Question
1) It seems somewhat strange for the Company to have an outstanding balance on this long-term account at the end of 2016 given its excellent
1) It seems somewhat strange for the Company to have an outstanding balance on this long-term account at the end of 2016 given its excellent operating results. This may be attributable to the growth in accounts receivable and inventory, or could be the result of an acquisition, or they simply havent paid it off. In any case, verifying this balance is a relatively easy audit procedure.
2)This account went down from 2015 to 2016. This doesnt seem reasonable at all given an increase in business activity. It is very possible there are unrecorded liabilities at the end of 2016, and this must be an area of major emphasis during the audit.
3)This cost is a lesser percent of sales in 2016 than in 2015. This may indicate that an accrual for this cost was not made. As this cost is a complex and important area, it will be verified in detail during the audit.
4) The Company made a significant additional investment in this account; increasing by 30.5 percent. These new purchases will need to be verified during the current audit. It is noteworthy that accumulated depreciation increased by only 16.1 percent. This could indicate that depreciation on the new purchases was not recorded, but may not be necessary, depending on dates of acquisition and depreciation method used. Depreciation must be tested considering these facts as determined.
5) 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 this 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 of both sales and purchase transactions.
6) In the face of company growth, this account increased by 59.3 percent, and at the same time, turnover slowed and days to collect increased somewhat. However, the allowance for uncollectibles was only .3 percent of gross receivables at the end of 2016, down from 1.0 percent at the end of 2015. This implies that the allowance may be significantly understated for 2016 and must be looked at very carefully during the current audit. This review would include considering whether a liberalization of credit policies was used to help increase sales.
7) This account 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.
8)This expense is only 22.5 percent of income before taxes for 2016. The related payable on the balance sheet is significantly lower at 12-31-16 than would be expected based on 2015. These both indicate that the Company has not made its accrual for 2016, and this area will require careful attention during the audit.
A. | Accounts Receivable |
B. | Accounts Payable |
C. | Common Stock |
D. | Property, Plant and Equipment |
E. | Loan Payable |
F. | Sales |
G. | Cost of Goods Sold |
H. | Federal Income Taxes |
I. | Pension Cost |
Match the items listed below to the relevant evaluations and conclusions listed.
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