Question

Weyman Z. Wannamaker is the chief financial officer of Cogburn Company. He prides himself on being able to manage the company's cash resources to minimize the interest expense. Consequently, on the second business day of each month, Weyman pays down or draws cash on Cogburn's revolving line of credit at First National Bank in accordance with his cash requirements forecast.

You are the auditor. You find the information on this line of credit in the following table. You inquired at First National Bank and learned that Cogburn Company's loan agreement specifies payment on the first day of each month for the interest due on the previous month's outstanding balance at the rate of "prime plus 1.5 percent." The bank gave you a report that showed the prime rate of interest was 8.5 percent for the first six months of the year and 8.0 percent for the last six months.

Cogburn Company Notes Payable Balances

Date	Balance
1-Jan	$150,000
1-Feb	$200,000
1-Apr	$225,000
1-May	$285,000
1-Jun	$375,000
1-Aug	$430,000
1-Sep	$290,000
1-Oct	$210,000
1-Nov	$172,000
1-Dec	$95,000

Required:

1. Prepare an audit estimate of the amount of interest expense you expect to find as the balance of the interest expense account related to these notes payable.
2. Which of the types of analytical procedures did you use to determine this estimate?
3. Suppose that you find that the interest expense account shows expense of $23,650 related to these notes. What could account for this difference?
4. Suppose that you find that the interest expense account shows expense of $24,400 related to these notes. What could account for this difference?
5. Suppose that you find that the interest expense account shows expense of $25,200 related to these notes. What could account for this difference?

Submit the Excel working paper and add in bulleted format below the workpaper answers to the prompts above.

Answer 1

Audit estimate of the amount of interest expenses.

Month	Outstanding Balance	Interest Rate	Interest for the month
Jan	$150,000	10%	$1250
Feb	$200,000	10%	$1667
Mar	$200,000	10%	$1667
Apr	$225,000	10%	$1875
May	$285,000	10%	$2375
June	$375,000	10%	$3125
July	$375,000	9.5%	$2969
Aug	$430,000	9.5%	$3404
Sep	$290,000	9.5%	$2296
Oct	$210,000	9.5%	$1663
Nov	$172,000	9.5%	$1362
Dec	$95,000	9.5%	$752
	Total		$24,403

Substantive analytical procedures is used to determine this estimate.

Suppose that you find that the interest expense account shows expense of $23,650 related to these notes. What could account for this difference?

Difference may e due to following reasons.

1.Wrong calculation of interest payable.

2.Omission of certain entries.

3. consider lower outstanding amount or lower interest rate while calculating interest expenses.

4.fluctuation in given interest rate or prime rate to lower side

Suppose that you find that the interest expense account shows expense of $24,400 related to these notes. What could account for this difference?

There is $3 difference may be due to rounding off the figure.

Suppose that you find that the interest expense account shows expense of $25,200 related to these notes. What could account for this difference?

1.consider higher outstanding amount or higher interest rate while calculating interest expenses then actual.

2.Penalty for non payment of interest or any other reason levied by bank not accounted for in the books of account.

3.fluctuation in given interest rate or prime rate to higher side but not consider in our book.