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During the course of your audit you find that the inventory of manufacturing material at the beginning of the year was $27,214.41, and at the close of the year $51,358.58. At the close of the year there was also factory supplies on hand to the amount of $200.oo, as well as fuel $2,188.40, and horse feed $14.22. You find that the unexpired insurance premiums amounted to $1,720. 18; that the accrued interest on notes payable amounted to $134.83 and accrued taxes to $376.75. An analysis of the customers' accounts disclosed the fact that $9,128. II was very doubtful of collection. The item of $727.77 to Power Machinery Co. represents an advance payment made on machinery which has been purchased, but not yet completely installed and not included in Machinery account. You find in the account for Horses and Wagons a charge for $75.00 for difference paid on an exchange of horses, the new horse being presumably of the same value at which the old horse originally entered. Prepare Balance Sheet, Manufacturing Statement and Profit and Loss statement providing for

depreciation of Io96 on Machinery and Equipment. C. P. A. Mich.

(Note. You are also required to prepare the adjusting journal entries and a Working Sheet similar in form to the one illustrated on pages 220 and 221 of this chapter. It is important that your entire solution be prepared in standard form, neatly exhibited and absolutely accurate. After you have your working papers ready to submit, be sure to check each item over again, using every precaution to avoid any possible errors or misstatements. Let your statements be in such form as you would prepare them if they were to be submitted to a client.)

PRACTICE DATA
(Continued from Chapter Thirteen)

Transaction No. 6. Upon demand, the following subscribers to the capital stock paid their subscriptions in full in cash and stock certificates were issued:

A. B. Opfer. . . . . . . . . . . . . . . . . . . . . $300,000.00
H. W. Henry. . . . . . . . . . . . . . . . . . . IOO,OOO.OO
Maude E. Barnes. . . . . . . . . . . . . . . 3OO,OOO.OO
Ruth E. Forry. . . . . . . . . . . . . . . . . . 350,000.OO
E. W. Atkinson. . . . . . . . . . . . . . . . . 550,000.00

Transaction No. 7. The following purchases for cash were made:

Machinery. . . . . . . . . . . . . . . . . . . . . $300,000.oo
Land. . . . . . . . . . . . . . . . . . . . . . . . . . 500,000.00
Buildings............ . . . . . . . . . . . . 250,000.00
Merchandise. . . . . . . . . . . . . . . . . . . . 500,000.00

Transaction No. 8. All of the preceding transactions really relate to the organization of the company and were completed before the company was ready to begin operations. Open accounts on ledger paper, allowing eight lines for each account and post your journal entries. Take a Trial Balance as of December 31, 1919.

ACCOUNTING PROBLEMS 223

Transaction No. 9. At the close of business December 31, 1920, it was decided to employ a Certified Public Accountant to make an audit of the books of the company. Assume that you were directed to complete the audit and prepare the report. The business has been in operation for a period of one year. Preliminary investigation showed that the system of accounts had been poorly devised and that no satisfactory internal check had been maintained; therefore, a detailed audit was recommended and authorized. During the course of the audit it became evident that the book entries could not be relied on and many vouchers were missing. There seemed to be no evidence of embezzlement, but the errors seemed to be due to a lack of knowledge of the ordinary principles of bookkeeping on the part of the bookkeeper. It seemed no effort had been made to keep the books in balance, the bookkeeper apparently having been satisfied in keeping only his cash in balance. Aggregate entries were found to have affected the respective accounts during the current year as follows:

Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $306,000.oo
Pay Rolls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2I2,000.00
Factory Expenses. . . . . . . . . . . . . . . . . . . . . . . I8,OOO.OO
Freight and Express (Inbound). . . . . . . . . . . I,OOO.OO
Administrative Expenses. . . . . . . . . . . . . . . . . 27,OOO.OO
Selling Expenses. . . . . . . . . . . . . . . . . . . . . . . . 8,000.OO
Interest on Notes Payable. . . . . . . . . . . . . . . . 22,000.00
Miscellaneous Interest Expense. . . . . . . . . . . 500.00
Interest Received. . . . . . . . . . . . . . . . . . . . . . . I,000.OO
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 942,OOO.OO
Returns and Allowances (Sales). . . . . . . . . . . 4,000.OO
Bad Debts and Special Allowances. . . . . . . . 32,OOO.OO
Freight on Goods Sold. . . . . . . . . . . . . . . . . . . 2,000.OO
Machinery, Tools and Equipment (Add.)... 37,530.00
Office Furniture and Fixtures (Additions).. 8OO.OO
Machinery, Tools and Equipment Sold..... I 9,000.00
Patents (Additions). . . . . . . . . . . . . . . . . . . . . IO,OOO.OO

Analysis of the Machinery account showed that the cost price of the machinery, tools and equipment sold was $20,000.00, there having been a loss of $1,000.00 incurred through the sale. Post above aggregate entries to the proper accounts, opening new accounts when necessary. Journal entries are not required.

Transaction No. 10. After analyzing the ledger accounts, the following net changes were found to have occurred in the respective accounts during the course of the year:

Debit Credit

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $134,870.00
Notes Receivable...... . . . . . . . . . . . . . . 7,000.00
Accounts Receivable....... . . . . . . . . . . 35,000.OO
Prepaid Administrative Expenses... . . . 1,000.00
Notes Payable, Banks . . . . . . . . . . . . . $7,700.00
Notes Payable, Trade. . . . . . . . . . . . . . . . 57,000.00
Accounts Payable. . . . . . . . . . . . . . . . . . . 67,000.00
Accrued Pay Roll. . . . . . . . . . . . . . . . . . . 8,000.OO
Notes Receivable Discounted. . . . . . . . . 5,000.00

Accrued Salaries is the same as at the end of the previous year. Post to the proper accounts. Journal entries are not required.

Transaction No. 11. It was found that the entire interest on the First and Second Mortgage Bonds, amounting to $29,88o.oo, has been added to machinery and tools. The interest on the Debenture Bonds, amounting to $7,650.oo, had been charged to administrative expense. All bonds were issued December 31, 1919, the interest payable semiannually on June 30 and December 31.

Formulate correcting entries in journal form and post to the proper accounts. Take a Trial Balance.

Transaction No. 12. Specific reserves are to be set up as follows:

Reserve for depreciation on buildings. . . . . . . . . . . 2%%
Reserve for depreciation on machinery, tools
and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . Io9%
Depreciation on patents. . . . . . . . . . . . . . . . . . . . . . 6%
Depreciation on office furniture and fixtures... . . Io9%
Reserve for doubtful accounts... . . . . . . . . . . . . . . 2%%

Depreciation is to be calculated on the cost price of fixed assets on hand at the beginning of the current year. The reserve for doubtful accounts is estimated to amount to 2%% of the total accounts receivable as at the end of the current year. (Drop the cents. Use the nearest dollar.)

The inventory shows merchandise on hand amounting to $650,000.00.

Formulate adjusting journal entries.

Chapter Fifteen

THE REPORT

In the previous chapter there was illustrated the Working Sheet prepared by the senior in charge of the audit of The Blank Manufacturing Company.

After the senior in charge has prepared a Working Sheet, supported by the necessary schedules from the working papers of the various persons employed in connection with an audit, and has them arranged in proper form, they are usually turned over to someone in the office, whose duty it is to prepare what is known as a Report. This Report may be divided into three parts—the statements, the comments and the certificate.

The Statements. There are two classes of statements— exhibits and schedules. The principal statements, such as the Balance Sheet and the Profit and Loss statement are known as exhibits, while the supporting statements, such as a Statement of Factory Operations, Analysis of General Expenses, Statement of Investments, etc., are known as schedules.

It is needless to say that every possible precaution must be used to insure absolute accuracy in the preparation of the statements. All the information should be obtainable from the Working Sheet and working papers which accompany it. The calculations and copying must be carefully verified by someone in authority. It is customary for the managing senior, a partner of the firm, or an officer of the company to pass upon the entire report before submitting it to the client.

In preparing the report, the auditor should have in mind the use that will be made of the information it will contain, for he may occasionally be able to make his report cover more fully some special points that will be of particular interest to the client. For instance, the prospective purchaser of stock would be primarily interested in the earnings or dividends of the corporation and of its value as a going concern. The prospective purchaser of bonds would be principally interested in the value of the property mortgaged and the ability of the company to maintain the interest payable during the life of the bonds and to retire them at maturity. The banker, while interested incidentally in the earning capacity of the concern, would be primarily desirous of knowing the probable ability of the concern to repay the loan at maturity. The stockholder's chief interest is usually in the earn

ing capacity of the corporation and of the conduct of the business in the past by the directorate chosen by the stockholders.

The Comments. It is customary for the auditor to submit comments in connection with the statements prepared for the client. These comments are made to explain any unusual items appearing in the financial statement, to describe his investigations into certain matters, to present what criticisms are considered necessary, to make suggestions that may be of value to the client, and, if so requested, to make what recommendations he considers advisable.

Properly prepared comments may be of great value to a client. They may be constructive and may lead to vast improvements in the accounting records and the means of keeping the records. If a proper method of internal check has not been maintained, he may make suggestions as to how to bring about a satisfactory system of internal checking. This is undoubtedly constructive. Wildman says, concerning the wording of the report that, “Good construction advocates the use of simple words, short sentences and nontechnical expressions as far as possible. By so doing someone may be bored, but it is much better to use language which the ordinary man understands rather than to attempt to impress readers with literary style. It is not necessary to indulge in literary style. All that is required is to express such thoughts as a person may have in connection with a technical subject in a clear, concise way which the layman will understand. The professional auditor is not expected to be a literary expert. He is expected to have an accounting sense and to understand accounting, and to be able to use English sufficiently well to express clearly what he has to say on the subject.”

The Certificate. When an auditor is employed by a business man, he is expected to submit proper statements of financial condition in standard form properly certified. The object of obtaining a certificate from the auditor is to secure from an unbiased person, one who is skilled in professional accounting, an opinion as to the accuracy of the accounts and statements which exhibit actual financial conditions.

Federal Reserve requirements specify that,

“The Balance Sheet and certificate should be connected with the accounts in such a way as to ensure that they shall be used only conjointly. This rule applies also to any report or memorandum containing any reservations as to the auditor's responsibility; any qualification as to the accounts, or any reference to facts materially affecting the financial position of the COn Cern.

“The certificate should be as short and concise as possible, consistent with a correct statement of the facts, and if qualifications are necessary the auditor must state them in a clear and concise manner.

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