14 posting and summarization 6 15 d inquire of the

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Unformatted text preview: escription for long-term debt. (15) Occurrence and rights e. For a sample of shipping documents selected from shipping records, trace each shipping document to a transaction recorded in the sales journal. f. Discuss with credit department personnel the likelihood of collection of all accounts as of December 31, 2009 with a balance greater than $100,000 and greater than 90 days old as of year-end. PRESENTATION AND DISCLOSURE AUDIT OBJECTIVE (10) Completeness (7) Realizable value g. Examine sales invoices for the last five sales transactions recorded in the sales journal in 2009 and examine shipping documents to determine they are recorded in the correct period. (5) Cutoff h. For a sample of customer accounts receivable balances for December 31, 2009, examine subsequent cash receipts in January 2010 to determine whether the customer paid the balance due. (1) Existence (7) Realizable value Case 6-31 a. A review provides limited assurance about the fair presentation of financial statements in accordance with generally accepted accounting principles but far less assurance than an audit. Presumably, the bank decided that the assurances provided by a review were needed before a loan could be approved, but an audit was not necessary. A review includes a CPA firm performing analytical procedures, making inquiries about the fair presentation of the statements, and examining the information for reasonableness. Because of a CPA firm’s expertise in accounting, the accountant from the CPA firm can often identify incorrect presentations in the financial statements that have been overlooked by the accountant of the company. Reviews are common for smaller privately-held companies with relatively small amounts of debt. The bank probably did not require an audit because the additional cost of an audit was greater than the benefit the bank perceived. In many cases, the decision as to whether to have a review or an audit is negotiated between the company seeking a loan and the bank loan officer. Both the company and the bank have options in negotiating such things as the amount of the loan, the rate of interest, and whether to require an audit or a review. The bank can reject the loan request and the company can go to other banks that want to make loans. Frequently, banks have a list of CPA firms in which they have considerable confidence due to their reputation in the community or past work they have done for other bank customers. b. Because the amount of the loans from the bank to Mabarak Baladi increased, the bank probably wanted additional assurance about the reliability of the financial statements. It is also likely that Mabarak Baladi negotiated the one percent reduction of the interest rate by offering to have an audit instead of a review. A one percent reduction in the interest rate saves Mabarak Baladi $100,000 annually compared to the $50,000 additional fee for an audit. c. Hakim referred to the CPA firm as partners in a professional sense, not a business sense. The CPA firm had provided many consulting and tax services, as well as providing review and audit services over the entire business life of the company. Hakim recognized that these professional services had contributed to the success of the business and he chose to acknowledge those contributions during his retirement comment. Assuming that the CPA firm retained an attitude of independence throughout all audits and reviews, no violation of professional independence standards occurred. Most well run CPA firms provide consulting, tax, and assurance service for their privately held clients without violating independence requirements. 7-1 6-31 (continued) d. As the external auditor, the firm of Abdullah & Elhakeen provides the stockholders, creditors, and management an independent opinion as to the fair presentation of the financial statements. Given the potential biases present when management prepares the financial statements, the stockholders and creditors must consider the potential for information risk that might be present. The independent audit conducted by Abdullah & Elhakeem helps stockholders and creditors reduce their information risk. Management also benefits by having the external auditors independently assess the financial statements even though those statements are prepared by management. Due to the complexities involved in preparing financial statements in accordance with generally accepted accounting principles, the potential for misstatement(s) on the part of management increases the need for an objective examination of those financial statements by a qualified independent party. e. The auditor is responsible for obtaining reasonable assurance that material misstatements are detected, whether those misstatements are due to errors or fraud. To obtain reasonable assurance, the auditor is required to gather sufficient, appropriate evidence. Auditors’ chief responsibility to stockholders, creditors, and management is to conduct the audit in accordance with auditing standards...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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