Prepare correcting entries The records of Davis Corporation have never been audited. The company is negotiating a large loanfor expansion purposes. The bank has requested that an audit of the company be performed. Duringthe course of the audit, the following facts were determined:• The inventory at December 31, 2019, was overstated by P 10,000.• The inventory at December 31, 2020, was overstated by P 20,000.The property, plant & equipment (an element of Selling Expense) was underdepreciated in2019 by P 9,000 and in 2020 by P 12,000.• Athree-year insurance premium of P 900 paid on January 1, 2019, was debited in full toAdministrative Expense at that time.• Accrued wages (an element of Administrative Expense) were not recorded as follows:2019, P800; and 2020, P1,000.• The patent, which originally cost P 17,000, is being amortized to Administrative Expenseover a 17-year life. Evidence clearly indicates that its economic life will approximate 14 yearsfrom date of acquisition.Service revenues earned but not yet collected were not recognized when earned as follows:2019, P 5,000; and 2020, P 7,500. Revenue is recognized when collection is made.A delivery truck purchased in January 2020, at a cost of P 13,000, was debited to Sellingexpenses at that time. The truck has an estimated useful life of 10 years and an estimatedresidual value of P 2,000. The company uses straight-line depreciation method.• Allowance for doubtful accounts in 2019 was understated by P 8,500.1

Journal entries (JE) are those which are recorded in the original books of accounts and it records…

f the audit, the following facts were c nventory at December 31, 2019, was nventory at December 31, 2020, was property, plant & equipment (an elem by P 9,000 and in 2020 by P 12,000. ee-year insurance premium of P 900 inistrative Expense at that time. ued wages (an element of Administra , P800; and 2020, P1,000. patent, which originally cost P 17,000

f the audit, the following facts were c nventory at December 31, 2019, was nventory at December 31, 2020, was property, plant & equipment (an elem by P 9,000 and in 2020 by P 12,000. ee-year insurance premium of P 900 inistrative Expense at that time. ued wages (an element of Administra , P800; and 2020, P1,000. patent, which originally cost P 17,000

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter9: Auditing The Revenue Cycle.

Section: Chapter Questions

Problem 40RQSC: Read the following scenario about Strang Corporation and identify the substantive procedures that...

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It is February 16, 2020, and you are auditing Davenport Corporation's financial statements for 2019 (which will be issued in March 2020). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenports accounts receivable is 50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss for 2019 might be appropriate. Jim replies, Why should we make an adjustment? Ted Travis, the president of Travis Corporation, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2020, so lets wait and see what happens; we can always make an adjustment later this year. Our 2019 income and year-end working capital are not that high; our creditors and shareholders wouldnt stand for lower amounts than they already are. Required: From financial reporting and ethical perspectives, prepare a response to Jim Davenport regarding this issue.
Read the following scenario about Strang Corporation and identify the substantive procedures that the CPA (Elaine Stanley) should perform to determine whether lapping exists. Do not discuss deficiencies in the system of internal control. During the year, Strang Corporation began to encounter cash flow difficulties, and a cursory review by management revealed receivable collection problems. Strang’s management engaged Elaine Stan ley, CPA, to perform a special investigation. Stanley studied the billing and collection cycle and noted the following: The accounting department employs one bookkeeper who receives and opens all incoming mail. This bookkeeper is also responsible for depositing receipts, filing daily remittance advices, recording receipts in the cash receipts journal, and posting receipts in the individual customer accounts and the general ledger accounts. There are no cash sales. The bookkeeper prepares and controls the mailing of monthly statements to customers. The concentration of functions and the receivable collection problems caused Stanley to suspect that a systematic theft of customers’ payments through a delayed posting of remittances (lapping of accounts receivable) is present.
Ingalls Corporation is in the process of negotiating a loan for expansion purposes. The books and records have never been audited, and the bank has requested that an audit be performed. Ingalls has prepared the following comparative financial statements for the years ended December 31, 2020 and 2019: 1. Prepare the journal entries to correct the books at December 31, 2020. The book s for 2020 have not been closed. Ignore income taxes. 2. Prepare a schedule showing the computation of corrected net income for the years ended December 31, 2020 and 2019, assuming that any adjustments are to be reported on comparative statements for the 2 years. The first items on your schedule should be the net income for each year. Ignore income taxes. (Do not prepare financial statements.)
Rayan Company, a CPA firm, conducted an audit for the 2020 financial statements of Tia Corporation. During the course of the audit, the auditors noticed that repairs and maintenance expenses were recorded as an addition to fixed assets to decrease expenses amount in the financial statements. Which one of the following assertions was violated? Occurrence Completeness Existence Accuracy None of the above
For the 2021 audit of the financial statements, you are tasked to audit EMPLEO Corporation’s liabilities. The following information relates to the obligations of EMPLEO Corporation as of December 31, 2021: Accounts payable for goods and services purchased on open account amounted to P350,000 on December 31, 2021. This amount was gross of a supplier’s debit balance of P30,000. On the other hand, the testing of the accounts receivable account revealed that a customer’s credit balance of P50,000 was netted against the balance of the accounts receivable. At December 31, 2021, EMPLEO declared a cash dividend at P0.50 per share on its P10 par value ordinary share capital, payable at January 12, 2022, to shareholders as of December 31, 2022. At December 31, 2021, EMPLEO had 1,000,0000 issued ordinary shares and 800,000 oustanding ordinary shares. The company financed its receivables, dated November 1, 2021, by discounting its 180-day P400,000 accounts receivable to a bank on a with…
For the 2021 audit of the financial statements, you are tasked to audit EMPLEO Corporation’s liabilities. The following information relates to the obligations of EMPLEO Corporation as of December 31, 2021: Accounts payable for goods and services purchased on open account amounted to P350,000 on December 31, 2021. This amount was gross of a supplier’s debit balance of P30,000. On the other hand, the testing of the accounts receivable account revealed that a customer’s credit balance of P50,000 was netted against the balance of the accounts receivable. At December 31, 2021, EMPLEO declared a cash dividend at P0.50 per share on its P10 par value ordinary share capital, payable at January 12, 2022, to shareholders as of December 31, 2022. At December 31, 2021, EMPLEO had 1,000,0000 issued ordinary shares and 800,000 oustanding ordinary shares. The company financed its receivables, dated November 1, 2021, by discounting its 180-day P400,000 accounts receivable to a bank on a with…
For the 2021 audit of the financial statements, you are tasked to audit EMPLEO Corporation's liabilities. The following information relates to the obligations of EMPLEO Corporation as of December 31, 2021: • Accounts payable for goods and services purchased on open account amounted to P350,000 on December 31, 2021. This amount was gross of a supplier's debit balance of P30,000. On the other hand, the testing of the accounts receivable account revealed that a customer's credit balance of P50,000 was netted against the balance of the accounts receivable. At December 31, 2021, EMPLEO declared a cash dividend at P0.50 per share on its P10 par value ordinary share capital, payable at January 12, 2022, to shareholders as of December 31, 2022. At December 31, 2021, EMPLEO had 1,000,0000 issued ordinary shares and 800,000 oustanding ordinary shares. • The company financed its receivables, dated November 1, 2021, by discounting its 180-day P400,000 accounts receivable to a bank on a with…
You are the lead partner overseeing the audit for Camo Ltd, a privately owned company. The completion of the audit report is pending for the income year 2020 and you have noted several situations with possible actions. The situations are as follows: 1. Camo Corporation carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements. 2. Management of Camo Corporation refuses to allow you to observe, or make, any counts of inventory. The recorded book value of inventory is highly material. 3. You were unable to confirm accounts receivable with Camo’s customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures. 4. One week before the end of fieldwork, you discover that the audit manager on the Camo engagement owns a material amount of Camo’s common stock. 5.…
You are the lead partner overseeing the audit for Camo Ltd, a privately owned company. The completion of the audit report is pending for the income year 2020 and you have noted several situations with possible actions. The situations are as follows: 1. Camo Corporation carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements. 2. Management of Camo Corporation refuses to allow you to observe, or make, any counts of inventory. The recorded book value of inventory is highly material. 3. You were unable to confirm accounts receivable with Camo’s customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures. 4. One week before the end of fieldwork, you discover that the audit manager on the Camo engagement owns a material amount of Camo’s common stock. 5.…
Analysis of accounts receivable reveals that with two exceptions, all appeared collectible as at December 31, 2021. These are: b.) The company’s receivable from Redding Corporation in the amount of P58,000 was written off as uncollectible during the year based on the suggestion of the company’s legal counsel. However, on January 25, 2022, two months before the issuance of the audited financial statements, P8,000 was received as final settlement on this account. Required: Adjusting entries
Jones, CPA, has completed the audit of Sarack Lumber Supply Co.and has issued a standard unqualified report. In addition to a report on the overall financialstatements, the company needs a special audited report on three specific accounts: sales,net fixed assets, and inventory valued at FIFO. The report is to be issued to Sarack’s lessor,who bases annual rentals on these three accounts. Jones was not aware of the need for thereport on the three specific accounts until after the overall audit was completed.a. Explain why Jones is unlikely to be able to issue the audit report on the three specificaccounts without additional audit tests.b. What additional tests are likely to be needed before the report on the three specificaccounts can be issued?c. Assuming that Jones is able to satisfy all the requirements needed to issue the reporton the three specific accounts, write the report. Make any necessary assumptions.
Chelsea Bank provided overdraft facilities to Liverpool Ltd and Manchester & Co. were Liverpool’s auditors. The relevant overdraft facility letters between Chelsea Bank and Liverpool Ltd contained a clause requiring Manchester & Co. to send Chelsea Bank, each year, a copy of the annual audited financial statements.In 2018 Liverpool Ltd was put into receivership with approximately $23.5M owing to Chelsea Bank. Chelsea Bank claimed that, due to massive fraud, Liverpool’s financial statements for the previous years had misstated the financial position of Liverpool and Manchester & Co. had been negligent in not detecting the fraud. Chelsea Bank contended that it had continued to provide the overdraft facilities in reliance on Manchester’s unqualified opinions.Manchester & Co. applied to the court for an order striking out the claim on the grounds that, even if all the facts alleged by Chelsea Bank were true, the claim could not succeed in law because Manchester & Co.…