BOTIGAN, SHIRLY P.

ACCTG 9A

CHAPTER 9 ACTIVITY
1. D 6. D 11. A 16. A
2. D 7. A 12. C 17. B
3. D 8. A 13. D 18. B
4. A 9. A 14. A 19. C
5. C 10. A 15. E (none of the 20. A
above)

EXERCISE1
a. What might motivate the management to overstate fixed assets.
-Overstating fixed asset might result to an increase in the revenues and income that
will be reflected in the financial statement of the entity. Having this higher income will
benefit the entity in many ways such as when used by creditors and other external
users. Overstating fixed asset will understate the depreciation expense account resulting
to an increase (overstating) in income account.

b. Other factors that auditor consider in assessing Fraud risk related to long lived asset.
 Incomplete recording of asset disposal
 Obsolescence of assets.
 Incorrect recording of assets due to complex ownership structures
 Amortization of depreciation schedules that do not reflect economic impairment
or use of the asset.
EXERCISE 2
Every auditor must have the attitude of professional skepticism. They must also be able to
understand the audit procedure and the audit result. This will help the client to understand the
situation and might as well make changes regarding the control of the asset. As part of the
audit, auditor must also be aware of the possibility of fraud, risk and misstatement that might
be occur and to be able to check the internal controls and to do some substantive test for such.
Auditors must make some investigation regarding matters that needs consideration and
attention. Also, as an auditor you will need to analyze and inspect documents related to this
specific account.

EXERCISE 3.
Potential fraud schemes related to long lived assets
a. Sales of asset are not recorded, and proceeds are misappropriated.
b. Assets that have been sold are not removed from the books.
c. Inappropriate residual values or lives are assigned to the assets, resulting in
miscalculation of depreciation.
 d. Amortization of intangible assets is miscalculated.
e. Cost that should have been expensed are improperly capitalized.
f. Impairment losses of long lived assets are recognized.
g. Fair value assets are unreasonable or unsupportable.
EXERCISE 4
RISK INTERNAL CONTROL
It is not easy to determine cost of intangible Acquisition, additions, amortization and
assets as it is for tangible assets. write-off of intangibles should be properly
authorized.
Cost of research and development can’t be Adequacy and consistency of account ting
determined easily. It is charged every year as policies governing intangible assets should be
expense from the point it is incurred to the reviewed periodically.
point product is launched in the market.
Some cost of obtaining patent is treated as General ledger account should be supported
capital expenditure if product is successfully by adequate detailed records and they
patented otherwise it will be shown as should be periodically reconciled.
expense
Cost of patent is charged every year as Schedules of intangibles showing their cost
expense till the life of the patent. and basis or amortization should be prepared
periodically and reviewed by a responsible
official.

EXERCISE 5 (same question with no. 4)

RISK
It is not easy to determine cost of intangible
assets as it is for tangible assets.
Cost of research and development can’t be
determined easily. It is charged every year as
expense from the point it is incurred to the
point product is launched in the market.
Some cost of obtaining patent is treated as
capital expenditure if product is successfully
patented otherwise it will be shown as
expense
Cost of patent is charged every year as
expense till the life of the patent.
INTERNAL CONTROL
Acquisition, additions, amortization and
write-off of intangibles should be properly
authorized.
Adequacy and consistency of account ting
policies governing intangible assets should be
reviewed periodically.
General ledger account should be supported
by adequate detailed records and they
should be periodically reconciled.
Schedules of intangibles showing their cost
and basis or amortization should be prepared
periodically and reviewed by a responsible
official.

CHAPTER 10 ACTIVITY
1. B 6. D
 2. B 7. B
3. C 8. D
4. D 9. D
5. A 10. C

EXERCISE 1
PURPOSE OF THE TYPE OF FINANCIAL AUDIT PROCEDURE
CONTROL STATEMENT ERROR
1. Liabilities for notes Making incorrect estimates Confirming outside
payable are properly of allowances for parties the significant
authorized and obligation factor and transactions
recorded that have occurred.
2. Liability for notes Making incorrect estimates Auditor traces the
payable are properly of allowances for proceeds into the cash
stated. obligation receipt records and the
bank statement.
3. To make sure that Making incorrect estimates Auditor traces the
separation of duties of allowances for proceeds into the cash
maintained. obligation receipt records and the
bank statement.
4. A satisfactory Failure to recognize a Auditors examines
system of record violation to debt obligation payments through the
keeping that all paid cash disbursement
notes were canceled records including
and retained in the canceled checks
company files
5. To make sure that Making incorrect estimates Auditor traces the
an individual has the of allowances for proceeds into the cash
authority or have obligation receipt records and the
obtain the authority bank statement.
of a specific duty or
responsibility.
6. Related interest and Accruing interest in the Reading loan agreement
accrue liabilities are wrong period. and interests.
properly stated
without fraud or
error.

Exercise 2
 a. Five Information the auditor should expect to obtain from a bond indenture relevant to
the conduct of an audit:
1. Stated interest rate
2. Face value of the bond
3. Maturity value of the bond
4. Callable Provision
5. Sinking Fund provision
6. Conversion terms and privileges
b. It is not necessary to confirm the existence of the liability with individual bondholder
because this can be verified by the bond trustees. Also if they want to confirm the
existence of the liability, they can easily check it through the transactions of money
received and the reduction of repayment.
c. Amount of discount can be computed by comparing the net proceeds available to the
bond offering with the stated interest rate. Auditor could determine whether the
amounts are properly amortized each year by analyzing the net proceeds to determine
the effective interest rate.
d. Auditor could verify that semiannual payments are made on the bond each year by
asking the bond trustees. Bond trustees having an agreement with most organization for
them to handle the registration of current bondholders to make periodic interest
payments.
e. Evidence auditor would gather:
Auditor should determine the appropriate classification of bond by getting
copies of debt agreement as well as any legal documentation regarding the bond. They
should also determine the schedule of debt obligation and interest. The bond will also
classified as current liability because the bond is due next month until it is refinanced.

Exercise 3
Audit Steps
a. Check Balance Sheets at the beginning and through the previous fiscal year for working
capital ratio. If capital ratio is under 2 to 1, check compensation of officers for
compliance with limitation.
b. Examine clients copies of insurance policies or certificate of insurance for compliance
with the covenant, preparing schedule of book value, appraised or estimated actual
value and coverage for report. Confirm policies held with trustee.
c. Examine Vouchers supporting tax payments on all property covered by the indenture.
By reference to the local tax laws and the vouchers, determine that all taxes have been
paid before the penalty-free period expired. If vouchers in any case are inadequate,
confirm with trustee who holds the tax repairs.
d. Vouch payments to sinking fund. Confirm bond purchases and sinking fund balance with
trustee. Observe cremation certificates or equal evidence of destruction of bond for
bonds canceled. Report the fund as an asset, preferably by giving the composition as to
cash and bond held alive, if any.
CHAPTER 11 ACTIVITY
Exercise 1.
a.

b. Possible explanation
 Check may have been recorded at the wrong amount, therefore auditor should
ascertain whether there is an isolated error or an indicative of poor record keeping
procedures by client.