ACCT 444 Professor Hayes 5-23 (Objectives 5-4, 5-5, 5-7)
Chen, CPA, is the auditor for Greenleaf Manufacturing Corporation, a privately owned company that has a June 30 fiscal year.
Greenleaf arranged for a substantial bank loan that was dependent on the bank’s receiving, by September 30, audited financial statements that showed a current ratio of at least 2 to 1.
On September 25, just before the audit report was to be issued, Chen received an anonymous letter on Greenleaf’s stationery indicating that a 5-year lease by Greenleaf, as lessee, of a factory building accounted for in the financial statements as an operating lease was, in fact, a capital lease.
The letter stated that there was a secret written agreement with the lessor modifying the lease and creating a capital lease.
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