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Audit Final study guide

Terms in this set (137)

In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items:


a.
January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.

b.
January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.

c.
January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.

d.
On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.

e.
On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.

1. For each of the subsequent events, indicate whether they should result in:
Adjustment—an adjusting entry as of 20X3.
Consider Disclosure—consideration of note disclosure as of 20X3.

2.
Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.
1.
A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.

2.
A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.

3. A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event.
4.
An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.

5.
An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements(including projecting misstatements where appropriate) only during the current year.

6.
An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.

7.
Misstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates.

8. Specific misstatements identified by the auditors during the course of the audit.

a. commitment
b. contingent liablility
c. general risk contingency
d. iron curtain approach
e. known misstatements
f. likely misstatements
g. loss contingency
h. rollover approach