plz finish the requirements of module 6-10, if u have any question, let me know

Go to www .cengage.com/accounting/rittenberg for the Ford and Toyota materials. Source and Reference Ford 10-K, Toyota 20-F ---------------~-------------------- Ford 10-K, Toyota 20-F Chapter 8 Ford! Toyota Appendix Materials Ford 10-K Question 1. What are the key acquisition and inventory cycle accounts for Ford? What are the critical accounting policies for these accounts? ------------- .. --------------------- -.---------- .. -------- - -------- ------------------------2. Compare Ford and Toyota's footnotes on inventory. Calculate the percentage of finished products that each company holds in inventory. What inferences do you draw from this analysis? How could this ratio be used to understand slow-moving inventory, e.g., by geographic region or product line? M __ , ___, 3a. Use the financial ratios provided in an earlier chapter appendix for Ford and Toyota. What are the ratios most relevant to the acquisition and inventory cycle? 3b. Think creatively, and develop additional ratios or comparisons that would help you understand this transaction cycle for these automotive companies. In addressing this question, it will be helpful to think about the general ratios that you calculated in Chapter 8, but to then tailor them to this unique industry and business setting. 4. Ford lists a variety of risk factors associated with its business. Review those and identify which relate most to the acquisition and inventory cycle. What evidence might the auditor gather to understand how those risks may affect the financial statement line items associated with the acquisition and inventory cycle? 5. As an auditor, what is your obligation regarding the statements that management makes in its management discussion and analysis? 657 Module VI: Sales and Purchases Cutoff Tests Along with Richard Derick and the rest of the audit team, you observed Biltrite's December 31, 2009, physical inventory. Derick is satisfied with the inventory-taking procedures and has considerable confidence in the reliability of the ending inventory quantities. He is concerned, however, with the methods used to value the ending inventories (especially the disposition of unfavorable budget variances) and with possible misstatements relating to sales and purchases cutoff. With regard to cutoff, Derick is particularly interested in learning why customers could not confirm details of sales transactions recorded by Biltrite on December 31, 2009. In response to the confirmation and cutoff concerns, he has asked you to examine the appropriate books of original entry and underlying documentation for a few days before and after the balance sheet date. Specifically, you are interested in the following: 1. Were purchases and sales recorded in the proper accounting period? 2. Were purchases recorded at year end included in the physical inventory? 3. Were all materials and purchased parts included in inventory recorded as purchases? 4. Were the finished goods inventory accounts properly relieved for all recorded sales? You download Biltrite's December voucher register and sales summary. These are partially reproduced in Exhibits BR. 7 and BR.8 referred to in Module II. Using these as a focal point, you requested that the client provide you with the documentation supporting certain of the recorded transactions. You now are prepared to record any necessary audit adjustments and reclassifications. Requirements 1. 2. Using the spreadsheet program and downloaded data, retrieve the file labeled "Cutoff" Study WP 6.4, "Inventory Cutoff," and compare it with the voucher register and sales summary portions reproduced in Exhibits BR.13 and BR.14 in Module II. Comment on any cutoff misstatements that you detect and determine their effect on net income. Do the misstatements appear to be intentional or unintentional? Explain. Draft any audit adjustments suggested by the analysis performed in requirement (1). (Remember that Biltrite maintains perpetual inventory records and adjusts its perpetual inventory to the physical inventory through the appropriate "Cost of Goods Sold" accounts.) 1. 658 Print the completed document with the proposed cutoff audit adjustments. Module VII: Search fo r Unrecorded Liabilities Module VII: Search for Unrecorded Liabilities An important part of every audit is examining vendors' invoices processed after year end. Related to cutoff, as discussed in Module VI, this set of procedures has the purpose of determining that no significant invoices pertaining to the year being audited have been omitted from recorded liabilities. Derick has asked that you examine the document prepared by Cheryl Lucas and entitled "Search for Unrecorded Liabilities," and review it for necessary audit adjustments. Requirements 1. 2. 3. Using the spreadsheet program and downloaded data, retrieve the file labeled "Liab." Comment on the adequacy of the procedures performed by Lucas. Assuming that you found the following additional unrecorded charges pertaining to 2009, draft Audit Adjustment 6 at the bottom of WP 15.1: a. Sales commissions $366,900 b. Employer's payroll taxes: FICA $94,000, state unemployment $126,000 c. Printing and copying $27,800 d. Postage $22,300 e. Office supplies $18,6002 Print the document. 659 LEARNING OBJECTIVES The overriding objective of this textbook is to build a foundation wi1h which to analyze current professional issues and adapt audit approaches to business and economic complexities. Through studying this chapter, you will be able to: Describe the accounts involved in the audit of cash and other liquid assets and identify the relevant financial statement assertions concerning cash and other liquid assets. 2 Describe the approach an auditor would take to perform an integrated audit of cash. 3 Describe why cash is an inherently risky asset and identify risks related to cash. Consider issues involving materiality, inherent risk, and various cash management techniques. 4 Identify controls typically present in cash accounts and articulate how auditors gain an understanding of internal controls over cash. 1 5 Identify tests of controls over cash and related accounts. 6 Describe the substantive audit procedures that should be used to test cash. 7 Identify types of marketable securities and other financial instruments, articulate the risks and controls typically associated with these accounts, and outline an audit approach for these accounts. 8 Apply the decision analysis and ethical decisionmaking frameworks to situations involving the audit of cash and other liquid assets. CHAPTER OVERVIEW Cash needs to be controlled for organizations to function effectively. In this chapter, we examine approaches that organizations take to control their cash assets and apply those concepts to the evaluation of control risk over the accounts and to audits of account balances. In terms of the audit opinion formulation process, this chapter involves Phases Ill and IV, that is, obtaining evidence about controls and substantive evidence about assertions concerning the audit of cash and other liquid assets. Even though a high volume of transactions flows through the cash account, it usually has a relatively small balance. However, because of the vulnerability to error or misappropriation, organizations and auditors usually emphasize the quality of controls over the cash transactions. We also consider issues concerning the The increase in the variety of financial risks to organizations. The auditor must by the organization, the risks inherent in 660 audit of marketable securities and financial instruments. instruments, particularly derivatives, presents additional understand the nature of the financial instruments used them, and the business purpose of the instruments. As part of the audit of cash and other liquid assets, you may now co mplete the following exercises contained in the Biltrite audit practice case: Module VIII: Dallas Dollar Bank-bank reconciliation Module IX: Analysis of interbank transfers Module X: Analysis of marketable securities Module VII I: Dallas Dollar Bank Reconciliation Biltrite maintains two general demand deposit accounts and a payroll account. One of the general demand deposit accounts and the payroll account are with Dallas Dollar Bank. The second demand deposit account is with Bank Two, the Chicago bank from which Biltrite obtained the $45 million loan referred to previously. As part of the cash audit, Derick has asked you to reperform the reconciliation of all three of the bank accounts for December 2009, and to do an analysis of inter-bank transfers between Dollar Bank and Bank Two. Recall that Biltrite has reconciled all bank accounts for each of the 12 months. You will begin, therefore, with the company's documentation of its December 2009 reconciliations. Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Bank." Briefly examine the following documentation in this file: WP 1-Cash on hand and in banks; WP 1.B-Bank reconciliation-Dallas Dollar Bank; and WP LC-Inter-bank transfer schedule. 2. 3. 4. 5. Scroll to WP 1.B, "Bank Reconciliation-Dallas Dollar Bank." Does the Dollar Bank account reconcile for December? What are the possible causes for nonreconciliation? In tracing cash disbursements from the December check register to the bank statement, you learn that check 44264, in the amount of $642,752, was recorded incorrectly as $651,752. Incorporate this misstatement into the appropriate section of the bank reconciliation. Does the account reconcile after you have made this correction? Assuming check 44264 was in payment of accounts payable (refer to Exhibit BR.16), draft the necessary audit adjustment at the bottom of your document. Print the bank reconciliation document. Scroll to WP 1 and record the audit adjustment in the "audit adjustments" column of the lead schedule. The deposit in transit, as well as all but the last two checks outstanding at December 31, cleared with the bank cutoff statement. What specific audit objectives does obtaining a cutoff statement directly from the bank support? If the cutoff bank statement covered the period 1/1/10 through 1/21/10 and the deposit in transit was credited 1/12/10, would you be concerned? If so, why? What additional procedures would you apply to allay your concerns? Note on document WP 1.B that Dollar Bank credited the deposit in transit on 1/3/10. 7"'13 714 Chapter 12 Audit of Cash and Other Liquid Assets Module IX: Analysis of Interbank Transfers Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Bank." Scroll to WP 1.C, "Inter-bank Transfer Schedule." Cheryl Lucas, a member of the Denise Vaughan & Co. audit team, prepared this document. As part of your audit training, Derick asks that you examine and review the document and determine the need for possible audit adjustments and reclassifications. a. What is the purpose of analyzing inter-bank transfers for a short period before and after the balance sheet date? b. Identify possible audit adjustments and reclassifications by examining WP 1.C. Assume that Bank Two check 127332 was dated December 31, 2009, deposited on that date, and also credited by Dollar Bank on December 31, 2009. c. As noted previously, Lawton had borrowed $3 million from Biltrite in April 2008, and had planned to repay the loan before December 31, 2009. Did he really repay the loan in December? Do you think the check drawn on Bank Two was reflected as an outstanding check in the 12/31/09 Bank Two reconciliation? Do you think the check was recorded as a December disbursement? If not, why not? (Hint: Remember that the loan agreement with Bank Two requires a $10 million compensating balance at all times.) 2. Draft Audit .Reclassification B at the bottom of WP 1.C. 3. Print the inter-bank transfer document. 4. Scroll to WP 1. Record Reclassification B from requirement (2) in the reclassification column of the lead schedule. Does the reclassification place Biltrite in default on the loan agreement? If so, what further audit procedures might you elect to apply at this time? 5. Print the lead schedule. Module X: Analysis of Marketable Securities Although the addition of the Waistliner Stationary Bike to the product line helped somewhat in increasing Biltrite's fall and winter revenue, business remains quite seasonal, producing large amounts in idle funds to be invested temporarily after the spring and summer bicycle sales seasons have ended. Marlene McAfee, the Biltrite treasurer, usually invests in marketable securities in mid-August and holds them until mid-January. They are sold in late January and February to finance spring inventories of bicycles. McAfee's goals in acquiring short-term investments are to maximize return while minimizing risk of loss from wide temporary price fluctuations. For this reason, the portfolio is limited to debt securities rated AA and above, and common stocks of "blue-chip" compames. Module X: Analysis of Marketable Securities As of December 31, 2009, the portfolio consisted of the following holdings: Security \\I Transco, Inc. Preferred 12/31/09 12/31/09 Carrying Value Market Value $804,024 $810,000 Jolly Roger Amusement Parks Common Pets 'R' Us Common 720,000 736,000 660,000 742,000 General Department Stores Common 660,000 550,000 942,000 AT&T 8% Debenture Bonds Daimler/Chrysler 11% Debenture Bonds Cleveland Electric 9% Debenture Bonds 930,000 1,150,000 1,131,000 2,000,000 2,066,000 Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Security." Do you think McAfee's securities portfolio is consistent with her stated goals of "maximizing return while minimizing risk of loss from temporary price fluctuations"? Justify your answer. 2. What determines whether marketable securities are to be classified as current or noncurrent on the balance sheet? 3. What are the objectives in the audit of marketable securities? What are the most relevant assertions for the auditor to examine? Examine the audit legends at the bottom of document 2. Have the objectives been satisfied? 4. Enter the market data for each security held at December 31, 2009. 5. Add an audit legend (and explain it at the bottom of the worksheet) regarding how market was determined. 6. Draft Audit Adjustment 8 at the bottom of WP 2 to recognize the understatement of interest revenue. The discrepancy results from failure to recognize accrued interest at 12/31/09 (debit account 1205, "Accrued Interest Receivable"). 7. Draft Audit Adjustment 9 to adjust the loss on decline of market value to reflect the corrected amount. The wide disparity in this instance arises because Biltrite, in adjusting to market at 12/31/09, compared market at 12/31/09 with the cost of the 12/31/08 portfolio, rather than comparing 12/31/09 market with 12/31/09 carrying values. For this adjustment, use account 9702, "Loss on Decline of Market Value of Securities," and account 1102, "Allowance for Decline of Market Value of Securities." 8. Print your document. 715 LEARNING OBJECTIVES The overriding objective of this textbook is to build a foundation with which to analyze current professional issues and adapt audit approaches to business and economic complexities. Through studying this chapter, you will be able to: 1 2 3 4 5 Identify the accounts and relevant assertions in the long-lived asset cycle. Describe the approach an auditor would take to perform an integrated audit in the long-lived asset cycle. Identify risks to reliable financial reporting in the long-lived asset cycle and explain how management can manage earnings through fixedasset accounts. Describe how to use preliminary analytical procedures to identify possible misstatements in the accounts associated with long-lived assets. Describe why it is important for the auditor to develop an understanding of internal controls, identify controls typically present in the long-lived asset cycle, and identify tests of controls used to test the effectiveness of controls over fixed assets. 6 Describe the substantive audit procedures that 7 8 9 10 should be used to test long-lived assets and related accounts. Describe the substantive audit procedures that should be used to test for the impairment of longlived assets. Discuss the risks associated with intangible assets and natural resources and the approach to auditing intangible assets and natural reso_urces. Discuss the risks associated with lease accounting and the audit approach for leases. Apply the decision analysis and ethical decisionmaking frameworks to situations involving the audit of long-lived asset accounts. CHAPTER OVERVIEW In this chapter, we present a general discussion of risks and audit approaches related to longlived assets and related expenses, intangibles, natural resources, and leases. In terms of the audit opinion formulation process, this chapter involves Phases Ill and IV, that is, obtaining evidence about controls and substantive evidence about long-lived asset account assertions. Auditors must consider the possibility that management may manage earnings by manipulating fixed-asset or lease accounts. Although types of fixed assets vary widely, there is a commonality in the audit approach to them. Assets are subject to impairment testing each year. 716 BIL THlTE PFI'A CTI'C'I'E CASE A: part efrhe audit efeash and alter liquid assets, you may now complete the owing exercises contained in the Biltcite audit practice case: Module VIII: Dulles Dollar Bankhm]; recenriliarien Module IX: Analysis ofinrer'oanlr transfers Module X: Analysis efmarlrctahie securities Module VIII: Dallas Dollar Bank Reconciliation Biltrite maintains. two general dermnd deposit accounts and. a plywoll account. Oneafdaegeneraldemmddeposilaecoumuidthcpaymacmunraremdi Dallas Dollar Bank. The securid demand deposit account is with Bank Two. the Chicago bank From which Biitrite obtained the 345 million loan referred to pre- viously,spartofti1eeaehzuditDeekhasaskedyeutorepedocmthe reconciliation ofall three of the bank accounts for December 2M9. and he do an analysis Minterbani: Handlers heweenDalhrBankmdBank Two; Recall that Biltrite has reconciled all bank accounts for each ofthe 12 months. You. will begin, there'are, with the company's denomination [3le December 2009 reemciljatimts. Requirements 1. Using the spreedsheet program and downloaded data. reuieve the le labeled \"Bank." Briey examine the following documentation in this le: ' WP lCashonhandmdinbmks; ' WP LBBank reconciliationMas Dollar Bank; and - WP LC[nterbanlt transfer schedule. Scroll to WP \"LB, \"Bank ReconciliationBulbs Dollar Bank." Do: the Dollar Bank account reconcile Eur December? What are the poerihle earner for ammonciliutiml? 2. In tracing cash disbursements from the December check register or: the hank statement. you learn that check 4426-1, in le amount al.3642352, was Ieeerded immcdj' as $651,752. [nem'pute this misstatement into the appropriate section of the bani: reconciliation. Does the letount reconcile after you have made this correction? Assuming check 4426-1- was. in payment ofaccounta payable {refer to Exhibit BRJIS). draft the necessary audit ardjtmnent at the barren of your docummt Print the bank reconciliation domrnent. Scroll to 'WP i and record the audit adjustment in the \"audit adjustments" column ofthe lead schedule. 5.ThedepoaitinmiLaswellaaallbulthclamtwocheckxou ' 31 December 31. cleared with the bank cuw'sratemmt. Wt specic audit objectives does obtaining a cumsmtemmt directly Earn the bank support? If the eutn'hmlr statement covered the period Lila-'10 through 1f21f10 and the deposit in transit was credited 11'123'10, would you be concerned? If so, why? What additional procedure: would you implyr to allay.r your con- cerns? Note on document WP LEI that Dolllrmk credited the deposit in. Emmi! on 1:"31'10. :5?" 714 Chapter 1'2 Audit oi Cash and Other Liquid Assela Module IX: Analysis of Interbank Transfers Requirements 1. PP!\" Using the spreadsheet program and. downloaded data, retrieve the le labeled "Bank." Scroll to \"FF LC, \"Inter-bank Transfer Schedule." Cheryl Lucas. a mmber nfthe Denise Vaughan a: Ca. audit team, prepared this document. As part ofyour audit training. Derick asks that you elm-nine and review the document and determine the need for possible audit adjmm'tents and rtdassicanons. a. Wt is the purpose of analyzing interbank transfers at a short period before and aier the balance sheet: date? is. Identify possible audit adjusnnents and reclassication: by examining WP LC. Assume that Bank Two check 127332 was dated December 31, 2009, deposited on that date, and also credited by Dollar Bani: on Deoecmber 31. 2009. ' c. As noted previously, Iaw'ton had borrowed $3 million from Briltrite in April 2003, and had planned to repay the loan beore December 31, 2009. Did he really repay the loan in December? Do you think the check drawn on Bank Two was reemd as an outstanding check in the l2f31f'3 Bank Two reconciliation? Do you think the check was recorded as a December disbursement? If not. why not? (Hint: Remem- ber that the loan agreement with Bank Two requires a 310 million compensating balance at all times.) Dra: AuditRedassit'ation B at the bottom ofW'P LC. Print the inter-bank transfer document. Scroll to WP 1. Record Reclassication B foam requirement [2) in the reclassication column of the lead schedule. Does the reclasilication place Btrite in default on the loan agreement? If so, what further audit proce dures might you elect to apply at this time? Print the lead schedule. Module X: Analysis of Marketable Securities Although the addition of the Waistliner Stationary Bike to the product line helped somewhat in increasing Burnett's Fall and winter revenue, business remains quite seasonal, producing large amounl: in idle funds to be harvested temporarily after the spring and summer bicycle sales seasons have ended. Mar- lene McMee. the Bilttite treasurer. usually invests in marketable securities in mid-August and holds them until midjammy. The;' are sold in late januaty and February to nance spring inventories beicycles. McAfce's goals in acquir- ingshott-terrn investments are to maximize return while minimizing risk ()le from wide temporal? price uenmions. For this reason. the portfolio is limited to debt securities rated AA and above, and common stocks of "bluechip" oomparues. Module X: Analysis of Marketable Seeuriliea As of December 3], 2009. the portfolio consisted ofthe aow'ing holdings: \"In!\" mm in" I! lm VIII! Market Veh- Tram-GD. he. Related $ 554.094 5 $13M July Huger Amusement Pate Carmen F2051!) 650.111] PM "11' U3 Comm "F35.\" 742.0\") EEI'IEI'BI Demure: Stores Common 660.000 550.000 ATE?! 56 Dbllll! Bonds 960.000 942.1300 Deimletfmslet 1156 Debenm Bonds 1.150.000 1.131.000 Clmlm Emu 9% Dwentum Bonds 2.000.000 2.065,m0 Requirements 1. Using the SpreadSheer prey-am and downloaded data. mutate the le labeled "Security." Do you think Ivicfee's securities portfolio is consistent with he: stated goals of\"nwcim.izing return while [Initializing risk ofless from temporary price uctuations"? justify your met. What detemiines whether marketable securities are to be classied as current or noncurtent on the balance sheet? What are the objectives in the audit of marketable securities? W'hat are the most relevant assertions for the auditor to examine? Examine the audit legends at the bottom ofdocurnem: 2. Have the objectives been satised? Enter the market data for each security held at December 31, 2009. Add an audit legend (and explain it at the bottom ofthe worksheet) regard- ing how market was determined. Dra: Audit Adjustment 3 at the bottom of'W'P 2 to recognize the under statement of interest revenue. The discrepancy results from Failure to recog nize accrued interest at 1331.309 (debit account 1205, "Accrued Interest Receivable"). Draft Audit Adjustment 9 to adjust the loss on decline of market value to reect the corrected amount. The Wide disparity in this instance arises because Biltrite, in adjusting to market at 123'31f09. compared market at 12f3lf'9 with the coat ofthe IQIEUOB portfolio. rather than comparing 123'311'09 mice: with 12/31.\")? carrying whet. For this adjustment, use account 93"02, "Loss on Decline ofhlatket Value ofSeeurities,\" and account 1102. \"Allowmce foe Decline of Market Value of Securities." Print your document. TIE As part of the audit of cash and other liquid assets, you may now co mplete the following exercises contained in the Biltrite audit practice case: Module VIII: Dallas Dollar Bank-bank reconciliation Module IX: Analysis of interbank transfers Module X: Analysis of marketable securities Module VII I: Dallas Dollar Bank Reconciliation Biltrite maintains two general demand deposit accounts and a payroll account. One of the general demand deposit accounts and the payroll account are with Dallas Dollar Bank. The second demand deposit account is with Bank Two, the Chicago bank from which Biltrite obtained the $45 million loan referred to previously. As part of the cash audit, Derick has asked you to reperform the reconciliation of all three of the bank accounts for December 2009, and to do an analysis of inter-bank transfers between Dollar Bank and Bank Two. Recall that Biltrite has reconciled all bank accounts for each of the 12 months. You will begin, therefore, with the company's documentation of its December 2009 reconciliations. Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Bank." Briefly examine the following documentation in this file: WP 1-Cash on hand and in banks; WP 1.B-Bank reconciliation-Dallas Dollar Bank; and WP LC-Inter-bank transfer schedule. 2. 3. 4. 5. Scroll to WP 1.B, "Bank Reconciliation-Dallas Dollar Bank." Does the Dollar Bank account reconcile for December? What are the possible causes for nonreconciliation? In tracing cash disbursements from the December check register to the bank statement, you learn that check 44264, in the amount of $642,752, was recorded incorrectly as $651,752. Incorporate this misstatement into the appropriate section of the bank reconciliation. Does the account reconcile after you have made this correction? Assuming check 44264 was in payment of accounts payable (refer to Exhibit BR.16), draft the necessary audit adjustment at the bottom of your document. Print the bank reconciliation document. Scroll to WP 1 and record the audit adjustment in the "audit adjustments" column of the lead schedule. The deposit in transit, as well as all but the last two checks outstanding at December 31, cleared with the bank cutoff statement. What specific audit objectives does obtaining a cutoff statement directly from the bank support? If the cutoff bank statement covered the period 1/1/10 through 1/21/10 and the deposit in transit was credited 1/12/10, would you be concerned? If so, why? What additional procedures would you apply to allay your concerns? Note on document WP 1.B that Dollar Bank credited the deposit in transit on 1/3/10. 7"'13 714 Chapter 12 Audit of Cash and Other Liquid Assets Module IX: Analysis of Interbank Transfers Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Bank." Scroll to WP 1.C, "Inter-bank Transfer Schedule." Cheryl Lucas, a member of the Denise Vaughan & Co. audit team, prepared this document. As part of your audit training, Derick asks that you examine and review the document and determine the need for possible audit adjustments and reclassifications. a. What is the purpose of analyzing inter-bank transfers for a short period before and after the balance sheet date? b. Identify possible audit adjustments and reclassifications by examining WP 1.C. Assume that Bank Two check 127332 was dated December 31, 2009, deposited on that date, and also credited by Dollar Bank on December 31, 2009. c. As noted previously, Lawton had borrowed $3 million from Biltrite in April 2008, and had planned to repay the loan before December 31, 2009. Did he really repay the loan in December? Do you think the check drawn on Bank Two was reflected as an outstanding check in the 12/31/09 Bank Two reconciliation? Do you think the check was recorded as a December disbursement? If not, why not? (Hint: Remember that the loan agreement with Bank Two requires a $10 million compensating balance at all times.) 2. Draft Audit .Reclassification B at the bottom of WP 1.C. 3. Print the inter-bank transfer document. 4. Scroll to WP 1. Record Reclassification B from requirement (2) in the reclassification column of the lead schedule. Does the reclassification place Biltrite in default on the loan agreement? If so, what further audit procedures might you elect to apply at this time? 5. Print the lead schedule. Module X: Analysis of Marketable Securities Although the addition of the Waistliner Stationary Bike to the product line helped somewhat in increasing Biltrite's fall and winter revenue, business remains quite seasonal, producing large amounts in idle funds to be invested temporarily after the spring and summer bicycle sales seasons have ended. Marlene McAfee, the Biltrite treasurer, usually invests in marketable securities in mid-August and holds them until mid-January. They are sold in late January and February to finance spring inventories of bicycles. McAfee's goals in acquiring short-term investments are to maximize return while minimizing risk of loss from wide temporary price fluctuations. For this reason, the portfolio is limited to debt securities rated AA and above, and common stocks of "blue-chip" compames. Module X: Analysis of Marketable Securities As of December 31, 2009, the portfolio consisted of the following holdings: Security \\I Transco, Inc. Preferred 12/31/09 12/31/09 Carrying Value Market Value $804,024 $810,000 Jolly Roger Amusement Parks Common Pets 'R' Us Common 720,000 736,000 660,000 742,000 General Department Stores Common 660,000 550,000 942,000 AT&T 8% Debenture Bonds Daimler/Chrysler 11% Debenture Bonds Cleveland Electric 9% Debenture Bonds 930,000 1,150,000 1,131,000 2,000,000 2,066,000 Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Security." Do you think McAfee's securities portfolio is consistent with her stated goals of "maximizing return while minimizing risk of loss from temporary price fluctuations"? Justify your answer. 2. What determines whether marketable securities are to be classified as current or noncurrent on the balance sheet? 3. What are the objectives in the audit of marketable securities? What are the most relevant assertions for the auditor to examine? Examine the audit legends at the bottom of document 2. Have the objectives been satisfied? 4. Enter the market data for each security held at December 31, 2009. 5. Add an audit legend (and explain it at the bottom of the worksheet) regarding how market was determined. 6. Draft Audit Adjustment 8 at the bottom of WP 2 to recognize the understatement of interest revenue. The discrepancy results from failure to recognize accrued interest at 12/31/09 (debit account 1205, "Accrued Interest Receivable"). 7. Draft Audit Adjustment 9 to adjust the loss on decline of market value to reflect the corrected amount. The wide disparity in this instance arises because Biltrite, in adjusting to market at 12/31/09, compared market at 12/31/09 with the cost of the 12/31/08 portfolio, rather than comparing 12/31/09 market with 12/31/09 carrying values. For this adjustment, use account 9702, "Loss on Decline of Market Value of Securities," and account 1102, "Allowance for Decline of Market Value of Securities." 8. Print your document. 715 LEARNING OBJECTIVES The overriding objective of this textbook is to build a foundation with which to analyze current professional issues and adapt audit approaches to business and economic complexities. Through studying this chapter, you will be able to: 1 2 3 4 5 Identify the accounts and relevant assertions in the long-lived asset cycle. Describe the approach an auditor would take to perform an integrated audit in the long-lived asset cycle. Identify risks to reliable financial reporting in the long-lived asset cycle and explain how management can manage earnings through fixedasset accounts. Describe how to use preliminary analytical procedures to identify possible misstatements in the accounts associated with long-lived assets. Describe why it is important for the auditor to develop an understanding of internal controls, identify controls typically present in the long-lived asset cycle, and identify tests of controls used to test the effectiveness of controls over fixed assets. 6 Describe the substantive audit procedures that 7 8 9 10 should be used to test long-lived assets and related accounts. Describe the substantive audit procedures that should be used to test for the impairment of longlived assets. Discuss the risks associated with intangible assets and natural resources and the approach to auditing intangible assets and natural reso_urces. Discuss the risks associated with lease accounting and the audit approach for leases. Apply the decision analysis and ethical decisionmaking frameworks to situations involving the audit of long-lived asset accounts. CHAPTER OVERVIEW In this chapter, we present a general discussion of risks and audit approaches related to longlived assets and related expenses, intangibles, natural resources, and leases. In terms of the audit opinion formulation process, this chapter involves Phases Ill and IV, that is, obtaining evidence about controls and substantive evidence about long-lived asset account assertions. Auditors must consider the possibility that management may manage earnings by manipulating fixed-asset or lease accounts. Although types of fixed assets vary widely, there is a commonality in the audit approach to them. Assets are subject to impairment testing each year. 716 BIL THlTE PFI'A CTI'C'I'E CASE A: part efrhe audit efeash and alter liquid assets, you may now complete the owing exercises contained in the Biltcite audit practice case: Module VIII: Dulles Dollar Bankhm]; recenriliarien Module IX: Analysis ofinrer'oanlr transfers Module X: Analysis efmarlrctahie securities Module VIII: Dallas Dollar Bank Reconciliation Biltrite maintains. two general dermnd deposit accounts and. a plywoll account. Oneafdaegeneraldemmddeposilaecoumuidthcpaymacmunraremdi Dallas Dollar Bank. The securid demand deposit account is with Bank Two. the Chicago bank From which Biitrite obtained the 345 million loan referred to pre- viously,spartofti1eeaehzuditDeekhasaskedyeutorepedocmthe reconciliation ofall three of the bank accounts for December 2M9. and he do an analysis Minterbani: Handlers heweenDalhrBankmdBank Two; Recall that Biltrite has reconciled all bank accounts for each ofthe 12 months. You. will begin, there'are, with the company's denomination [3le December 2009 reemciljatimts. Requirements 1. Using the spreedsheet program and downloaded data. reuieve the le labeled \"Bank." Briey examine the following documentation in this le: ' WP lCashonhandmdinbmks; ' WP LBBank reconciliationMas Dollar Bank; and - WP LC[nterbanlt transfer schedule. Scroll to WP \"LB, \"Bank ReconciliationBulbs Dollar Bank." Do: the Dollar Bank account reconcile Eur December? What are the poerihle earner for ammonciliutiml? 2. In tracing cash disbursements from the December check register or: the hank statement. you learn that check 4426-1, in le amount al.3642352, was Ieeerded immcdj' as $651,752. [nem'pute this misstatement into the appropriate section of the bani: reconciliation. Does the letount reconcile after you have made this correction? Assuming check 4426-1- was. in payment ofaccounta payable {refer to Exhibit BRJIS). draft the necessary audit ardjtmnent at the barren of your docummt Print the bank reconciliation domrnent. Scroll to 'WP i and record the audit adjustment in the \"audit adjustments" column ofthe lead schedule. 5.ThedepoaitinmiLaswellaaallbulthclamtwocheckxou ' 31 December 31. cleared with the bank cuw'sratemmt. Wt specic audit objectives does obtaining a cumsmtemmt directly Earn the bank support? If the eutn'hmlr statement covered the period Lila-'10 through 1f21f10 and the deposit in transit was credited 11'123'10, would you be concerned? If so, why? What additional procedure: would you implyr to allay.r your con- cerns? Note on document WP LEI that Dolllrmk credited the deposit in. Emmi! on 1:"31'10. :5?" 714 Chapter 1'2 Audit oi Cash and Other Liquid Assela Module IX: Analysis of Interbank Transfers Requirements 1. PP!\" Using the spreadsheet program and. downloaded data, retrieve the le labeled "Bank." Scroll to \"FF LC, \"Inter-bank Transfer Schedule." Cheryl Lucas. a mmber nfthe Denise Vaughan a: Ca. audit team, prepared this document. As part ofyour audit training. Derick asks that you elm-nine and review the document and determine the need for possible audit adjmm'tents and rtdassicanons. a. Wt is the purpose of analyzing interbank transfers at a short period before and aier the balance sheet: date? is. Identify possible audit adjusnnents and reclassication: by examining WP LC. Assume that Bank Two check 127332 was dated December 31, 2009, deposited on that date, and also credited by Dollar Bani: on Deoecmber 31. 2009. ' c. As noted previously, Iaw'ton had borrowed $3 million from Briltrite in April 2003, and had planned to repay the loan beore December 31, 2009. Did he really repay the loan in December? Do you think the check drawn on Bank Two was reemd as an outstanding check in the l2f31f'3 Bank Two reconciliation? Do you think the check was recorded as a December disbursement? If not. why not? (Hint: Remem- ber that the loan agreement with Bank Two requires a 310 million compensating balance at all times.) Dra: AuditRedassit'ation B at the bottom ofW'P LC. Print the inter-bank transfer document. Scroll to WP 1. Record Reclassication B foam requirement [2) in the reclassication column of the lead schedule. Does the reclasilication place Btrite in default on the loan agreement? If so, what further audit proce dures might you elect to apply at this time? Print the lead schedule. Module X: Analysis of Marketable Securities Although the addition of the Waistliner Stationary Bike to the product line helped somewhat in increasing Burnett's Fall and winter revenue, business remains quite seasonal, producing large amounl: in idle funds to be harvested temporarily after the spring and summer bicycle sales seasons have ended. Mar- lene McMee. the Bilttite treasurer. usually invests in marketable securities in mid-August and holds them until midjammy. The;' are sold in late januaty and February to nance spring inventories beicycles. McAfce's goals in acquir- ingshott-terrn investments are to maximize return while minimizing risk ()le from wide temporal? price uenmions. For this reason. the portfolio is limited to debt securities rated AA and above, and common stocks of "bluechip" oomparues. Module X: Analysis of Marketable Seeuriliea As of December 3], 2009. the portfolio consisted ofthe aow'ing holdings: \"In!\" mm in" I! lm VIII! Market Veh- Tram-GD. he. Related $ 554.094 5 $13M July Huger Amusement Pate Carmen F2051!) 650.111] PM "11' U3 Comm "F35.\" 742.0\") EEI'IEI'BI Demure: Stores Common 660.000 550.000 ATE?! 56 Dbllll! Bonds 960.000 942.1300 Deimletfmslet 1156 Debenm Bonds 1.150.000 1.131.000 Clmlm Emu 9% Dwentum Bonds 2.000.000 2.065,m0 Requirements 1. Using the SpreadSheer prey-am and downloaded data. mutate the le labeled "Security." Do you think Ivicfee's securities portfolio is consistent with he: stated goals of\"nwcim.izing return while [Initializing risk ofless from temporary price uctuations"? justify your met. What detemiines whether marketable securities are to be classied as current or noncurtent on the balance sheet? What are the objectives in the audit of marketable securities? W'hat are the most relevant assertions for the auditor to examine? Examine the audit legends at the bottom ofdocurnem: 2. Have the objectives been satised? Enter the market data for each security held at December 31, 2009. Add an audit legend (and explain it at the bottom ofthe worksheet) regard- ing how market was determined. Dra: Audit Adjustment 3 at the bottom of'W'P 2 to recognize the under statement of interest revenue. The discrepancy results from Failure to recog nize accrued interest at 1331.309 (debit account 1205, "Accrued Interest Receivable"). Draft Audit Adjustment 9 to adjust the loss on decline of market value to reect the corrected amount. The Wide disparity in this instance arises because Biltrite, in adjusting to market at 123'31f09. compared market at 12f3lf'9 with the coat ofthe IQIEUOB portfolio. rather than comparing 123'311'09 mice: with 12/31.\")? carrying whet. For this adjustment, use account 93"02, "Loss on Decline ofhlatket Value ofSeeurities,\" and account 1102. \"Allowmce foe Decline of Market Value of Securities." Print your document. TIE As part of the audit of cash and other liquid assets, you may now co mplete the following exercises contained in the Biltrite audit practice case: Module VIII: Dallas Dollar Bank-bank reconciliation Module IX: Analysis of interbank transfers Module X: Analysis of marketable securities Module VII I: Dallas Dollar Bank Reconciliation Biltrite maintains two general demand deposit accounts and a payroll account. One of the general demand deposit accounts and the payroll account are with Dallas Dollar Bank. The second demand deposit account is with Bank Two, the Chicago bank from which Biltrite obtained the $45 million loan referred to previously. As part of the cash audit, Derick has asked you to reperform the reconciliation of all three of the bank accounts for December 2009, and to do an analysis of inter-bank transfers between Dollar Bank and Bank Two. Recall that Biltrite has reconciled all bank accounts for each of the 12 months. You will begin, therefore, with the company's documentation of its December 2009 reconciliations. Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Bank." Briefly examine the following documentation in this file: WP 1-Cash on hand and in banks; WP 1.B-Bank reconciliation-Dallas Dollar Bank; and WP LC-Inter-bank transfer schedule. 2. 3. 4. 5. Scroll to WP 1.B, "Bank Reconciliation-Dallas Dollar Bank." Does the Dollar Bank account reconcile for December? What are the possible causes for nonreconciliation? In tracing cash disbursements from the December check register to the bank statement, you learn that check 44264, in the amount of $642,752, was recorded incorrectly as $651,752. Incorporate this misstatement into the appropriate section of the bank reconciliation. Does the account reconcile after you have made this correction? Assuming check 44264 was in payment of accounts payable (refer to Exhibit BR.16), draft the necessary audit adjustment at the bottom of your document. Print the bank reconciliation document. Scroll to WP 1 and record the audit adjustment in the "audit adjustments" column of the lead schedule. The deposit in transit, as well as all but the last two checks outstanding at December 31, cleared with the bank cutoff statement. What specific audit objectives does obtaining a cutoff statement directly from the bank support? If the cutoff bank statement covered the period 1/1/10 through 1/21/10 and the deposit in transit was credited 1/12/10, would you be concerned? If so, why? What additional procedures would you apply to allay your concerns? Note on document WP 1.B that Dollar Bank credited the deposit in transit on 1/3/10. 7"'13 714 Chapter 12 Audit of Cash and Other Liquid Assets Module IX: Analysis of Interbank Transfers Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Bank." Scroll to WP 1.C, "Inter-bank Transfer Schedule." Cheryl Lucas, a member of the Denise Vaughan & Co. audit team, prepared this document. As part of your audit training, Derick asks that you examine and review the document and determine the need for possible audit adjustments and reclassifications. a. What is the purpose of analyzing inter-bank transfers for a short period before and after the balance sheet date? b. Identify possible audit adjustments and reclassifications by examining WP 1.C. Assume that Bank Two check 127332 was dated December 31, 2009, deposited on that date, and also credited by Dollar Bank on December 31, 2009. c. As noted previously, Lawton had borrowed $3 million from Biltrite in April 2008, and had planned to repay the loan before December 31, 2009. Did he really repay the loan in December? Do you think the check drawn on Bank Two was reflected as an outstanding check in the 12/31/09 Bank Two reconciliation? Do you think the check was recorded as a December disbursement? If not, why not? (Hint: Remember that the loan agreement with Bank Two requires a $10 million compensating balance at all times.) 2. Draft Audit .Reclassification B at the bottom of WP 1.C. 3. Print the inter-bank transfer document. 4. Scroll to WP 1. Record Reclassification B from requirement (2) in the reclassification column of the lead schedule. Does the reclassification place Biltrite in default on the loan agreement? If so, what further audit procedures might you elect to apply at this time? 5. Print the lead schedule. Module X: Analysis of Marketable Securities Although the addition of the Waistliner Stationary Bike to the product line helped somewhat in increasing Biltrite's fall and winter revenue, business remains quite seasonal, producing large amounts in idle funds to be invested temporarily after the spring and summer bicycle sales seasons have ended. Marlene McAfee, the Biltrite treasurer, usually invests in marketable securities in mid-August and holds them until mid-January. They are sold in late January and February to finance spring inventories of bicycles. McAfee's goals in acquiring short-term investments are to maximize return while minimizing risk of loss from wide temporary price fluctuations. For this reason, the portfolio is limited to debt securities rated AA and above, and common stocks of "blue-chip" compames. Module X: Analysis of Marketable Securities As of December 31, 2009, the portfolio consisted of the following holdings: Security \\I Transco, Inc. Preferred 12/31/09 12/31/09 Carrying Value Market Value $804,024 $810,000 Jolly Roger Amusement Parks Common Pets 'R' Us Common 720,000 736,000 660,000 742,000 General Department Stores Common 660,000 550,000 942,000 AT&T 8% Debenture Bonds Daimler/Chrysler 11% Debenture Bonds Cleveland Electric 9% Debenture Bonds 930,000 1,150,000 1,131,000 2,000,000 2,066,000 Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Security." Do you think McAfee's securities portfolio is consistent with her stated goals of "maximizing return while minimizing risk of loss from temporary price fluctuations"? Justify your answer. 2. What determines whether marketable securities are to be classified as current or noncurrent on the balance sheet? 3. What are the objectives in the audit of marketable securities? What are the most relevant assertions for the auditor to examine? Examine the audit legends at the bottom of document 2. Have the objectives been satisfied? 4. Enter the market data for each security held at December 31, 2009. 5. Add an audit legend (and explain it at the bottom of the worksheet) regarding how market was determined. 6. Draft Audit Adjustment 8 at the bottom of WP 2 to recognize the understatement of interest revenue. The discrepancy results from failure to recognize accrued interest at 12/31/09 (debit account 1205, "Accrued Interest Receivable"). 7. Draft Audit Adjustment 9 to adjust the loss on decline of market value to reflect the corrected amount. The wide disparity in this instance arises because Biltrite, in adjusting to market at 12/31/09, compared market at 12/31/09 with the cost of the 12/31/08 portfolio, rather than comparing 12/31/09 market with 12/31/09 carrying values. For this adjustment, use account 9702, "Loss on Decline of Market Value of Securities," and account 1102, "Allowance for Decline of Market Value of Securities." 8. Print your document. 715 LEARNING OBJECTIVES The overriding objective of this textbook is to build a foundation with which to analyze current professional issues and adapt audit approaches to business and economic complexities. Through studying this chapter, you will be able to: 1 2 3 4 5 Identify the accounts and relevant assertions in the long-lived asset cycle. Describe the approach an auditor would take to perform an integrated audit in the long-lived asset cycle. Identify risks to reliable financial reporting in the long-lived asset cycle and explain how management can manage earnings through fixedasset accounts. Describe how to use preliminary analytical procedures to identify possible misstatements in the accounts associated with long-lived assets. Describe why it is important for the auditor to develop an understanding of internal controls, identify controls typically present in the long-lived asset cycle, and identify tests of controls used to test the effectiveness of controls over fixed assets. 6 Describe the substantive audit procedures that 7 8 9 10 should be used to test long-lived assets and related accounts. Describe the substantive audit procedures that should be used to test for the impairment of longlived assets. Discuss the risks associated with intangible assets and natural resources and the approach to auditing intangible assets and natural reso_urces. Discuss the risks associated with lease accounting and the audit approach for leases. Apply the decision analysis and ethical decisionmaking frameworks to situations involving the audit of long-lived asset accounts. CHAPTER OVERVIEW In this chapter, we present a general discussion of risks and audit approaches related to longlived assets and related expenses, intangibles, natural resources, and leases. In terms of the audit opinion formulation process, this chapter involves Phases Ill and IV, that is, obtaining evidence about controls and substantive evidence about long-lived asset account assertions. Auditors must consider the possibility that management may manage earnings by manipulating fixed-asset or lease accounts. Although types of fixed assets vary widely, there is a commonality in the audit approach to them. Assets are subject to impairment testing each year. 716