Question

(Disclosures Required in Various Situations) 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, 2018, 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.

Item 3: A major electronics firm has introduced a line of products that will compete directly with Ace’s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Ace’s line. The competitor announced its new line during the week following completion of field work. Ms. Rodd read the announcement in the newspaper and discussed the situation by telephone with Ace executives. Ace will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs.

Instructions

For each of the above items, discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)

Short answer

The auditor may conclude that Ace's poor competitive position was evident at year-end.

Step-by-step solution

Meaning of Accounting Disclosure  

An "accounting disclosure" is a declaration that acknowledges the financial practices of a firm or business. This detail shows how much money was spent and how much money was made at one point in time. For both current and future investors in the firm, an accounting policy statement is given.

Additional disclosure in the financial statements

This form of competitive development is generally regarded as a type of aftermarket event that presents evidence of a condition that did not exist at the balance sheet date. In such cases, the auditor may infer that Ace's poor competitive position was evident at year-end.