Winter2009Mid01Solution

Winter2009Mid01Solution - BROCK UNIVERSITY THIS EXAMINATION...

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BROCK UNIVERSITY THIS EXAMINATION SCRIPT IS NOT TO BE DEPOSITED IN THE LIBRARY RESERVE Mid-Term 1: Winter 2009 Number of Pages: 12 Course: ACTG 3P11 Number of Students:125 Examination Date: February 13, 2009 Instructors: Ian L. Adamson Norman Chasse Location: In class Question 1 15 2 10 3 10 4 10 Bonus 2 Total 45 Name: SOLUTION Student Number:
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Accounting 3P11 Mid-Term 1 Winter 2009 2 of 12 Question 1: (15 marks) Able & Cain, PAs has completed the audit of the financial statements of Aviation Components Ltd. for the past four years and has always rendered an unqualified opinion. Over these years Aviation has grown to be a very large producer of aviation components and related products. In fact, the partner in charge of the audit learned that Aviation was intending, during the next year, to issue debentures of $20,000,000 to raise capital for expansion of its production facilities. Unknown to Able & Cain, several large accounts receivable shown on Aviation’s books represent goods that the “purchasers” had actually accepted from Aviation on consignment. George Flyby, the president of Aviation, had somehow persuaded the companies involved to sign the receivable confirmations for the amounts shown. Aviation also had a large inventory of radio parts that are carried at full value even though the parts are “old technology” and not marketable at full price. The combined result of these misrepresentations was to show a net profit of $2,500,000 instead of a loss of $2,000,000 and a positive net worth instead of a negative net worth. The current year’s audit proceeded smoothly and Able & Cain issued an unqualified report on the financial statements. The following year, Aviation issued the debentures. Unfortunately the expanded production facilities came on stream just in time for a severe downturn in the aviation sector and Aviation, facing a declining market and high debt load, went bankrupt. Required: a. A third party situation. (1 mark) Thus must consider if investors are a LIMITED CLASS. (1 mark) Yes they are a limited class as the partner in charge knows that Aviation is intending to issue debentures. (1 mark) 1. 2. 3. The investors suffered a loss. 4. The breach of duty resulted in the loss. (2 marks, ½ each) If they are successful in this they could recover for negligence. (1 mark)
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Accounting 3P11 Mid-Term 1 Winter 2009 3 of 12 b. 1. Absence of negligence. They performed the audit with due care in that they followed GAAS. Their working papers would be proof of this. 2.
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This note was uploaded on 10/22/2009 for the course ACCT 70360 taught by Professor Pathak during the Spring '09 term at Windsor.

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Winter2009Mid01Solution - BROCK UNIVERSITY THIS EXAMINATION...

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