Question: Inventory Evidence and Long-Term Purchase Contracts. During the audit of Mason Company Inc., for the calendar year 2014, you noted that the company produces aluminum cans at the rate of about 40 million units annually. On the plant tour, you noticed a large stockpile of raw aluminum in storage. Your inventory observation and pricing procedures showed this stockpile to be the raw materials inventory of 400 tons valued at $240,000 (LIFO cost). Inquiry with the production chief yielded the information that 400 tons was about a four-month supply of raw materials. Suppose you learn that Mason had executed a firm long-term purchase contract with All Purpose Aluminum Company to purchase raw materials on the following schedule:
Because of recent economic conditions, principally a decline in the demand for raw aluminum and a consequent oversupply, the price stood at 20 cents per pound as of January 15, 2015. Commodities experts predict that this low price will prevail for 12 to 15 months or until there is a general economic recovery.
Required: a. Describe the procedures you would employ to gather evidence about this contract (including its initial discovery).
b. What facts recited in the problem would you have to discover for yourself in an audit?
c. Discuss the effect this contract has on the financial statements.