Auditing Case

21-17

a) The audit procedures that I would use to learn about this situation would be to contact Chen Corp to see why they did not pay there interest payment. You could also send a confirmation letter to their lawyers to see if there is any legal issues which pertain to the bond or anything similar. Also other legal issues that could cause the company to go bankrupt which in turn would cause them to not pay the interest. You could also review the minutes to see if this issue was talked about or any other issues pertaining to Chen Corp was talked about. You could also read the contract, agreements and related correspondence and documents that pertain to the bond and the interest that is guaranteed to be paid.

I would say that this situation would require no adjustment to the books but there should be something in the disclosures stating that Marco Corp is going to pay the interest for Chen Corp, the amount, and the terms of their contract or why they are paying it.

a)The audit procedures that I would perform that would relate to this issue would be to obtain legal confirmation from the law firm who is in charge of this lawsuit. With that letter they should confirm the amount that is being sued for, as well as the possibilities of the outcomes of the lawsuit. You could also ask for the contract itself so you could analyze it and see if their was a breach of contract or even analyze it with management. Also request a written or oral confirmation on the lawsuit and the terms that management believe is going to happen. Management is responsible for identifying and deciding the appropriate accounting treatment for this situation.

With the information provided we cannot determine the likelihood of the lawsuit. With that being said if it is:

Unlikely to occur then there is no disclosure necessary.

If it is not determinable than a footnote disclosure is necessary

If it is likely to occur and the amount can be estimated then the financial statement accounts must be adjusted.

If it is likely to occur and the amount cannot be estimated then a footnote disclosure is necessary.

3.a) You could ask management why they are making a dividend payment or review the companies earning to see how the earning and the dividend payment compare. This could possible be a payment that the company guarantees which in turn would mean that earnings mean very little, even if the company is recording a loss they are still obligated to pay the dividend if they have guaranteed it.

b)This would have to be recorded on the books as a dividend payable or dividend expense. There would also have to be a note describing the dividend.

21-20

a) The audit procedures that may have brought this situation to my attention could have been, a letter from management stating situations such as these. Also a confirmation letter from a law office asking them if there is any extraordinary legal situations that the company may be involved in. Most of these provincial approved construction plans are made public and with this in mind after reviewing the statements of the company and reviewing the land portion the auditor would then be able to see that this piece of land is in the middle of the new approved construction plan.

Because this is likely to occur and the amount cannot be estimated, Olars must prepare a footnote disclosure.The items that should be recognized is that there is going to be construction throughout a piece of property that Olars owns which will eventually lead to a cash deal for the land from the government.

2 a) This would be recovered by simply analyzing the loans in which the corporation has received. After reviewing the loans payable section the auditor would then realize that this loan was given to the corporation by My Olars.

The disclosure that would relate to this loan payable should state where the loan was received from The terms of the loan should state that Mr Olars personal life insurance is involved in the situation because the Corporation pays the premiums on his life insurance.

3. a) This would be uncovered with the review of the inventory section of the statments. When there is an inventory count the auditor would realize that it was wrong and he/she would realize that the mineral content

...