The Case of Lancaster ElectronicsTypes of Disclosure - Essay Example

Financial ments and auditing Introduction Conducting an audit for a firm is a thrilling feeling for an auditor since it sharpens the skills one already got. According to (Meigs & Whittington, 1982), any financial transactions done by a corporation should be noted in its financial statements. As an auditor financial transactions and policy changes need to be backed up with appropriate documents. Mr. Olds, certified public accountant, goes through the financial statements for Lancaster Electronics and found out anomalies.

Financial transactions were carried out and were not included in the financial statements. As an auditor he is supposed to give a report to give direction to the management of Lancaster Electronics. Financial statements and auditing The payment of the dividend, year 2009 was as per the policy, but 2010 payment was halted and resumed in the first quarter of 2011. The information should have been reflected in the equity’s statement. Grinaker & Barr (1965) argued that changes in the equity payment should always be explained briefly in the footnote of equity statement.

In 2010, the dividend was retained to finance the equipment for the new plant. The amount was neither reflected in the income statement as expenses nor in cash flow statement as investing activities. An auditor has to be certain that cash generated and spent can be accounted. Lancaster electronics received a loan that was to be repaid within a timeframe of ten years. The loan is a long term liability since it has to be repaid for more than one year. This should have been reflected in the balance sheet as long term liability.

A ten year loan repayment period is a huge chunk amount of money. Therefore, the report of an auditor will not represent the actual state of the company. The agreement between the lender and Lancaster, of dividend payment, should not exceed the net income is contrary to how the firm used to treat preferred stocks. A brief explanation should be attached at the footnote of the equity statement. The staff auditor’s reported stated there was no restriction on the retained earning as at 31 Dec 2011.

The information should be in equity statement so that other auditor can make a report that is accurate and reliable. Failure to include that information an auditor will a make wrong conclusion regarding dividend payment. Lancaster Electronics has a new manufacturing plant that costs $ 600,000. However, the lease is neither reflecting on the balance sheet nor income statement. An increase in asset volume and value makes the company stable. If a company does not present its entire asset on the balance sheet, it becomes hard to verify the liquidity and solvency of a corporation.

The plant is said to have a lifespan of twenty-five years. Depreciation of the plant should be calculated on an annual basis. The amount deducted as an expense in the income statement. According to Drake & Fabozzi, (2006), failure to deduct depreciation cost will give a false impression of high income that will seduce investors. The income statement should be revised for the previous three year and deducted. On this point, it is hard to be certain that the retained earned was indeed not supposed to be restricted.

In addition to that Lancaster is expected to pay property taxes, insurance and maintenance, but in the income statement all these expenses are excluded. Conclusion Omission of any financial transactions is being regarded as a grey area that requires broad analysis. Mr. Olds’ recommendations to the management should be implemented or else the firm will find itself on the wrong side of the law. In future any financial transactions be it dividend policy it has to be noted and presented in the financial statements.

Though the expansion of Lancaster Electronic by acquiring new plant would be beneficial to the shareholders, interruption of dividend policy should be communicated to the ReferencesDrake, P., & Fabozzi, F. (2006). Analysis of financial statements (2nd ed.). Hoboken, N.J.: Wiley.Grinaker, R., & Barr, B. (1965). Auditing; the examination of financial statements,. Homewood, Ill.: R.D. Irwin.Meigs, W., & Whittington, R. (1982). Principles of auditing (7th ed.). Homewood, Ill.: R.D. Irwin.