a)

How acceptable is each suggestion if the management has decided to pursue a clean audit report?

b)

How audit procedures (existence, occurrence, cutoff, valuation, rights and obligations, presentation and disclosure) would detect misstatements of financial statements, if each recommendation was followed on the matters discussed? Put in a table

Suggestion Acceptable? Explain Audit procedure Explanation of detection

1

2

3

...

James Minor, president of the corporation, set up a board meeting on 1stDecember. He opened the meeting with the following statement:

"All of you know that we are not in a very liquid position, and our October 31 balance sheet shows it. We need to raise some outside capital in January, and our December 31 financial statements (both balance sheet and income statement) must look reasonably good if we're going to make a favorable impression upon lenders or investors. I want every officer of this company to do everything possible during the next month to ensure that, at December 31, our financial statements look as strong as possible, especially our current position and our earnings."

The vice president for sales was first to offer suggestions:

1-I can talk some of our large customers into placing some orders in December that they wouldn't ordinarily place until the first part of next year. If we get those extra orders shipped, it will increase this year's earnings and also increase our current assets. The amount of orders is expected to be $100,000.

The vice president in charge of production commented:

2-We can ship every order we have now and every order we get during December before the close of business on December 31. We'll have to pay some overtime in our shipping department, but we'll try not to have a single unshipped order on hand at year-end.

3-Also, we could over-ship some orders, amounting to $20,000 and the customers wouldn't make returns until January.

The controller spoke next:

4-There are late December orders from customers approximately $30,000 that we can't actually ship, we can just label the merchandise as sold and bill the customers with December 31 sales invoices.

5-Also, there are always some checks from customers dated December 31 that don't reach us until Januarysome as late as January 10. We can record all those customers' checks bearing dates of late December as part of our December 31 cash balance. The amount of these checks is estimated to be $15,000.

The treasurer offered the following suggestions:

6-I owe the company $50,000 on a call note I issued to buy some of our stock. I can borrow $50,000 from my mother-in-law about Christmas time and repay my note to the company. However, I'll have to borrow the money from the company again early in January because my mother-in-law is buying a condo and will need the $50,000 back by January 15.

7-Another thing we can do to improve our current ratio is to write checks on December 31 to pay part of our current liabilities and reduce current liabilities by $25,000. We might even wait to mail the checks for a few days or mail them to the wrong addresses. That will give time for the January cash receipts to cover the December 31 checks.

The vice president of production made two final suggestions:

8-Some of our inventory, approximately $25000, which we had tentatively identified as obsolete, does not represent an open-and-shut case of being unsalable. We could defer any write-down until next year.

9-Another item is some machinery we have ordered for delivery in December in the amount of $18,000. We could instruct the manufacturer not to ship the machines and not to bill us before January.

The president is wondering if any of these suggested actions would prevent the auditors from giving a clean bill of health to year-end statements.