External Auditing: Assignment

1203 WordsAug 9, 20135 Pages
Week 7 Assignment Chapter 20, pages 623–625: Problems 20-17 and 20-20 20-17 a. (2) b. (3) c. (3) 20-20 1. Substantive testof transactions | To determine if monthly payroll costs have been correctlyallocated (accuracy). | 2. Test of control | To determine if recorded payroll transactions are for workactually performed by existing employees (occurrence). | 3. Substantive testof transactions | To determine if employees are paid for the hours they haveworked (accuracy). | 4. Substantive testof transactions | To determine if the appropriate person is paid and amount andtime are correct (accuracy and timing). | 5. Substantive testof transactions | To determine if the correct job is charged for labor and if theamount is recorded…show more content…
* Obtain letters from all major attorneys performing legal services for the client as to the status of pending litigation or other contingent liabilities. * Review financial statements of affiliate, and where related party transactions are apparent, make direct inquiries of affiliate management, and perhaps even examine records of affiliate if necessary. c. Nature of adjusting entries or disclosure, if any, would be as follows: 1. The lawsuit should be described in a footnote to the balance sheet. In view of the court decision, retained earnings may be restricted for $4,000,000, the amount of the first court decision. Also, in view of the court decision any reasonable estimate of the amount the company expects to pay as a result of the suit might be used in lieu of the $4,000,000. A current liability will be set up as soon as a final decision is rendered or if an agreement as to damages is reached. If liability is admitted to by Marco, and only the amount is in dispute, a liability can be set up for the amount admitted to by the company with a corresponding charge to expense or shown as an extraordinary item if the amount is material. 2. The declaration of such a dividend does not create a liability that affects the aggregate net worth in any way. The distribution of the dividend will cause a reduction in retained earnings and an increase in capital stock. No
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