CHAPTER

19

19-1

EVALUATION OF AUDIT
EVIDENCE AND COMPLETION
OF THE AUDIT

Refer to p.640 for the full discussion on the assessment of the sufficiency of
evidences.

19-2 19-6
Note to instructor: Please see the other CD attached within the purchased
materials.

19-7.

a.

(3)

b.

(1)

c.

(4)

d.

(3)

19-8.

a.

(4)

b.

(3)

c.

(1)

d.

(4)

19-9.

a.

(3)

b.

(1)

c.

(1)

d.

(2)

19-10.

Tracy Brewing Company

e.

(1)

a.

4 - The amount appeared collectible at the end of the field work.

b.

1 - The uncollectible amount was determined before end of field work.

c.

3 - Amount should have been determined to be uncollectible before end of

field work, but it was discovered after the issuance of the statements. The
financial statements should have been known to be in error on 8-20-15.

d.

2 - The cause of the bankruptcy took place after the balance sheet date,
therefore the balance sheet was fairly stated. Account may be written off as
uncollectible at 6-30-15, but they are not required to do so. Footnote
disclosure is necessary because the subsequent event is material.

e.

2 - The sale took place after the balance sheet date but, since the loss was
material and will affect future profits, footnote disclosure is necessary.

f.

2 - The lawsuit originated in the current year, but the amount of the loss is
unknown.

19-2

19-5.

Applied Auditing 2014 Edition Solutions Manual

g.

1 - The settlement should be reflected in the 6-30-15 financial statements as

an adjustment of current period income and not a prior period adjustment.

h.

4 - The financial statements were believed to be fairly stated for 6-30-15 or 819-15.

i.

2 - The cause of the lawsuit occurred before the balance sheet date and the
lawsuit should be included in the 6-30-15 footnotes.

Flowmeter, Inc.
Item
No.
1.

2.

3.

Audit Procedures
Goods in-transit would be
detected in the course of the
auditors review of the year-end
cutoff of purchases. The auditor
would examine receiving reports
and purchase invoices to make
certain that the liability to suppliers
had been recorded for all goods
included in inventory, and that all
goods for which the client was
liable at year-end were recorded in
inventory.
Settlements of litigation would be
revealed by requesting from the
companys legal counsel a
description and evaluation of any
litigation, impending litigation,
claims, and contingent liabilities of
which he has knowledge that
existed at the date of the balance
sheet being reported upon, together
with a description and evaluation
up to the date the information is
furnished.
A review of cash
disbursements for the period
between the balance sheet date and
completion of field work may also
reveal evidence of the settlement.
The purchase would normally be

Required Disclosure
and Reasons
The receipt of the goods provides
additional evidence with respect to
conditions that existed at the date
of the balance sheet and hence the
financial statements should be
adjusted to take into account such
additional information.

The settlement of litigation would

require an adjustment of the
financial statements since the
events that gave rise to the
litigation had taken place prior to
the balance sheet date.

The purchase of a new business is

Evaluation of Audit Evidence and Completion of the Audit

revealed in general conversations
with the client and would further
be detected by reading the minutes
of meetings of stockholders,
directors,
and
appropriate
committees. In addition, because
the amount paid is likely to be
unusually large in relation to other
cash disbursements, a review of
cash disbursements for the period
between the balance sheet date and
completion of field work is likely
to reveal such an extraordinary
transaction. Moreover, because a
purchase of a business usually
requires a formal purchase
agreement, the letter from the
firms legal counsel would
probably have revealed the
purchase.

4.

Inventory losses attributable to a

flood would be brought to the
auditors
attention
through
inquiries and discussions with
corporate officers and executives.
Moreover, the auditor would know
the location of the plants and
warehouses of his client and upon
becoming aware of any major
floods in such a location, he would
investigate to determine if his
clients facilities had suffered any
damage.

5.

The sale of bonds or other

securities would require a filing
with the SEC in which the auditor

19-3

not an event that provides evidence

with respect to conditions existing
at the balance sheet date; hence, it
does not require adjustment in the
financial statements.
However,
such an event would normally be
of such importance that disclosure
of it is required to keep the
financial statements from being
misleading. If the acquisition is
significant enough, it might be
advisable to supplement the
historical statements with pro
forma statements indicating the
financial results if the two firms
had been consolidated for the year
ending December 31, 2014.
Otherwise, disclosure in footnotes
to the statements would be
adequate. Occasionally, a situation
of this type may have such a
material impact on the entity that
the auditor may wish to include in
his report an explanatory paragraph
directing the readers attention to
the event and its effect.
Losses attributable to floods
subsequent to the balance sheet
date do not provide information
with respect to conditions that
existed at the balance sheet date;
hence, it does not require an
adjustment in the financial
statements.
However, such an
incident may be of sufficient
importance to require footnote
disclosure.
Occasionally, a
situation of this type may have
such a material impact on the entity
that the auditor may wish to
include in his report an explanatory
paragraph directing the readers
attention to the event and its effect.
Sales of bonds or capital stock are
transactions of the type that do not
provide information with respect to

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Applied Auditing 2014 Edition Solutions Manual

would presumably be involved. In
addition, the sale would be
revealed by reading the minutes of
directors and finance committees
meetings, by corresponding with
the clients attorneys and by
examining the cash receipts book
in the period subsequent to the
balance sheet date for evidence of
unusually large receipts.

19-6.

conditions that existed at the

balance
sheet
date;
hence,
adjustment of the financial
statement
is
not
required.
However, such sales may be of
sufficient importance to require
footnote disclosure. Occasionally,
a situation of this type may have
such a material impact on the entity
that the auditor may wish to
include in his report an explanatory
paragraph directing the readers
attention to the event and its effect.

Olars Manufacturing Corporation

1.

The governments approval of a plan for the construction of an express

highway would have come to the CPAs attention through his inquiries of
officers and key personnel, his examination of the minutes of the meetings of
the board of directors and stockholders, and his reading of local newspapers.
The details of the item would not have to be disclosed as a separate footnote
because all fixed assets of the corporation, including the right to the
condemnation award, were to be sold as of March 1, 2006 (see item 6).

2.

It is improbable that the CPA would learn the source of the P25,000 unless it
were revealed in a discussion with the president or his personal accountant, or
unless the auditor prepared the presidents personal income tax return, in
which case the interest charges would have lead to his investigation of the use
to which the funds were put. Setting out the loan in the balance sheet as a
loan from an officer would be sufficient disclosure. The source from which
the officer obtained the funds would not be disclosed because it is the
officers personal business and has no effect upon the corporations financial
statements. Indeed, disclosure of the funds source might be construed as
detrimental to the officer.

3.

The additional liability for the ore shipment would have been revealed to the
CPA in his scanning of January transactions. His regular examination of
2001 transactions and related documents such as purchase contracts would
have caused him to note the time for subsequent follow up to determine the
final liability. In addition the clients letter of representation might have
mentioned the potential liability. The item would not require separate
disclosure by footnote or otherwise and would be handled by adjusting the
financial statement amounts for purchases, ending raw materials inventory,
and accounts payable by the amount of the additional charge, P9,064 {[(72 50) / 50] = 0.44; 0.44 x P20,600 = P9,064}.

Evaluation of Audit Evidence and Completion of the Audit

19-5

4.

The CPA might learn of the agreement to purchase the treasurers stock
ownership through his inquiries of management and legal counsel,
examination of the minutes of the meetings of the board of directors and
stockholders and subsequent reading of the agreement. The absence of the
treasurer might also arouse the CPAs curiosity. The details of the agreement
would be disclosed in a footnote because the use of company cash for the
repurchase of stock and the change in the amount of stock held by
stockholders might have a heavy impact on subsequent years financial
statements.
Usually, a management change, such as the treasurers
resignation, does not require disclosure in the financial statements. The
details underlying the separation (personal disagreements and divorce) should
not be disclosed because they are personal matters.

5.

Through inquiries of management, review of financial statements for January,

scanning of transactions, and observations, the CPA would learn of the
reduced sales and of the strike. Disclosure would not be made in the financial
statements of these conditions because such disclosure might create doubt as
to the reasons therefore and misleading inferences might be drawn.

6.

The contract with Lopez Industries would come to the CPAs attention
through his inquiries of management and legal counsel, his reading of the
minutes of the meetings of the board of directors and stockholders, and his
examination of the contract. All important details of the contract should be
disclosed in a footnote because of the great effect upon the corporations
future. The factors contributing to the entry into the contract need not be
disclosed in statements; while they might be of interest to readers, they are by
no means essential to make the statements not misleading.