answer 4.50 & 4.51

Chapter 4 Management Frond and Audit Risk 159 4.50 Appropriateness of Evidence and Related Parties. Johnson & Company, CPAs, audited Guaranteed Savings & Loan Company. M. Johnson had the assignment of evaluating the collectability of real estate loans, Johnson was working on two particular loans (1) a 54 million loan secured by Smith Street Apartments and (2) a 55.5 million construction Joan on Baker Street Apartments now being built. The appraisals performed by Guaran teed Appraisal Partners Inc. showed values in excess of the loan amounts. On inquiry, Bumpus, the S&L vice president for loan acquisition, stated, "I know the Smith Street Toan is good because I myself own 49 percent of the partnership that owns the property and is obligated on the loan." Johnson then wrote in the audit documentation: () the Smith Street loan appears collect ible as Bumpus personally attested to knowledge of the collectability as a major owner in the partnership obligated on the loan; (2) the Baker Street loan is assumed to be collectible because it is new and construction is still in progress; and (3) the appraised values all exceed the loan amounts Required: 1. Do you perceive any problems with related-party involvement in the evidence used by Johnsol Explain b. Do you perceive any problems with Johnson's seasoning or the appropriateness oferi dence used in that reasoning? 4.51 Risk of Misstatement in Various Accounts. An auditor must identify the relevant asse tions about each significant financial statement account and disclosure and then there dence to conclude whether a material mistatement exists for each assertion. The nature of each financial statement account and disclosure contributes to the likelibood that a material misstatement exists general, which accounts are most susceptible to overstatement? To understatement b. Why do you think a company could permit asset accounts to be understated Why do you think a company could permit liability accounts to be overstated dWhich direction of misstatement most likely: income overstore understatement? 4.52 Analysis of Accounting Estimates. Oak Industries, a manufacturer of radio and cable TV Serve MacBook Air