Case Analysis - Terry Timber Inc

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Recommended: Role of external auditors for financial statements

To : Mr. Taylor, President, Terry Timber Inc. From : External Auditor, Terry Timber Inc. Subject : Advice on accounting policies of stated matters of Terry Timber Inc. (TT) Dear Mr. Taylor Enclosed is the report you requested regarding the adequate accounting policies for the stated matters for financial statements of TT. My objective, as an external auditor for TT, is to come up with reasonable and justifiable treatments for the accounting matters that result in meeting the goals of the company and objectives of all users. The Financial Statements (FS) of TT have primarily four users with different objectives, Shareholders – to evaluate the performance and growth of the company, to increase return on their investment, and to ensure accurate reporting. Bank - to determine, if company complies with covenants, to ensure repayment of their loan and accurate reporting, Union - to evaluate ongoing and future gains of the company and to see maximum profits, and Mr. Taylor, president of TT (preparer of FS) - to maximize profits, to evaluate growth of the company, to meet bank covenants, to minimize taxes and to ensure accurate financial reporting. There are other users as well like CRA/Auditors - to ensure accurate reporting by TT, Court (if requested during trails) – to see if FS reports are fairly stated or not. TT is a publicly traded company listed on Toronto Stock Exchange therefore it is constraint by GAAP and has to meet the requirements of the securities laws of Ontario and the rules of the stock exchange. TT is also constraint by covenants set by its Bank, and has to be extra careful about the Current Ratio. Also, union is expecting a significant gain-sharing plan therefore incomes reported in this year financial report will play crucial role in the negotiations. Further this time; auditors will be extra careful during audits because of the lawsuit filed by the shareholders, therefore, scrutiny will be high. Following are the issues that need to be addressed, while complying with the Financial reporting constraints. Court Cases : TT has two potential court cases against it, first, by Shareholders and second by Mr. MacDonald, ex-president of TT. According to GAAP, if likelihood of the event happening is known, damage is material and measurable then accrue the cost and disclose in financial notes but if any one of the three components are not known than disclose it in Financial Notes. In Mac Donald’s Case - even though damage is known and is very much material, likelihood of happening is not known.

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