Case12
The Lakeside Company
Case studies in auditing, 12ths edi.
Case 12 Discussion Questions
1. In examining a bank cut-off statement, the auditor is seeking to verity canceled checks and deposits returned by the bank agreed with the year-end reconciliations.
2. Auditors send confirmation letters to banks because some illegal acts (thefts) could be perpetrated through the use of bank accounts. A dishonest employee could cash the checks by using the company’s bank account. Also, the company could use a closed account to hide illegal payments from the auditors.
3. Construction of the warehouse: Since the construction is in progress and has not been used, it should be reported separately from other accounts like land and buildings on the Balance Sheet. Also, Lakeside should disclose the specific information such as the completion date and estimated expenditure of the construction on its note.
Fire damage: If the amount of loss is material, Lakeside should disclose the loss regarding fire in 2012’s FS. If the amount of loss is not material, Lakeside does not need to disclose it.
Declaration of a cash dividend: A disclosure would not be needed if the declaration of a cash dividend is a normal occurrence and in a reasonable amount.
4. Cut-off test ensures the impact on transactions that are recorded in a proper time period. Also, the company could manipulate its revenue by having the cut-off made after the reporting period. Cut-off testing of inventory and sales is important because Lakeside has a large volume of daily transactions regarding these accounts.
5. Unrecorded liabilities could increase the company’s debt ratio and net income. Therefore, the company could defer some liabilities until next year in order to increase its debt ratio and net income for the current year.
6. Sometimes, the amount of contingent losses could be material. Auditors should figure out any contingent losses that may result in a material effect on the FS. Auditors could seek evidence of
Case studies in auditing, 12ths edi.
Case 12 Discussion Questions
1. In examining a bank cut-off statement, the auditor is seeking to verity canceled checks and deposits returned by the bank agreed with the year-end reconciliations.
2. Auditors send confirmation letters to banks because some illegal acts (thefts) could be perpetrated through the use of bank accounts. A dishonest employee could cash the checks by using the company’s bank account. Also, the company could use a closed account to hide illegal payments from the auditors.
3. Construction of the warehouse: Since the construction is in progress and has not been used, it should be reported separately from other accounts like land and buildings on the Balance Sheet. Also, Lakeside should disclose the specific information such as the completion date and estimated expenditure of the construction on its note.
Fire damage: If the amount of loss is material, Lakeside should disclose the loss regarding fire in 2012’s FS. If the amount of loss is not material, Lakeside does not need to disclose it.
Declaration of a cash dividend: A disclosure would not be needed if the declaration of a cash dividend is a normal occurrence and in a reasonable amount.
4. Cut-off test ensures the impact on transactions that are recorded in a proper time period. Also, the company could manipulate its revenue by having the cut-off made after the reporting period. Cut-off testing of inventory and sales is important because Lakeside has a large volume of daily transactions regarding these accounts.
5. Unrecorded liabilities could increase the company’s debt ratio and net income. Therefore, the company could defer some liabilities until next year in order to increase its debt ratio and net income for the current year.
6. Sometimes, the amount of contingent losses could be material. Auditors should figure out any contingent losses that may result in a material effect on the FS. Auditors could seek evidence of