Ann Marcus, CPA, is performing an audit for one of her clients, Artistcraft Ltd., a glass factory,
Question:
Ann Marcus, CPA, is performing an audit for one of her clients, Artistcraft Ltd., a glass factory, for its December 31, 2020, year end. The audit program requires a substantive analytical procedure to be performed on the reasonableness of Artistcraft’s interest expense on its long-term debt.
Ann has identified the following information:
Long-term debt balance confirmed by the lender in prior-year file ........................ $1,545,861
Long-term debt balance confirmed by the bank in the current year ..................... $1,427,529
Interest rate per the bank confirmation ............................................................................. 6.25%
Balance per the general ledger ........................................................................................ $89,525
Performance materiality ..................................................................................................... $7,000
Required
a. Assess the reliability of the data provided by Ann.
b. Using the average loan balance and the stated interest rate, prepare a working paper calculating the expected interest expense. Compare this to the amount recorded by the client in the general ledger and make a conclusion.
c. What level of evidence does this test provide?
Step by Step Answer:
Auditing A Practical Approach
ISBN: 978-1119566007
3rd Canadian edition
Authors: Robyn Moroney, Fiona Campbell, Jane Hamilton, Valerie Warren