Interstate Land Development: Case Study

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Marshall and Wyatt, CPAs is an independent auditor for the publically traded company Interstate Land Development. Interstate has been preparing and filing there own tax returns since Marshall and Wyatt have been auditing their company. While the SEC was processing the registration statement Marshall and Wyatt received a subpoena directing them to turn over all the working papers relating to Interstate for the year 20X2-20x5. They initially refused to turn them over because they did not prepare the companies tax returns and believed that they were confidential. In the end they did turn over the working papers. The IRS had claimed that Interstate had underpaid their taxes and were being assessed $800,000.
When auditing financial statements for
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This means that they would need to decide how they are going to handle the $800,000 from the tax assessment with the financial statements. The amount was material relative to the financial statements as of December 31, 20x6. The tax liability of $800,000 is a loss contingency. “A loss contingency is an existing condition or set of circumstances involving uncertainty as to possible loss to an enterprise that will ultimately be resolved when one or more events occurs or fails to occur. “ (AICPA) There are three different ranges it could fall into, Probable, reasonable possible and remote. The amount also has to be reasonably estimated. If this contingency is probably and can be reasonable estimated then it needs to be reported on the 20x6 financial statements. If it is anything else it needs to be put into the disclosure notes. Since nothing has happened with this yet the auditors will need to make a decision if it is suitable to accrue, disclose or completely ignore this loss contingency in the financial statements. In this case Marshall and Wyatt should tell Interstate Company to accrual some if not all of the $800,000 to a liability. They should also suggest having complete disclosure of the event in the financial …show more content…
There only argument against this would be the privileged communication rule to the CPA-client relationship but the courts do not follow this rule of evidence. According to the AICPA when dealing with Subpoena documents the member does not have to inform the client. They are allowed to consult with a legal council to determine the validity of the subpoena that the specific information that has to be provided. When a document is subpoenaed it is allowed to be disclosed and may even be required. “The Confidential Client Information Rule would not be construed to affect in any way the member’s obligation to comply with a validly issued and enforceable subpoena or summons, or to prohibit a member’s compliance with applicable laws and governments regulations.” Once the subpoena is validated by a legal source it is not possible to legally refuse to hand over the documents even if they did not prepare the tax

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