Question

Dunder Mifflin Inc. wanted to expand its manufacturing and sales facilities. The company applied for a loan from First Bank, presenting the prior- year audited financial statements and the forecast for the current year shown in Exhibit 4.58.1. The bank was impressed with the business prospects and granted a $ 1,750,000 loan at 8 percent interest to finance working capital and the new facilities that were placed in service July 1 of the current year. Because Dunder- Mifflin Inc. planned to issue stock for permanent financing, the bank made the loan due on December 31 of the following year. Interest is payable each calendar quarter on October 1 of the current year and January 1, April 1, July 1, October 1 of the following year. The auditors’ interviews with Dunder-Mifflin Inc. management near the end of the cur-rent year produced the following information: The facilities did not cost as much as previously anticipated. However, sales were slow and the company granted more liberal return privilege terms than in the prior year. Officers wanted to generate significant income to impress First Bank and to preserve the company dividend ($ 120,000 paid in the prior year). The production managers had targeted inventory levels for a 4.0 turnover ratio and were largely successful even though prices of materials and supplies had risen about 2 percent relative to sales dollar volume. The new facilities were depreciated using a 25- year life from the date of opening. Dunder-Mifflin Inc. has now produced the current- year financial statements (Exhibit 4.58.1 , Current Year column) for the auditors’ work on the current audit.





Required:
Perform preliminary analytical procedures on the current- year unaudited financial statements for the purpose of identifying accounts that could contain errors or frauds. Use your knowledge of Dunder-Mifflin Inc. and the forecast in Exhibit 4.58.1. Calculate comparative and common- size financial statements as well as relevant ratios (assume that the market value of the equity for the company is $ 3 million). Once your calculations are complete, identify the accounts that could bemisstated


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  • CreatedOctober 27, 2014
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