Question

During the course of the 2017 audit of Smithson Company, the auditor discovered the following situations that may or may not require an adjusting journal entry. Each audit finding is independent of any of the other findings. Indicate the adjusting journal entry, if required, to correct the audit finding. If no entry is required, indicate whether or not a related footnote should be included in the financial statements. Would any of the findings cause you to consider increasing your assessment of fraud risk?

Audit finding

The bank’s confirmation reply regarding the company’s line of credit indicated that the December 2017 interest of $11,200 was unpaid at year-end. Interest expense has been recorded by the company as it was paid (through November 2017).

Employee overtime pay for hours worked before year-end, but paid in the following year in the amount of $18,500, was not recorded in 2017.

In the last week of 2017, the company recorded $145,000 revenue for services rendered to some clients on account in 2018.

During 2017, a former client sued the company for inappropriate work. Legal counsel has advised that it is “reasonably possible” that the company will be assessed damages. An amount of $200,000 has been estimated as the possible loss.

On January 2, 2018, a major customer owing $50,000 to the company for services provided in November 2017 filed for bankruptcy. Collection of the account receivable is not expected. No entry was made by the client to recognize this fact.

Answer 1