will be subjected
to further testing.
a) Trace beginning balance for plant assets and accumulated depreciation to prior
years working papers.
b) Review activity in general ledger accounts plant assets and depreciation expense
and investigate entries that appear unusual in amount or source.
c) Obtain client-prepared schedules of plant asset additions, retirements and
depreciation expense, and determine that they accurately represent the
underlying accounting records from which they were prepared by:
i) Footing and crossfooting the schedules and reconciling the totals with
increases or decreases in the related general ledger balances during the
period.
ii) Testing agreement of items on schedules with entries in related general
ledger accounts.
3) Perform analytical procedures:
a) Develop an expectation for plant assets using knowledge of the industry and the
entitys business activity
b) Calculate ratios:
i) Fixed asset turnover
ii) Depreciation expense as a percent of sales
iii) Repair and maintenance expense as a percent of sales
iv) Rate of return on assets
c) Analyze ratio results relative to expectations based on prior years, industry data,
budgeted amounts, or other data.
4) Vouch plant asset additions to supporting documentation.
5) Vouch plant asset disposals to supporting documentation.
6) Vouch a sample of entries to repairs and maintenance expense.
7) Vouch the recording of new capital lease and operating leases to underlying
contracts.
8) Inspect plant asset.
a) Inspect plant asset additions.
b) Tour other plant assets and be alert to evidence of additions and disposals not
included on clients schedules and to conditions that bear on the proper
valuation and classification of the plant assets.
9) Examine title documents and contracts
10) Evaluate the fair presentation of depreciation expense by evaluating the
appropriateness of useful lives and estimated salvage values.
11) Determine if any significant events have resulted in an impairment of the value of
plant assets.
12) Compare statement presentation with GAAP.
a) Determine that plant assets and related expenses, gains, and losses are properly
identified and classified in the financial statements.
b) Determine the appropriateness of disclosures related to the cost, book value,
depreciation methods, and useful lives of major classes of plant assets, the
pledging of plant assets as collateral and the terms of lease contracts.
c) Evaluate the completeness of presentation and disclosures for receivables in
drafts of financial statements to determine conformity to GAAP by reference to
disclosure checklist.
d) Read disclosures and independently evaluate their understandability.
All
VA4
EO1, EO4
VA4
VA4
All
17-10
b.
Item No.
1.
2.
3.
4.
Is Audit Adjustment
Reasons Why Audit Adjustment or Reclassification
or Reclassification
is Required or Not Required
Required?
Yes or No
Yes
Commissions paid to real estate agents are costs directly related to
the acquisition of the property and should be included in the land
cost. Costs of removing, relocating, or reconstructing property of
others to acquire possession are costs that are directly attributable
to conditioning the property for use and should be included in land
costs. An adjustment is required for these items so that total land
costs can properly be included in Property, Plant & Equipment.
No
No adjustment is required because clearing costs are costs that are
directly attributable to conditioning the property for use and should
be included in land costs which are part of Property, Plant &
Equipment.
Yes
Since clearing costs are costs of the land, amounts realized from the
sale of materials recovered, such as timber and gravel, should be a
reduction of the cost of the land and should not be recorded as other
income.
Yes
All costs relating to the purchase of machinery and equipment
should be capitalized. For purchased items such costs would
include invoice price, freight costs, and unloading charges. Royalty
payments, however, should not be included in the cost of the
machinery. Such payments should be charged to expenses as they
accrue. The machinery costs, other than royalty payments, should
be included in Property, Plant & Equipment.
17-11
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
a. Substantive Test
c. Type of
Evidence
Documentary
Documentary
Mathematical
Documentary
Documentary,
confirmation
Valuation or allocation
Mathematical
Documentary,
confirmation
Documentary
Documentary
17-12
a. Substantive Test
c. Type of
Evidence
stock issues
17-26. (Estimated time - 25 minutes)
a.
The substantive tests that Andrews should employ in examining the loans are as
follows:
Obtain an understanding of the business purpose of the loans made by the
president.
Confirm the loans, including terms, by direct communication.
Re-compute (or verify) interest expense and interest payable.
Re-compute the long-term and short-term portions of the debt.
Review minutes of meetings of the board of directors for proper authorization.
Verify payments made during the year and transactions after the year end.
Read (notes to) the financial statements and the loan agreements, and evaluate
the adequacy of disclosure and compliance with restrictions.
Obtain a management representation letter.
b.
17-13
Compare the total in the stockholders' ledger and the stock certificate book to the
balance sheet presentation.
Re-compute the weighted average number of shares outstanding.
Compare the financial statement presentation and disclosure with generally accepted
accounting principles.
Determine the existence of and proper accounting for common stock and treasury stock
transactions occurring since year-end.
Obtain written representations concerning common and treasury stock in the client
representation letter.
17-14
Cases
17-29. (Estimated Time 40 minutes)
a.
b.
The economic substance of the patent is the right to produce and sell a particular
drug if the drug becomes marketable. The primary issues associated with the
recording of the patent is the fair market value of the redeemable preferred stock. If
9% is a market interest rate and no discount or premium is appropriate, then the book
value of the patent is appropriately recognized at $10 million. The auditor also will
need to consider the appropriate amortization period. At this point in time the
appropriate amortization period might be 16 years. In the future, the auditor needs
be sensitive to impairment in the value of the patent.
Assertion
All assertions
Valuation or allocation
c.
The economic substance of the redeemable preferred stock is debt. The security has a fixed
rate of return stated as a percentage of the par value of the security and it has a fixed
redemption date. Corporate holders of the redeemable preferred stock will enjoy a dividend
received deduction for tax purposes. The company has not appropriately classified the
security as the redeemable preferred stock is debt in economic substance and should be
reported as the last item in debt, prior to shareholders equity.
d.
Assertion
All assertions
Existence and
occurrence, right and
obligations
All assertions
Valuation and allocation
17-15
Procedure
Compare statement presentation with GAAP.
a) Determine that long-term debt balances are properly identified and classified
in the financial statements.
b) Determine the appropriateness of disclosures concerning all terms, covenants,
and retirement provisions pertaining to long term debt.
Assertion
Presentation and
disclosure
c)
Professional Simulation
Audit
Procedures
FARS
Research
Situation
Audit Report
The following table explains the auditing procedures that should be performed associated with the
legend identified as a) through h).
Legend
a)
b)
c)
d)
e)
f)
g)
h)
Audit Procedure
Foot
Crossfoot
Traced beginning balance to prior years working papers and the general ledger.
Vouched additions to supporting documentation, e.g., vendors invoices, title reports, etc.
Vouched disposals to supporting documentation, e.g., bill of sale and cash receipts
Vouched reclassification to supporting documents, title reports and underlying
appraisals, showing the underlying value of the building.
Recalculated depreciation expense and evaluated the reasonableness of depreciation
methods, useful lives, and salvage values.
Vouched historical cost of disposal to underlying asset schedule with net book values.
FARS
Research
Situation
Audit
Procedures
Audit Report
The following quotes are from Statement of Financial Accounting Standards No. 13, Accounting for
Leases. Paragraphs 6 and 7 provide the basis for determining if the lease is a capital lease or an
operating lease.
17-16
6.
For purposes of applying the accounting and reporting standards of this Statement, leases are
classified as follows:
a.
7.
The criteria for classifying leases set forth in this paragraph and in paragraph 8 derive from
the concept set forth in paragraph 60. If at its inception (as defined in paragraph 5(b)) a
lease meets one or more of the following four criteria, the lease shall be classified as a
capital lease by the lessee. Otherwise, it shall be classified as an operating lease. (See
Appendix C for an illustration of the application of these criteria.)
a.
b.
c.
d.
The lease transfers ownership of the property to the lessee by the end of the lease
term (as defined in paragraph 5(f)).
The lease contains a bargain purchase option (as defined in paragraph 5(d)).
The lease term (as defined in paragraph 5(f)) is equal to 75 percent or more of the
estimated economic life of the leased property (as defined in paragraph 5(g)).
However, if the beginning of the lease term falls within the last 25 percent of the
total estimated economic life of the leased property, including earlier years of use,
this criterion shall not be used for purposes of classifying the lease.
The present value at the beginning of the lease term of the minimum lease payments
(as defined in paragraph 5(j)), excluding that portion of the payments representing
executory costs such as insurance, maintenance, and taxes to be paid by the lessor,
including any profit thereon, equals or exceeds 90 percent of the excess of the fair
value of the leased property (as defined in paragraph 5(c)) to the lessor at the
inception of the lease over any related investment tax credit retained by the lessor
and expected to be realized by him. However, if the beginning of the lease term falls
within the last 25 percent of the total estimated economic life of the leased property,
including earlier years of use, this criterion shall not be used for purposes of
classifying the lease. A lessor shall compute the present value of the minimum lease
payments using the interest rate implicit in the lease (as defined in paragraph 5(k)).
A lessee shall compute the present value of the minimum lease payments using his
incremental borrowing rate (as defined in paragraph 5(1)), unless (i) it is practicable
for him to learn the implicit rate computed by the lessor and (ii) the implicit rate
computed by the lessor is less than the lessee's incremental borrowing rate. If both
of those conditions are met, the lessee shall use the implicit rate.
The lease described in the simulation meets all the criteria to be classified as an operating lease.
Also relevant to the evaluation of this lease is FIN 46. Shailer Enterprises is a variable interest
entity that should be consolidated ANUs financial statements. FIN 46 indicates that an enterprise
that consolidates a variable interest entity is the primary beneficiary of the variable interest entity.
The primary beneficiary of a variable interest entity is the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected residual returns, or both, as a result of
Solutions Manual to Modern Auditing: Copyright
17-17
holding variable interests, which are the ownership, contractual, or other pecuniary interests in an
entity. The ability to make decisions is not a variable interest, but it is an indication that the decision
maker should carefully consider whether it holds sufficient variable interests to be the primary
beneficiary. An enterprise with a variable interest in a variable interest entity must consider variable
interests of related parties and de facto agents as its own in determining whether it is the primary
beneficiary of the entity. ANU is it primary beneficiary that absorbs the majority of any losses to
the bank or Shailer Enterprises and received the expected returns if the value of the property
increases. The appropriate paragraphs of FIN 46 follow.
Shailer enterprises meets the following conditions of a variable interest entity based on paragraph 2
to the summary of FIN 46.
2.
The equity investors lack one or more of the following essential characteristics of a
controlling financial interest:
a.
The direct or indirect ability to make decisions about the entity's activities through
voting rights or similar rights
b.
The obligation to absorb the expected losses of the entity if they occur, which makes
it possible for the entity to finance its activities
c.
The right to receive the expected residual returns of the entity if they occur, which is
the compensation for the risk of absorbing the expected losses.
A party that cannot finance its operations without subordinated financial support
from the enterprise, for example, another variable interest entity of which the
enterprise is the primary beneficiary
A party that received its interests as a contribution or loan from the enterprise
An officer, employee, or member of the governing board of the enterprise
A party that has (1) an agreement that it cannot sell, transfer, or encumber its
interests in the entity without the prior approval of the enterprise or (2) a close
business relationship like the relationship between a professional service provider
and one of its significant clients.
Further, paragraph 14 of FIN 46 explains why the primary beneficiary should consolidate the
variable interest entity in the financial statements.
14.
An enterprise shall consolidate a variable interest entity if that enterprise has a variable
interest (or combination of variable interests) that will absorb a majority of the entity's
expected losses if they occur, receive a majority of the entity's expected residual returns if
17-18
they occur, or both. An enterprise shall consider the rights and obligations conveyed by its
variable interests and the relationship of its variable interests with variable interests held by
other parties to determine whether its variable interests will absorb a majority of a variable
interest entity's expected losses, receive a majority of the entity's expected residual returns,
or both. A direct or indirect ability to make decisions that significantly affect the results of
the activities of a variable interest entity is a strong indication that an enterprise has one or
both of the characteristics that would require consolidation of the variable interest entity. If
one enterprise will absorb a majority of a variable interest entity's expected losses and
another enterprise will receive a majority of that entity's expected residual returns, the
enterprise absorbing a majority of the losses shall consolidate the variable interest entity.
The economic substance of this lease arrangement is that Shailer Enterprises is dependent upon
ANU to obtain the loan, and ANU enjoys the benefits if the value of the real estate increases and
suffers the loss (through the contingent rent payment) if the value of the real estate decreases. As a
result, ANU should consolidate the financial statements of Shailer Enterprises as part of its own
financial statements.
17-19
Audit Report
Situation
Audit
Procedures
FARS
Research
INDEPENDENT AUDITORS REPORT
17-20