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Discuss the arguments for and against the auditors insisting that MPS begin expensing some portion of the construction costs rather than continuing to accumulate an ever-increasing asset. Indicate the position you would take as the auditor.
Discuss whether the auditors should modify their report because of uncertainty about whether or not MPS can remain a going concern. Indicate the type of opinion that you would issue.
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1. Arguments and Position as Auditor
Discussion For "For"
The expensing of some portion of construction costs can help in paying off debts and faster completing of the project. The other advantage of the expensing potion of construction costs is because in this type of method the assurance of reimbursement of costs exists and moreover, there exists an opportunity of earning profits. In expensing a portion of costs there exist no risks of losing the contract. Moreover, charging some portion of construction costs is justifiable because of Metropolitan Power Supply can increase the price of the contract by pointing out an increase in the costs and reason for increasing costs.
Discussion For "Against"
Asset accumulation is the method by which the valuation of the assets of the organization is completely different from the book value of the company. The reason for MPS to select the option of asset accumulation is that it helps in the categorization of assets thereby helping MPS in analyzing the contribution of each value of the assets. Moreover, this method can also help the Auditor of MPS in analyzing whether it is useful to enter in license or lease transaction. Asset accumulation is increased in assets that are saving assets. The benefit of this method for Asset Accumulation for MPS is it helps in analyzing the damages suffered from the assets and helps in analyzing the valuation that is it is whether going concern or the liquidation valuation. The asset accumulation further helps MPS in structuring and pricing, securitization of finance, accounting of the fair value of transactions, accounting values and reporting of financial statements.
Position as Auditor
The position as an auditor is expensing some portion of costs. The advantages of the expensing or charging some costs are it helps MPS in charging the appropriate amount of charges incurred in the construction of Eagle Mountain. It is suggested that the accumulation of assets is suitable for financial planning and accounting of the fair value of transactions. The asset accumulation method is suitable when the asset needs to be revalued.However, in the case of MPS the different problems that exist in the case of asset accumulation it can lead to incompletion of the project due to lack of funds. As explained by Fields (2018), the disadvantage of accumulation of assets that is they are unable to recover funds from the accumulation of assets. The auditor is entitled to review the financial position of the organization. The Asset accumulation method is suitable for the valuation of security and valuation purposes. Moreover, it is also suitable for litigation purposes. In the case of MPS, the asset accumulation is not appropriate because it leads to overvaluation of asset thereby leading to MPS being entitled to pay more funds thereby causing MPS to go bankrupt.
2. Modification of report
The Going Concern Concept is the principle in accounting in which the company is liable to finish its current plans and make use of existing assets for meeting financial obligations. The assumption of going concern concept is that an entity is going to remain in business in the coming future. As discussed by Caplan (2016), As per this concept organization is not likely to liquidate its assets and halt operations of the organization. The auditor is not like to make modification in the report as the going concern concept states that the business is going to continue in future due to which they are not likely to liquidate its position. The indicators of MPS that can remain a going concern are the recurring losses, increases of construction costs, a decline in sales and adversing of financial ratios. As per the going concern concept, the business is likely to carry out its activities for an indefinite period. As per this concept, some portion of the amount is to be shown as expenses whereas the remaining amount can be shown as an asset. As per this concept, MPS can take several measures to avoid bankruptcy. So in order to avoid liquidation of assets the stockholders of the company are likely to issue nearly $ 500 million as bonds and shares in order to finance the completion of the project. As per this concept, the auditors that need to be taken into account while preparing financial statements are loan defaults, legal proceedings, halting of operation and denying of trade credits. The Going Concern concept helps auditors in showing the financial position and stability of the business. This concept that helps in analyzing the risks involved in running of business operations. In case of MPS, the risk involved in running different business operations can be analyzed through going concern concept. The risks involved in running of MPS operations are decline of funds, halting of operations, issuing of stockholders shares and construction costs not being able to recovered.
The auditor can be made modification as per the Realisation concept which states that the transactions of business need to be included in records of accounting whenever any kind of asset is realized. Realization concept means that business has the right to receive money. As per this concept, MPS is entitled to perceive money for the completing of 50% of the project Eagle Mountain. According to Shvyreva & Kruglyak (2016), As per the Realization concept, the MPS has helped in issuing the bonds and additional shares for the financing of the project. Another concept that is applicable is the Money Measurement Concept. As per Money Measurement Concept, states that financial transactions are likely to be placed in accounting. As per the Money Measurement Concept, only those accounting transactions that are expressed in terms of money is only to be recording in accounting terms. As per this concept if the organization undergoes any kind of management overhaul is likely to enter into accounting. In the case of MPS, the auditor is not likely to be included in the accounting records that are 70% of the writing off of stakeholder's equity is thereby helping in surviving of the organization.
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