Writing Engaging Discussion Boards on Accounting Topics
46. The equivalent units for materials for June, using the FIFO method, were
Harward Company"s Staining department recorded the following activity in June:
All materials are added at the beginning of the process in the Staining Department.
The equivalent units for materials for June, using the FIFO method, were:
A) 46,000 units
B) 42,000 units
C) 58,000 units
D) 50,000 units
47. current liabilities
13-2
(Liability Entries and Adjustments) Listed below are selected transactions of Schultz Department Store for the current year ending December 31.
1. On December 5, the store received $500 from the Jackson Players as a deposit to be returned after certain furniture to be used in stage production wa...
48. (Objective 24-6) In your audit of Aviary Industries for calendar year 2011, you found a number of...
(Objective 24-6) In your audit of Aviary Industries for calendar year 2011, you found a number of matters that you believe represent possible adjustments to the company’s books. These matters are described below. Management’s attitude is that “once the books are closed, they’re closed,” and management does not want to make any adjustments. Planning materiality for the audit was $100,000, determined by computing 5% of expected income before taxes. Actual income before taxes on the financial statements prior to any adjustments is $1,652,867. Possible adjustments:
1. Several credit memos that were processed and recorded after year-end relate to sales and accounts receivable for 2011. These total $26,451.
2. Inventory cutoff tests indicate that $25,673 of inventory received on December 30, 2011, was recorded as purchases and accounts payable in 2012. These items were included in the inventory count at year-end and therefore were included in ending inventory.
3. Inventory cutoff tests also indicate several sales invoices recorded in 2011 for goods that were shipped in early 2012. The goods were included in inventory even though they were set aside in a separate shipping area. The total amount of these shipments was $41,814.
4. The company wrote several checks at the end of 2011 for accounts payable that were held and not mailed until January 15, 2012. These totaled $43,671. Recorded cash and accounts payable at December 31, 2011, are $2,356,553 and $2,666,290, respectively.
5. The company has not established a reserve for obsolescence of inventories. Your tests indicate that such a reserve is appropriate in an amount somewhere between $15,000 and $30,000. 6. Your review of the allowance for uncollectible accounts indicates that it may be understated by between $35,000 and $55,000.
Required
a. Determine the adjustments that you believe must be made for Aviary’s financial statements to be fairly presented. Include the amounts and accounts affected by each adjustment.
b. Why may Aviary Industries’ management resist making these adjustments?
c. Explain what you consider the most positive way of approaching management personnel to convince them to make your proposed changes.
d. Describe your responsibilities related to unadjusted misstatements that management has determined are immaterial individually and in the aggregate.
e. Assuming Aviary Industries is an accelerated filer public company, describe how the noted adjustments might impact your audit report on internal control over financial reporting.
(Objectives 24-6)
EVALUATE RESULTS
After performing all audit procedures in each audit area, including the review for contingencies and subsequent events and accumulating final evidence, the auditor must integrate the results into one overall conclusion about the financial statements. Ultimately, the auditor must decide whether sufficient appropriate audit evidence has been accumulated to warrant the conclusion that the financial statements are stated in accordance with accounting standards applied on a basis consistent with those of the preceding year. Similarly, when issuing a report on internal control, auditors must also arrive at an overall conclusion about the effectiveness of internal control over financial reporting. The five main aspects of evaluating the results are discussed next.
To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor reviews the audit documentation for the entire audit to deter - mine whether all material classes of transactions, accounts and disclosures have been adequately tested, considering all circumstances of the audit. An important part the review is to make sure that all parts of the audit program have been accurately completed and documented, and that all audit objectives have been met. The auditor must decide whether the audit program is adequate, considering problem areas identified as the audit progressed. For example, if misstatements were discovered during tests of sales, the initial plans for tests of details of accounts receivable may have been insufficient. As an aid in deciding whether the audit evidence is adequate, auditors often use a completing the audit checklist which is a reminder of items that may have been over - looked. Figure 24-5 illustrates part of a completing the audit checklist. If auditors conclude that sufficient evidence has not been obtained to decide whether the financial statements are fairly presented, they have two choices: accumulate addi - tional evidence or issue either a qualified opinion or a disclaimer of opinion. An essential part of evaluating whether the financial statements are fairly stated involves the auditor’s review of their summary of misstatements found in the audit. When any one misstatement is material, auditors should propose that the client correct the financial statements. It may be difficult to determine the appropriate amount of adjustment because the exact amount of the misstatement may be unknown if it involves an estimate or includes sampling error. Nevertheless, the auditor must decide on the required adjustment. (In some audits there may be more than one material misstatement.) In addition to individually material misstatements, there are often several imma - terial misstatements that the client did not adjust. Auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material. They can keep a record of these misstatements and combine them in different ways, but many auditors use an unadjusted misstatement audit schedule or summary of possible misstatements. An example of an unadjusted misstatement worksheet is given in Figure 24-6. The schedule in Figure 24-6 includes both known misstatements that the client has decided not to adjust and projected misstatements, including sampling error, and total possible misstatements for several financial statement categories. The bottom left portion of the audit schedule, under the heading “Conclusions,” includes a comparison of possible overstatements and understatements to materiality. A summary of this audit schedule is often included with management’s representation that the uncorrected misstatements are immaterial.
If auditors believe that there is sufficient evidence but they conclude that the financial statements are not fairly presented, they again have two choices: The statements must be revised to the auditor’s satisfaction or either a qualified or an adverse opinion must be issued. Notice that the options here are different from those in the case of insufficient evidence. Before completing the audit, auditors must make a final evaluation of whether the dis - closures in the financial statements satisfy all presentation and disclosure objectives. As we discussed at the beginning of this chapter, auditors must design and perform audit procedures to obtain evidence that the four presentation and disclosure objectives are satisfied. As part of the final review for financial statement disclosures, many CPA firms require the completion of a financial statement disclosure checklist for every audit. These questionnaires are designed to remind the auditor of common disclosure problems in financial statements and to facilitate the final review of the entire audit by
an independent partner. Figure 24-7 illustrates a partial financial statement disclosure checklist. Naturally, a checklist is not sufficient to replace the auditor’s knowledge of the proper application of accounting standards for the circumstances of the audit. There are three reasons why an experienced member of the audit firm must thoroughly review audit documentation at the completion of the audit: 1. To evaluate the performance of inexperienced personnel. A considerable portion of most audits is performed by audit personnel with fewer than four or five years of experience. These people may have sufficient technical training to conduct an adequate audit, but their lack of experience affects their ability to make sound professional judgments in complex situations.
2. To make sure that the audit meets the CPA firm’s standard of performance. Within any CPA firm, the quality of staff performance varies considerably, but careful review by top-level personnel in the firm helps to maintain a uniform quality of auditing.
3. To counteract the bias that often enters into the auditor’s judgment. Auditors must attempt to remain objective throughout the audit, but they may lose proper perspective on a long audit when complex problems need to be solved. Except for a final independent review, which is discussed shortly, the review of audit documentation should be conducted by someone who is knowledgeable about the client and the circumstances in the audit. Therefore, the auditor’s immediate supervisor normally conducts the initial review of audit files prepared by another auditor. For example, the least experienced auditor’s work is ordinarily reviewed by the audit senior. The senior’s immediate superior, who is normally a supervisor or manager, reviews the senior’s work and also reviews, less thoroughly, the schedules of the inexperienced auditor. Finally, the partner assigned to the audit must ultimately review all audit documentation, but the partner reviews those prepared by the supervisor or manager more thoroughly than the others. While performing the review, each reviewer has discussions with the auditor responsible for preparing the audit documentation to learn how significant audit issues were resolved. Except for the final independent review, most audit documentation review is done as each segment of the audit is completed. At the completion of larger audits, it is common to have the financial statements and the entire set of audit files reviewed by a completely independent reviewer who has not participated in the audit, but is a member of the audit firm doing the audit. An independent review, sometimes referred to as an engagement quality review, is
required for SEC engagements, including the review of interim financial information and the audit of internal controls. This reviewer often takes an adversarial position to make sure the conduct of the audit was adequate. The audit team must be able to justify the evidence it has accumulated and the conclusions it reached on the basis of the circumstances of the audit.
49. Braverman Company has two manufacturing departments-Finishing and Fabrication. The predetermined...
Braverman Company has two manufacturing departments-Finishing and Fabrication. The predetermined overhead rates in Finishing and Fabrication are $18.00 per direct labor-hour and 110% of direct materials cost, respectively. The company s direct labor wage rate is $16.00 per hour. The following information pertains to Job 700: _______________________ Finishing _____________ Fabrication Direct materials ................ $410 .............................. $60 Direct labor ..................... $128 .............................. $48 Required: 1. What is the total manufacturing cost assigned to Job 700? 2. If Job 700 consists of 15 units, what is the unit product cost for this job?
50. 1.Walter Industries’ current ratio is 0.5. Considered alone, which of the following actions would...
1.Walter Industries’ current ratio is 0.5. Considered alone, which of the following actions would increase the company’s current ratio?
a. Borrow using short-term notes payable and use the cash to increase inventories.
b. Use cash to reduce accruals.
c. Use cash to reduce accounts payable.
d. Use cash to reduce short-term notes payable.
e. Use cash to reduce long-term bonds outstanding
2. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
b. The discount rate increases.
c. The riskiness of the investment’s cash flows decreases.
d. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
e. The discount rate decreases.
3. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)
a. The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
b. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.
c. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.
e. The outstanding balance declines at a slower rate in the later years of the loan’s life.
4. Which of the following statements is CORRECT?
a. If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
b. Liquidity premiums are generally higher on Treasury than corporate bonds.
c. The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
d. Default risk premiums are generally lower on corporate than on Treasury bonds.
e. Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
5. Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P has 50% invested in Stock A and 50% invested in B. Which of the following statements is CORRECT?
a. Portfolio P has a standard deviation of 25% and a beta of 1.0.
b. Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium.
c. Portfolio P has more market risk than Stock A but less market risk than B.
d. Stock A should have a higher expected return than Stock B as viewed by the marginal investor.
e. Portfolio P has a coefficient of variation equal to 2.5.
6. Stock A has a beta of 1.2 and a standard deviation of 25%. Stock B has a beta of 1.4 and a standard deviation of 20%. Portfolio AB was created by investing in a combination of Stocks A and B. Portfolio AB has a beta of 1.25 and a standard deviation of 18%. Which of the following statements is CORRECT?
a. Stock A has more market risk than Portfolio AB.
b. Stock A has more market risk than Stock B but less stand-alone risk.
c. Portfolio AB has more money invested in Stock A than in Stock B.
d. Portfolio AB has the same amount of money invested in each of the two stocks.
e. Portfolio AB has more money invested in Stock B than in Stock A.
7. Which of the following statements is CORRECT?
a. If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.
b. If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
c. An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
d. There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
e. Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.
8. Savickas Petroleum’s stock has a required return of 12%, and the stock sells for $40 per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = $1.00(1.30)4 = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock’s expected constant growth rate after t = 4, i.e., what is X?
a. 5.17%
b. 5.44%
c. 5.72%
d. 6.02%
e. 6.34%
9. Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?
Expected dividend, D0 $3.00
Current price $50
Expected constant growth rate 6%
a. The stock’s required return is 10%
b. The stock’s expected dividend yield and growth rate are equal.
c. The stock’s expected dividend yield is 5%.
d. The stock’s expected capital gains yield is 5%.
e. The stock’s expected price 10 years from now is $100.00.
10. Which of the following statements is CORRECT?
a. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity.
b. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.
c. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
d. Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.
e. Higher flotation costs tend to reduce the cost of equity capital.
i want know why choose the answer!
