1) Prepare a workpaper using substantive analytical procedures to test the reasonableness of interest expense 2) Downey...
Question:
1) Prepare a workpaper using substantive analytical procedures to test the reasonableness of interest expense
2) Downey Inc 2020 income statement shows $1,183,000 of interest expense. To conduct a sub-stantive analytical procedure on this account, the auditor could develop an expectation using reasonableness analysis by building a model in the following manner. Obtain the ending monthly balance for the short-term line of credit from the monthly loan statement and calculate the average monthly ending balance. Trace the monthly loan balances to the general ledger.
Determine the average interest rate for the year for the short-term line of credit based on the bank's published rate in the monthly bank loan statement. Multiply the average monthly balance previously calculated by the average interest rate, and compare the result to the recorded interest expenses.
| January | 41,500 |
| Feb | 36,600 |
| March | 28,100 |
| April | 27,900 |
| May | 26,100 |
| June | 25,500 |
| July | 24,200 |
| August | 30,200 |
| September | 44,500 |
| October | 28,100 |
| November | 25,200 |
| December | 31,000 |
| Total | 380,900 |
calculate the average
assume that the interest rates recorded on the loan statements have remained stable over the year, fluctuating between 4 and 5.25 . If the auditor uses 4.875% as the average interest rate.
Assume 5% of recorded balance is the tolerable difference.
Are the difference between the expectation and recorded amount acceptable or do you need to do more work? What is your conclusion
