Professional Documents
Culture Documents
Chapter17 - Answer
Chapter17 - Answer
17
17-1.
a.
(3)
b.
(1)
c.
(4)
d.
(3)
17-2.
a.
(4)
b.
(3)
c.
(1)
d.
(4)
17-3.
a.
(3)
b.
(1)
c.
(1)
d.
(2)
17-4.
e.
(1)
a.
b.
c.
d.
2 - The cause of the bankruptcy took place after the balance sheet date,
therefore the balance sheet was fairly stated. Account may be written off as
uncollectible at 6-30-06, but they are not required to do so. Footnote
disclosure is necessary because the subsequent event is material.
e.
2 - The sale took place after the balance sheet date but, since the loss was
material and will affect future profits, footnote disclosure is necessary.
f.
2 - The lawsuit originated in the current year, but the amount of the loss is
unknown.
g.
h.
4 - The financial statements were believed to be fairly stated for 6-30-06 or 819-06.
i.
2 - The cause of the lawsuit occurred before the balance sheet date and the
lawsuit should be included in the 6-30-06 footnotes.
17-2
17-5.
Flowmeter, Inc.
Ite
m
No.
1.
2.
3.
Audit Procedures
Goods in-transit would be
detected in the course of the
auditors review of the year-end
cutoff of purchases. The auditor
would examine receiving reports
and purchase invoices to make
certain that the liability to suppliers
had been recorded for all goods
included in inventory, and that all
goods for which the client was
liable at year-end were recorded in
inventory.
Settlements of litigation would be
revealed by requesting from the
companys legal
counsel
a
description and evaluation of any
litigation, impending litigation,
claims, and contingent liabilities of
which he has knowledge that
existed at the date of the balance
sheet being reported upon, together
with a description and evaluation
up to the date the information is
furnished.
A review of cash
disbursements for the period
between the balance sheet date and
completion of field work may also
reveal evidence of the settlement.
The purchase would normally be
revealed in general conversations
with the client and would further
be detected by reading the minutes
of meetings of stockholders,
directors,
and
appropriate
committees. In addition, because
the amount paid is likely to be
unusually large in relation to other
cash disbursements, a review of
cash disbursements for the period
between the balance sheet date and
completion of field work is likely
Required Disclosure
and Reasons
The receipt of the goods provides
additional evidence with respect to
conditions that existed at the date
of the balance sheet and hence the
financial statements should be
adjusted to take into account such
additional information.
4.
5.
17-3
statements
with
pro
forma
statements indicating the financial
results if the two firms had been
consolidated for the year ending
December 31, 2005. Otherwise,
disclosure in footnotes to the
statements would be adequate.
Occasionally, a situation of this
type may have such a material
impact on the entity that the auditor
may wish to include in his report an
explanatory paragraph directing the
readers attention to the event and
its effect.
Losses attributable to floods
subsequent to the balance sheet
date do not provide information
with respect to conditions that
existed at the balance sheet date;
hence, it does not require an
adjustment
in the financial
statements.
However, such an
incident may be of sufficient
importance to require footnote
disclosure.
Occasionally, a
situation of this type may have
such a material impact on the entity
that the auditor may wish to
include in his report an explanatory
paragraph directing the readers
attention to the event and its effect.
Sales of bonds or capital stock are
transactions of the type that do not
provide information with respect to
conditions that existed at the
balance
sheet
date;
hence,
adjustment of the financial
statement
is
not
required.
However, such sales may be of
sufficient importance to require
footnote disclosure. Occasionally,
a situation of this type may have
such a material impact on the entity
that the auditor may wish to
include in his report an explanatory
paragraph directing the readers
17-4
17-6.
2.
It is improbable that the CPA would learn the source of the P25,000 unless it
were revealed in a discussion with the president or his personal accountant, or
unless the auditor prepared the presidents personal income tax return, in
which case the interest charges would have lead to his investigation of the use
to which the funds were put. Setting out the loan in the balance sheet as a
loan from an officer would be sufficient disclosure. The source from which
the officer obtained the funds would not be disclosed because it is the
officers personal business and has no effect upon the corporations financial
statements. Indeed, disclosure of the funds source might be construed as
detrimental to the officer.
3.
The additional liability for the ore shipment would have been revealed to the
CPA in his scanning of January transactions. His regular examination of 2001
transactions and related documents such as purchase contracts would have
caused him to note the time for subsequent follow up to determine the final
liability. In addition the clients letter of representation might have mentioned
the potential liability. The item would not require separate disclosure by
footnote or otherwise and would be handled by adjusting the financial
statement amounts for purchases, ending raw materials inventory, and
accounts payable by the amount of the additional charge, P9,064 {[(72 - 50) /
50] = 0.44; 0.44 x P20,600 = P9,064}.
4.
The CPA might learn of the agreement to purchase the treasurers stock
ownership through his inquiries of management and legal counsel,
examination of the minutes of the meetings of the board of directors and
stockholders and subsequent reading of the agreement. The absence of the
treasurer might also arouse the CPAs curiosity. The details of the agreement
would be disclosed in a footnote because the use of company cash for the
repurchase of stock and the change in the amount of stock held by
stockholders might have a heavy impact on subsequent years financial
statements.
Usually, a management change, such as the treasurers
resignation, does not require disclosure in the financial statements. The
details underlying the separation (personal disagreements and divorce) should
not be disclosed because they are personal matters.
17-5
5.
6.
The contract with Lopez Industries would come to the CPAs attention
through his inquiries of management and legal counsel, his reading of the
minutes of the meetings of the board of directors and stockholders, and his
examination of the contract. All important details of the contract should be
disclosed in a footnote because of the great effect upon the corporations
future. The factors contributing to the entry into the contract need not be
disclosed in statements; while they might be of interest to readers, they are by
no means essential to make the statements not misleading.