Question

Analyze the Balance Sheet and Income Statement for ABC Company. Come up with 6 questions for the client that you would like to dig deeper into based on the change from 2016 to 2017. For each of the 6 questions, list audit steps you would take to check for material misstatements and would you allow you to eventually sign off on the audit report.

Balance Sheet
12/31/2017 and 12/31/2016
Assets					Liabilities
	12/31/2017	12/31/2016				12/31/2017	12/31/2016
Current Assets					Current Liabilities
Cash	60,000	100,000			Notes payable	2,500	4,000
Petty Cash	5,000	1,000			Accounts payable	50,000	80,000
Accounts Receivable - net	40,000	65,000			Wages payable	35,000	42,000
Inventory	10,000	12,000			Interest payable	3,000	3,200
Supplies	3,000	2,500			Taxes payable	500	1,000
Prepaid Insurance	12,000	4,500			Unearned revenues	1,500	1,300
Total current assets	130,000	185,000			Total current liabilities	92,500	131,500
Property, plant and equipment					Long-term liabilities
Land	30,000	30,000			Notes payable	12,000	22,000
Land improvements	4,500	4,000			Bonds payable	75,000	100,000
Buildings	65,000	65,000			Total long-term liabilities	87,000	122,000
Equipment	26,000	8,000
Less: accumulated deprec	(25,000)	(20,000)			Total liabilities	179,500	253,500
Prop, plant, and equip-net	100,500	87,000
Intangible assets					Stockholders' Equity
Goodwill	15,000	15,000			Common Stock	5,000	5,000
Trade names	10,000	3,000			Retained Earnings	74,000	34,500
Total intangible assets	25,000	18,000
					Total Stockholders' equity	79,000	39,500
Other assets	3,000	3,000
Total assets	258,500	293,000			Total liabilities and stockholders' equity	258,500	293,000

Income Statement
For the Twelve Months Ended 12/31/17 and 12/31/16
			2017	2016
Revenues and Gains
Sales revenues			120,000	150,000
Interest revenues			1,000	1,500
Gain on sale of assets			15,000	2,000
Total revenue and gains			136,000	153,500
Expenses and losses
Cost of goods sold			32,000	40,000
Office supplies expense			30,000	10,000
Maintenance expense			10,000	20,000
Depreciation expense			5,000	3,000
Office equipment expense			15,000	25,000
Advertising expense			3,000	2,500
Interest expense			5,000	5,800
Loss from lawsuit			20,000	2,000
Total expenses and losses			120,000	108,300
Net Income			256,000	261,800
Capitalization threshold = $5,000 +

Answer 1

Audit questions to ask ABC companies Management for analysis -

1. Nature of company and various types of revenue it is generating. List of various locations it is operating from.

2.Any merger/acquisition/sale /disposal of investment / unit/subsidiary.

3.Crediors and debtors ageing for year 2016 and 2017 to check creditability and liquidity position of company.

4. Any specific reason for increase in net income ratio by 10% as compared to previous yera - 2016.

5.Resons for Increase in office supplies expenses by 200% during year 2017 as compared to 2016. Further Bifurcation of Office supplies expenses to understand nature.

6.Goodwill valuation method followed by company. Any impariement done to goodwill balance.

7.Any leasehold agreement endered by Company or assets given on lease to check lease accounting.

Audit steps to check material misstatement :

• Testing classes of transactions, account balances, and disclosures
• Agreeing the financial statements and accompanying notes to the underlying accounting records
• Examining material journal entries and other adjustments made during the preparation of the financial statements
• Examining documentation indicating that a procedure was performed
• Reperforming a procedure to ensure that the procedure functions as planned
• Inquiring or observing regarding a transactions which are indifferent in nature.
• Analytical analysis of assets, liabilities, revenue, and expenses
• Observe a physical inventory count

I would allow to signoff the audit report once all procedure relating to audit and confirmations and analysis is done and which gives us assurance that there is not material misstatement.