Discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client.
Ace Inc. produces electronic components for
sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination
of Ace’s financial statements for the year ended December 31, 2011, Gloria Rodd, CPA, completed field work 2 weeks ago. Ms. Rodd now is evaluating the significance of the following items prior to preparing her auditor’s report. Except as noted, none of these items have been disclosed in the financial statements or notes.
A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2011, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings
restriction at December 31, 2011.