You are on page 1of 5

CHAPTER

19

19-1

EVALUATION OF AUDIT
EVIDENCE AND COMPLETION
OF THE AUDIT

Refer to p.640 for the full discussion on the assessment of the sufficiency of
evidences.

19-2 – 19-6
Note to instructor: Please see the other CD attached within the purchased
materials.

19-7.

a.

(3)

b.

(1)

c.

(4)

d.

(3)

19-8.

a.

(4)

b.

(3)

c.

(1)

d.

(4)

19-9.

a.

(3)

b.

(1)

c.

(1)

d.

(2)

19-10.

Tracy Brewing Company

e.

(1)

a.

4 - The amount appeared collectible at the end of the field work.

b.

1 - The uncollectible amount was determined before end of field work.

c.

3 - Amount should have been determined to be uncollectible before end of
field work, but it was discovered after the issuance of the statements. The
financial statements should have been known to be in error on 8-20-15.

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 6-30-15, 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.

The settlement should be reflected in the 6-30-15 financial statements as an adjustment of current period income and not a prior period adjustment.The financial statements were believed to be fairly stated for 6-30-15 or 819-15. The settlement of litigation would require an adjustment of the financial statements since the events that gave rise to the litigation had taken place prior to the balance sheet date. claims. together with a description and evaluation up to the date the information is furnished. Applied Auditing 2014 Edition Solutions Manual g. Audit Procedures Goods “in-transit” would be detected in the course of the auditor’s review of the year-end “cutoff” of purchases. Inc. Flowmeter. h. The purchase of a new business is . 3. 1.19-2 19-5. 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.The cause of the lawsuit occurred before the balance sheet date and the lawsuit should be included in the 6-30-15 footnotes. Item No. and contingent liabilities of which he has knowledge that existed at the date of the balance sheet being reported upon. 2. 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. impending litigation. 2 . i. 4 . 1 . The purchase would normally be 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. Settlements of litigation would be revealed by requesting from the company’s legal counsel a description and evaluation of any litigation.

it does not require an adjustment in the financial statements. Moreover. 5. directors. Occasionally. 2014. 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. The sale of bonds or other securities would require a filing with the SEC in which the auditor 19-3 not an event that provides evidence with respect to conditions existing at the balance sheet date. hence. Occasionally. he would investigate to determine if his client’s facilities had suffered any damage. because the amount paid is likely to be unusually large in relation to other cash disbursements. 4. and appropriate committees. Moreover. such an event would normally be of such importance that disclosure of it is required to keep the financial statements from being misleading. Sales of bonds or capital stock are transactions of the type that do not provide information with respect to . disclosure in footnotes to the statements would be adequate. the letter from the firm’s legal counsel would probably have revealed the purchase. because a purchase of a business usually requires a formal purchase agreement. In addition.Evaluation of Audit Evidence and Completion of the Audit revealed in general conversations with the client and would further be detected by reading the minutes of meetings of stockholders. a review of cash disbursements for the period between the balance sheet date and completion of field work is likely to reveal such an extraordinary transaction. 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 reader’s attention to the event and its effect. However. hence. it does not require adjustment in the financial statements. Otherwise. such an incident may be of sufficient importance to require footnote disclosure. it might be advisable to supplement the historical statements with pro forma statements indicating the financial results if the two firms had been consolidated for the year ending December 31. Inventory losses attributable to a flood would be brought to the auditor’s attention through inquiries and discussions with corporate officers and executives. the auditor would know the location of the plants and warehouses of his client and upon becoming aware of any major floods in such a location. However. If the acquisition is significant enough. 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 reader’s attention to the event and its effect.

In addition.44. 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. The details of the item would not have to be disclosed as a separate footnote because all fixed assets of the corporation. and accounts payable by the amount of the additional charge. in which case the interest charges would have lead to his investigation of the use to which the funds were put. ending raw materials inventory. and his reading of local newspapers.19-4 Applied Auditing 2014 Edition Solutions Manual would presumably be involved.600 = P9. Olars Manufacturing Corporation 1. by corresponding with the client’s attorneys and by examining the cash receipts book in the period subsequent to the balance sheet date for evidence of unusually large receipts. 19-6. The source from which the officer obtained the funds would not be disclosed because it is the officer’s personal business and has no effect upon the corporation’s financial statements. were to be sold as of March 1. including the right to the condemnation award. his examination of the minutes of the meetings of the board of directors and stockholders.064}. The government’s approval of a plan for the construction of an express highway would have come to the CPA’s attention through his inquiries of officers and key personnel. 3. It is improbable that the CPA would learn the source of the P25. such sales may be of sufficient importance to require footnote disclosure. 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 reader’s attention to the event and its effect. Indeed. the sale would be revealed by reading the minutes of directors’ and finance committee’s meetings. Occasionally. or unless the auditor prepared the president’s personal income tax return. 2006 (see item 6). 0. Setting out the loan in the balance sheet as a loan from an officer would be sufficient disclosure. P9. hence. adjustment of the financial statement is not required.064 {[(72 50) / 50] = 0. In addition the client’s letter of representation might have mentioned the potential liability. . The additional liability for the ore shipment would have been revealed to the CPA in his scanning of January transactions. The item would not require separate disclosure by footnote or otherwise and would be handled by adjusting the financial statement amounts for purchases. disclosure of the funds’ source might be construed as detrimental to the officer.44 x P20. However. 2.000 unless it were revealed in a discussion with the president or his personal accountant. conditions that existed at the balance sheet date.

Disclosure would not be made in the financial statements of these conditions because such disclosure might create doubt as to the reasons therefore and misleading inferences might be drawn. does not require disclosure in the financial statements. the CPA would learn of the reduced sales and of the strike. The details underlying the separation (personal disagreements and divorce) should not be disclosed because they are personal matters. and his examination of the contract.Evaluation of Audit Evidence and Completion of the Audit 19-5 4. scanning of transactions. . 5. The contract with Lopez Industries would come to the CPA’s attention through his inquiries of management and legal counsel. 6. examination of the minutes of the meetings of the board of directors and stockholders and subsequent reading of the agreement. a management change. his reading of the minutes of the meetings of the board of directors and stockholders. Through inquiries of management. while they might be of interest to readers. such as the treasurer’s resignation. All important details of the contract should be disclosed in a footnote because of the great effect upon the corporation’s future. Usually. 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. and observations. The CPA might learn of the agreement to purchase the treasurer’s stock ownership through his inquiries of management and legal counsel. The factors contributing to the entry into the contract need not be disclosed in statements. review of financial statements for January. The absence of the treasurer might also arouse the CPA’s curiosity. they are by no means essential to make the statements not misleading.