The long-term debt working paper shown below was prepared by entity personnel and audited by Andy Fogelman,
Question:
The long-term debt working paper shown below was prepared by entity personnel and audited by Andy Fogelman, an audit assistant, during the calendar year 2015audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewing the working paper thoroughly.
Required:
There are a number of deficiencies in the working paper. For example, the subject of the working paper is not properly indicated in the title and there is no indication that the unusually high average interest rate (20% = $281,333/$1,406,667) was noted or investigated. Identify at least five additional deficiencies that the engagement supervisor should discover.
AMERICAN WIDGETS, INC. Working Paper December 31, 2015 Initials Date 1/22/16 Prepared By AF Approved By Accrued Interest Interest Balance 2015 2015 Balance Interest Payable 12/31/15 Lender Payment Terms Borrowings 12/3/15 Paid to Rate Colateral 12/31/14 Reductions Comments $ 100,0000 $ 250,000CX $ 50,000/ $300,000A $2,500NR Dividend of $80,000 paid 9/2/15 (W/P N-3) violates a provision of the debt agreement, which thereby permits First Commercial 12% Interest only on 25th of month, principal due in full 1/1/19; no prepayment penalty Inventories 12/25/15 Bank ф 1/31/15 6/30/15 lender to demand immediate payment; lender has refused to waive this violation. Lender's Capital Corporation o Gigantic Building & Loan Association o Prime plus Interest only on last day of month, principal 2nd mortgage on Park Street Building 1st mortgage on Park Street Building 100,000/ 50,000A 2/28/15 200,000C 12/31/15 Prime rate was 8% to 9% during the year. 1% due in full 3/5/17 $5,000 principal plus 720,000/ 60,0000 660,000C 12/5/15 Reclassification entry for current portion proposed (see RJE-3). 12% 5,642R Interest due on 5th of month, due in full 12/31/24 J. Lott, majority stockholder o 0% Due in full 12/31/18 Unsecured 300,000/ 100,000N 200,000C Borrowed additional $100,000 from J. Lott 12/31/15 on 1/7/16 $1,170,000/ $350,000 $1,310,000T/B $ 260,000 $8,142T/B Tick Mark Legend C= Confirmed without exception, W/P K-2. Interest costs from long-term debt F= Foots correctly. CX = Confirmed with exception, W/P K-3. $ 281,333T/B Interest expense for year $1,406,667R Average loan balance outstanding NR = Does not recompute correctly. A = Agreed to loan agreement, validated bank deposit ticket, and board of directors' authorization, W/P W-7. Five-year maturities (or disclasure purposes) 0 = Agreed to canceled checks and lender's monthly statements. $ 60,000 Year-end 12/31/16 N= Agreed to cash disbursements journal and canceled check dated 12/3/15, clearing 1/8/16. 12/31/17 260,000 T/B = Traced to working trial balance. V= Agreed to 12/3V14 working papers. 260,000 12/31/18 310,000 12/31/19 0 = Agreed interest rate, term, and collateral to copy of note and loan agreement. O = Agreed to canceled check and board of directors' authorization, WP W-7. 12/31/20 60,000 Thereafter 360,000 $ 1,310,000 Conclusions: Long-term debt, accrued interest payable, and interest expense are correct and complete at 12/31/15.
Step by Step Answer:
The working paper contains the following deficiencies The subject of the working paper is not proper...View the full answer
Auditing and Assurance Services A Systematic Approach
ISBN: 978-0077732509
10th edition
Authors: William Messier Jr, Steven Glover, Douglas Prawitt
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