This preview shows page 1. Sign up to view the full content.
Unformatted text preview: esn't seem reasonable at all given an increase in business
activity. It is very possible there are unrecorded liabilities at the end
of 2009, and this must be an area of major emphasis during the
Bank Loan Payable It seems somewhat strange for the Company to
have an outstanding balance on its bank loan payable at the end of
2009 given its excellent operating results. It is possible this was the
result of an acquisition, or they simply haven't paid it off. In any
case, verifying this balance is a relatively easy audit procedure.
Federal Income Taxes Payable and Income Tax Expense The
Company's effective tax rate for 2006 was 34 percent. Income tax
expense is only 22.5 percent of income before taxes. Federal
income taxes payable on the balance sheet is significantly lower at
12-31-09 than would be expected based on 2008. These both
indicate that the Company has not made its final tax accrual for
2008, and this area will require careful attention during the audit.
Common Stock Common stock increased by 25 percent. It is
possible that this occurred in connection with an acquisition (see
Goodwill), or in some other way. The issuance of new shares and
surrounding circumstances will need to be understood and examined.
Sales Whenever there is a drastic increase in business activity,
there is an increased risk of problems. It is possible that controls
will lapse or not be carefully observed. It is possible that
transactions will not be carefully accounted for. Therefore, in a
situation such as Stanton's it is important to understand the nature
of the changes that took place and to do a careful review of
controls. It will be especially important to thoroughly test cutoffs if
both sales and purchase transactions. 9-71 9-36 (continued)
Cost of Goods Sold and Gross Profit Consistent with the comments
under sales, the auditors must determine why the gross profit
percent has made such a significant improvement. Tests of costs and
inventories will be more extensive than in more stable circumstances.
Pension Cost It appears that the Company exceeded the contractual
amount for additional pension contribution. Yet, pension cost is a
lesser percent of sales in 2009 than in 2008. This may indicate that
an accrual for additional pension cost was not made. As pension
cost is a complex and important area, it will be verified in detail
during the audit.
AUDIT RISK INHERENT
PROCEDURES Detail tie-in Medium Medium See Note 5 Existence Medium Medium See Note 5 Completeness Medium Medium See Note 5 Accuracy Medium Medium See Note 5 Classification Medium Medium See Note 5 Cutoff Medium High High Realizable value Medium High High Rights Medium Medium See Note 5 Tolerable misstatement:
Trade accounts receivable
Allowance for uncollectible
15,000 $95,000 RATIONALE
2. Acceptable audit risk is medium for the engagement, therefore, it is
medium for accounts receivable and all of its related objectives.
Inherent risk for the engagement would be considered medium for
the following reasons: 9-72 9-36 (continued)
5. Stanton's background problems.
Stanton's autocratic management style.
Some indication of deficiencies in the control environment,
particularly rejection of recommendation to establish an internal
audit function. Inherent risk for cutoff is considered high due to the Company's
rapid growth in 2009 and the general frequency of cutoff errors.
Inherent risk for realizable value is considered high because of the
Company's rapid growth and the amount of judgment involved in
establishing the allowance for uncollectible accounts.
The analytical procedures performed are preliminary only, and don't
provide substantive evidence. However, they can indicate areas
where possible problems exist. In other words, they can't lower risk,
but can increase it. In this case, they corroborate the high inherent
risk level specified for cutoff and realizable value. Stanton Enterprises
Determination of Materiality and
Allocation to the Accounts
DETERMINATION OF MATERIALITY:
Income before taxes
Possible adjustments - estimated.
See Worksheet 9-36b:
Increase allowance for
uncollectible accounts $8,004,277 Increase accounts payable (1,069,997) (60,248) Pension cost NA Adjusted net income before taxes $6,874,032 5 percent $ 343,702 Round down to $ 340,000 Note: A key consideration is whether the
Company will be required to make its
additional pension contribution. As more
information is obtained, the amount
considered material may be reduced to
assure any possible misstatements in
earnings are considered in light of that
contractual obligation. 9-73 Increase to 1.7%
of trade accounts
increase as cost
of goods sold.
May or may not
be required. 9-36 (continued)
Worksheet 9-36A, cont.
ALLOCATION TO THE ACCOUNTS:
Misstatement Cash $243,689 10000 Easy to audit at low cost. Trade accounts receivable 3,544,009 80000 Large tolerable misstatement (TM) because account
is large and requires extensive sampling to audit. Allowance for uncollectible accounts
Inventories (120,000) 15000 Fairly low TM beca...
View Full Document
- Fall '13