Audit of King Ltd

Summary of Issues:

• King wants to issue shares the following year, and does not want their earnings decreased by Queens losses

• King LTD owns 22% in Queen LTD. Last year, King reported Queen via the equity method, however after Queen reporting losses of 140MM in Q3 F/S King has elected to switch to the cost method to report their investment in Queen.

• Under the equity method this would decrease the Kings investment amount of queen to -$3,400 (thousands of dollars).

• Under the cost method, Queen would be reported as a $25,000 (thousands of dollars) investment on King’s Balance sheet.

Issues:

• Does King have significant influence over Queen?

o Kings owns 22% of Queen and therefore meets the guidelines for significant influence

o King managers were previous members of the board of directors of Queen, but have recently removed themselves.

o Kings purchases from Queen have declined over the years

o King has been unable to influence Queen into handing over information to be helpful with the audit.

o Conclusion: Because it seems that King has not been able to influence Queen into cooperation, it can be reasonably assumed that King has lost significant influence over the Board of Directors and of Queen.

• Accounting Policy Changes

o Because King has lost significant influence, the accounting policy should be changed to Fair Value Method.

o Because King does not want to divest themselves from Queen – Any changes in fair value would be allocated to other comprehensive income.

o On August 31st Queens FMV would be equal to (2MM x $13) $26MM, a loss of 1.4MM should be adjusted to the investment in Queen.

• Other Concerns

o A disclosure should be made to the volatility of Queens stock price, their plans for the new drug development and the nature of these types of companies. Perhaps a trailing 12 month average would be a better estimate of Queens FMV – however at this time 26MM is a fair value of Kings Investment in Queen.

o A disclosure should...