CH 13
CH 13
CH 13
213
2.
3.
214
4.
5.
6.
7.
ANSWER:
8.
10.
9.
215
216
11.
12.
13.
14.
ANSWER:
15.
17.
16.
217
218
18.
19.
20.
ANSWER:
21.
23.
22.
219
220
24.
25.
26.
27.
Management letter.
Engagement letter.
ANSWER:
28.
29.
221
30.
222
existed at
the balance sheet date.
c.
Obtain assurance from management that it has disclosed
all unasserted claims that the lawyer has advised are
probable of assertion and must be disclosed.
d.
Confirm directly with the client's lawyer that all
claims have been recorded in the financial statements.
ANSWER:
32.
33.
223
ANSWER:
35.
37.
38.
224
ANSWER:
39.
40.
ANSWER:
42.
225
COMPLETION:
43.
44.
226
45.
46.
DISCLOSURE
50.
ACCRUALS, DISCLOSURES
49.
AUDITED
48.
ACCOUNTING SYMMETRY
47.
OPEN ITEMS
MATCHING:
51.
227
_____2.
_____3.
_____4.
_____5.
_____6.
_____7.
_____8.
_____9.
C
D
F
I
G
B
228
7.
8.
9.
10.
PROBLEM/ESSAY:
52. For each of the following situations, (1) identify the
financial statement effect(s) of the error or fraud, (2) describe
procedures enabling the auditor to detect the misstatement, and
(3) draft the audit adjustment(s) suggested by the procedures.
(a) An unsecured loan for $3.2 million was granted to Maria
Juarez, the chief executive officer of Compton, Inc., at the
beginning of 2002. On December 31, 2002, the company drew a
check for $3.2 million on Bank A for deposit in Bank B. The
transaction was recorded by a debit to cash in Bank B and a
credit to loans receivable-officers. The check was not listed
as outstanding on Bank A. It did appear as a credit on the
December 31 bank statement received from Bank B. On January 2,
2003, the company made a journal entry debiting loans
receivable-officers and crediting cash in Bank A for $3.2
million. The loan accounted for 35% of the entitys total assets.
(b) George Luminas, chief executive officer of Jako
Manufacturing, used a wholly-owned subsidiary to channel funds
for his personal use. To effect the transfer, he had the
subsidiary borrow money by issuing notes guaranteed by Jako to
various banks. The borrowed funds, $2,300,000, were then
transferred to Jako and Jako made cash advances of $1,200,000 to
the subsidiary which then transferred the funds to Luminas in the
form of unsecured loans. The transfers from the subsidiary to
Jako were recorded as customer deposits and the advances from
Jako to the subsidiary were debited to the customer deposits
account. To avoid auditor detection of the economic substance of
these transactions, Jako did not include the subsidiary in its
consolidated financial statements; nor did the company inform the
auditors of the existence of either the subsidiary or the loan
guarantee. These are the only transactions completed by the
subsidiary during the year under audit. The following balances
appear on the books of Jako and the wholly-owned subsidiary:
Jako:
Customer Deposits
$1,100,000 credit
Subsidiary: Notes Payable-Banks
$2,300,000 credit
Receivable from Parent
$2,300,000 debit
Payable to Parent
$1,200,000 credit
Receivable from Officers
$1,200,000 debit
229
SOLUTION:
(a)
(1) This set of journal entries is an example of fraudulent
misrepresentation in the form of kiting and the effect is to
overstate cash in bank and understate loans receivable.
(2) The auditors should detect the fraud by obtaining
cutoff bank statements from both banks and performing analysis of
interbank transfers for a few days before and after the balance
sheet date.
(3) Recommended audit adjustment:
Loans receivable-officers
Cash in Bank A
$3,200,000
$3,200,000
(b)
(1) In addition to misrepresenting Jakos financial
position, these transactions constitute misappropriation fraud by
the CEO, assuming Luminas has no intention of repaying the loans.
The effect is to understate loans payable to banks - given the
loan guarantee and the lack of subsidiary financial resources,
these are really loans made by the banks to Jako. Loans
receivable from officers is also understated.
(2) The following auditing procedures should identify the
related party and related party transactions:
a. Examination of directors minutes should reveal
authorization to establish the subsidiary.
b. Analysis of the customer deposits account and
confirmation of balances with customers should disclose the
substance of this account.
c. Bank confirmation letters expressly requesting
information regarding any existing loan guarantees should enable
the auditors to detect the loans.
(3)
Recommended audit adjustment:
Customer deposits
Receivable from officers
Notes payable-banks
$1,100,000
$1,200,000
$2,300,000
53. Assume that you are the audit manager in charge of the Gregs
Auto Parts audit, and that Sara Engles, the in-charge senior
230
231