Cite applicable reference in the answers You are the auditor for Bennett Industr

Question

Cite applicable reference in the answers

You are the auditor for Bennett Industries, Inc., a public company that makes plastic food containers. You are preparing for the upcoming 06/30/2014 annual audit. In October 2013, Bennett acquired a small private company – Recycled To Reuse Company (RTR) – based in Tuscaloosa, Alabama. RTR contracts with local towns and universities to purchase their recyclable “household materials” and then converts those materials into reusable granules for resale. Bennett management made this investment to appeal to investors’ recent feedback that they would like to see the company promote and support plastic recycling. RTR ships recycled granules to the Bennett manufacturing facility outside of Atlanta, Georgia, where they are used as “raw materials” in their plastic products, especially ones that are sold to environmentally conscious businesses (e.g., Whole Foods; Trader Joes; etc.). Doing so will allows Bennett to label these product lines are “made with recycled materials” (as well as reduce costs associated with raw materials since Bennett does not pay RTR for the granules). RTR will continue to sell granules to other manufacturers, since Bennett does not use all types of granules that RTR currently produces. For example, some granules cannot be used by Bennett since they are not “food-grade” to be utilized in Bennett products (example: granules come from products that includes BPA, a toxic material).

1. As the auditor for Bennett Industries, would you consider this arrangement between Bennett and RTR legal? How should it be classified by Bennett?

2. What is required under applicable auditing standards in terms of performing an audit when a client has this type of business arrangement?

3. Under what circumstances would you be able to issue an unqualified opinion? In other words, what would Bennett Industries have to do in order to receive an unqualified opinion from your firm?

Explanation / Answer

We will assume that RTR is a wholly owned subsidiary of Bennett Industries.

1. Therefore the arrangement between the companies is legal. But it should be classified ad wholly owned subsidiary in Bennett's Financial Statements.

2. When a client has this this type of arrangement, the whole group needs to be audited if it doesn't fall under the criteria of small company. Further more the intercompany transactions needs to be looked at as in this case Bennett is not paying for the raw material supply from RTR which is not a correct treatment, the raw materials cost should be recorded at market value or the arm's length transaction cost whichever is lower.

The auditor will also audit the books of RTR if it is not a small company.

3. To get an unqualified report, Bennett must consolidate RTR's financial statement with its own as a group according to US GAAP.

Record the transaction regarding supply of raw material at the arm's length transaction.

Eliminate inter company unrealuzed profits to reflect a true value of profit or loss.

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