Question 5 (9 + 3 = 12 marks)

You are assigned to do the audit the work for Howard Ltd for the calendar year 2019, you found some issues that you believe represent possible adjustments to the company's books. In addition, there are others issues that need to be addressed. The maters include:

1.Several credit memos that were processed and recorded after year-end relate to sales and accounts receivable for 2019. These total $42 000.

2.Electricity and other utilities' invoices received after the cut-off date $30 000.

3.Inventory cut off tests indicate that $35 000 of inventory received on 30 December 2019 was recorded as purchases and accounts payable in 2020. These items were included in the inventory count at year-end and were therefore included in ending inventory.

4.On 15 December 2019, Howard Ltd declared a bonus issue of 2 000 shares with a par value of $100 000 of its ordinary shares, payable 25 January 2020 to the ordinary shareholders on record as in 30 December 2019.

5.Howard Ltd has not established a reserve for obsolescence of inventories. Your tests indicate that such a $27 000 reserve is appropriate under the circumstances.

6.Several debit memos that were processed and recorded after year-end relate to purchases and accounts payable for 2019. These total $40 000.

7.Your review of the allowance for doubtful accounts indicates that it is overstated by $36 000.

8.The company was concerned about the possibility of a liability, amounting to $100 000, that may result from an income tax dispute.

9.There were two incidents of fraudulent disbursements amounting to $25 000.

You have noticed that the management's attitude is that "once the books are closed, they're closed", and they do not want to make any adjustments.

Planning materiality for the engagement was $80 000, determined by calculating 5% of expected profit before taxes. Actual profit before taxes on the financial statements prior to any adjustments is $ 1000 000.

Required:

a.Prepare the required adjusting journal entries and explain the treatment of all other issues. (9 marks)

b.Given the management's attitude about books being closed, explain the reason what would you do in the circumstances? (3 marks)