In: Miscellaneous

Submitted By analing
Words 1742
Pages 7
Norman Corporation (A)*

Until 2006, Norman Corporation, a young manufacturing of specialty products, had not had its financial statements audited. It had, however, relied on the auditing firm of Kline & Burrows to prepare its income tax returns. Because it was considering borrowing on a long-term note and the lender surely would require audited statements, Norman decided to have its 2006 financial statements attested by Kline & Burrows.

Kline & Burrows assigned Jennifer Warshaw to do preliminary work on the engagement, under the direction of Allen Burrows, Norman’s financial vice president had prepared the preliminary financial statements shown in Exhibit 1. In examining the information on which these financial statements were based, Ms Warshaw discovered the facts listed below. She referred these to Mr. Burrows.

1. In 2006 a group of female employees sued the company, asserting that their salaries were unjustifiably lower than the salaries of men doing comparable work. They skied for back pay of $250,000. A large number of similar suits had been filed in other companies, but results were extremely varied. Norman’s outside counsel thought that the company probably would win the suit but pointed out that the decisions thus far were divided, and it was difficult to forecast the outcome. In any event, it was unlikely that the suit would come to trial in 2007. No provision for this loss had been made in the financial statements.

2. The company had a second lawsuit outstanding. It involved a customer who was injured by one of the company’s products. The customer asked for $500,000 damages. Based on discussions with the customer’s attorney, Norman’s attorney believed that the suit probably could settled for $50,000. There was no guarantee of this, of course. On the other hand, if the suit went to trial, Norman might win it. Norman did not carry…...

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