Accounting and Auditing

Accounting and Auditing

Part 1

  1. The company shall report the potential costs due to the discovery of a possible product defect as a loss or a liability since the defect on one of its products was probable, and the asset-inventory had been impaired as at the date of preparation of the financial statements, and because the company can reasonably quantify the amount of the loss.
    2. Skinner shall report the claim for the damages on the notes in the financial statements since, according to the convention of conservatism and the revenue recognition criteria, the gain in contingencies should not be accrued, and therefore shall not appear in the financial statements but rather they shall be disclosed in the notes to the financial statements.
    3.         The 40% of the coupons that was actually redeemed shall be reported as an incurred expense and the 30% shall be reported as an accrued expense, thus a liability. This is because the first 40% was actually incurred during the financial year and affects the asset-cash in the current year by reducing it, the remaining 30% has not yet been incurred but is probable that it shall be paid in the following year, and thus reported as current liability.

Part 2

  1. The major authorization principles an auditor should investigate regarding cash management and investments in marketable securities are,
  2. a) Authorizations from the Board of Director for both cash and or investment purposes: This is because most organizations have it in their policies that the Board is required to approve significant investments. The Board is also required to delegate duties to various officers in the firm like the Treasurer to make daily investments and cash transfers. The Treasurer then has the power to in turn, delegate for investments of minor amounts to other employees.
  3. b) Verification of authorization: This verification is very important especially in the case of electronic transfer of funds since the organization shall make transfers of large amounts of money with electronic signatures such as passwords only.
  4. c) The control of signature plates such as those used for signing of checks is also important.
  5. d) The auditor shall also investigate the organizational policies that are used to determine the types of investments that the organization can make. This shall include the level of risk of investments that can be incurred.
  6. The major elements of an internal control over property, plant, and equipment are a listed below:-
  7. a) Control over the approval process for capital expenditures
  8. b) Control over the determination whether expenditure that is planned is capitalized or expensed
  9. c) Control over purchasing and accounts payables systems and making sure, they are correctly applied
  10. d) Control over components of capital and making sure their appropriate useful life and salvage values are determined
  11. e) Control over the depreciation expense and making sure it is correctly calculated and applied in each period
  12. e) Control over property tax reports and making sure they are filed with tax jurisdictions
  13. f) Controls over insurance coverage and making sure they relate directly to asset exposure

Part 3

The FASB’s accounting for leases generally treats a sale-leaseback as one financing transaction where any profits or losses on the sale are deferred and later amortized by the lessee who is the seller.

References

Pany, K., & Whittington, R. (2010). Auditing. Los Angeles, CA: Irwin.

Whittington, R., & Pany, K. (2004). Principles of auditing and other assurance services. Los Angeles, CA: McGraw-Hill/Irwin.

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