Auditing case 2:

audit planning and risk assessment of a scooter trader

Ivy Bishnoi is preparing a report for the engagement partner of an existing client, Scooter Ltd., an importer of scooters and other low-powered motorcycles. Ivy has been investigating certain aspects of Scooter Ltd.’s business given the change in economic conditions over the past 12 months. She has found that Scooter Ltd.’s business, which experienced rapid growth over its first five years in operation, has slowed significantly during the last year. Initially, sales of scooters were boosted by good economic conditions and solid employment growth, coupled with rising gas prices. Consumers needed transport to get to work and the high gas prices made the relatively cheap running costs of scooters seem very attractive. In addition, the low purchase price of a small motorcycle or scooter, at between $3,000 and $8,000, meant that almost anyone who had a job could obtain a loan to buy one.

However, Ivy has found that the sales of small motorcycles and scooters have slowed significantly and that all importers of these products, not just Scooter Ltd., are being adversely affected. The onset of an economic recession has restricted employment growth, and those people who still have jobs are less certain of continued employment. In addition, the slowdown in the world economy has caused oil prices to fall, further reducing demand for this type of economical transport. Ivy has also discovered that, due to the global financial crisis, the finance company used by Scooter Ltd.’s customers to finance. the purchase of scooters and motorcycles has announced that it will not be continuing to provide loans for any type of vehicle with a purchase price of less than $10,000.

Required:

(a) Identify the issues that potentially have an impact on the audit of Scooter Ltd.

(b) Explain how each issue affects the audit plan by identifying the risks and the financial statement accounts that require closer examination

Source: Campbell et. al (2013), Cloud 9 Pty Ltd: An Audit Case Study, Canada:

Case 1 Cost-Volume-Profit (CVP) analysis + marginal analysis

You are the manager in Bright company that produces paper bags for food shops and supermarkets. You are provided with following information:

• Bright company is able to produce 60,000 packs of bags.
• Its current sale volume is 50,000 packs of bags per year. This has achieved its maximum sale force.
• Current selling price is $10 per pack of bags.
• Variable costs in total are $200,000;
• Fixed costs are $ 125,000.

A newly established shop has approached you, informing a willingness of purchasing 5,000 packs of bags per year at a price of $6 for each bag. If this proposal is accepted, unit variable costs would remain the same however fixed costs would increase by $6,000 per year.

Required:

1. Discuss whether this proposal is worthwhile from a financial point of view.

2. Analyze, if your competitor in the paper industry knows the above cost and price information, what action(s) may the competitor take to beat you in the market.

what needs to consider when determining property reversionary value? using DCF

Flounder Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. The company is trying to decide whether to purchase or lease the building and related facilities.

Purchase: The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,861,400. An immediate down payment of $406,400 is required, and the remaining $1,455,000 would be paid off over 5 years at $354,200 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $508,400. As the owner of the property, the company will have the following out-of-pocket expenses each period.

Property taxes (to be paid at the end of each year)    $41,860

Insurance (to be paid at the beginning of each year) 26,960

Other (primarily maintenance which occurs at the end of each year) 17,170

   $85,990

Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Flounder Inc. if Flounder will lease the completed facility for 12 years. The annual costs for the lease would be $266,320. Flounder would have no responsibility related to the facility over the 12 years. The terms of the lease are that Flounder would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $104,900 is required when the store is opened. This deposit will be returned at the end of the 12th year, assuming no unusual damage to the building structure or fixtures.

Compute the present value of lease vs purchase. (Currently, the cost of funds for Flounder Inc. is 11%.)

Adden Company signs a lease agreement dated January 1, 2016, that provides for it to lease heavy equipment from Scott Rental Company beginning January 1, 2016. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $20,000 to be paid in advance at the beginning of each year. 2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is $68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time. 3. Adden agrees to pay all executory costs. 4. The lease contains no renewal or bargain purchase option. 5. Scott’s interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate. 6. Adden uses the straight-line method to record depreciation on similar equipment. 7. Executory costs paid at the end of the year by Adden are: 2016 2017 Insurance, $1,500 Insurance, $1,300 Property taxes, $6,000 Property taxes, $5,500 Required: 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Adden. 2. Prepare a table summarizing the lease payments and interest expense for Adden. 3. Prepare journal entries for Adden for the years 2016 and 2017.

Cordova manufactures three types of stained glass window, cleverly named Products A, B, and C. Information about these products follows:

Cordova currently is limited to 60,000 labor hours per month. Cordova’s marketing department has determined the following demand for its products:

Required:
Given the company’s limited resource and expected demand, compute how many units of each product Cordova should produce to maximize its profit. (Enter the products in the sequence of their preferences; the product with first preference should be entered first. Round your answers to the nearest whole number.)

Income statements for Benson Company for 2018 and 2019 follow:

Required

1. Perform a horizontal analysis, showing the percentage change in each income statement component between 2018 and 2019.

2. Perform a vertical analysis, showing each income statement component as a percentage of sales for each year.

I'm looking at the below webpage. The question states "On 01/30/12, prior to...., Rice declared a 100% stock dividend on c/s".

I see mathematically what happens but I don't understand why. How come two years of COMMON stock dividends are issued not just one year? It isn't cumulative preferred stock.

There's something about issuing common stock dividends I must not understand. Could you please connect the dots?

https://www.chegg.com/homework-help/questions-and-answers/december-31-2010-rice-company-300-000-shares-common-stock-10-000-shares-5-100-par-value-cu-q1083710.

Thank you, Natalie

The following transactions and events that occurred in the village of Kowitt Gorge during the calendar year 2019: 1. The village commissioners adopted the following budget: Estimated revenues: Property taxes $1,850,000 All other revenues 300,000 Total revenues $2,150,000 Appropriations: All departments other than police $1,000,000 Police—salaries 600,000 Police—fringe benefits 450,000 Police—supplies 80,000 Total appropriations $2,130,000 2. The village received, in cash, property taxes of $1,840,000 and all other revenues of $295,000. 3. The village made cash payments, charging the following appropriations: All departments other than police $1,000,000 Police—salaries 595,000 Police—fringe benefits 390,000 4. The administrator of fringe benefits received an invoice for police employee health insurance in the amount of $95,000, together with a letter from the insurance provider, explaining that the large increase was caused by a change in federal laws. The invoice could not be paid because the Police—fringe benefits appropriation had a balance of only $60,000 (appropriation of $450,000 minus expenditures in item 3 of $390,000). As a result, the village commissioners amended the budget as follows: Increase: Appropriation for police—fringe benefits $35,000 Decrease: Appropriation for police—salaries 5,000 Decrease: Appropriation for police—supplies 25,000 Use of fund balance 5,000 5. The village paid the invoice for $95,000, referred to in item 4 above, charging the appropriation for police—fringe benefits. 6. The police department placed PO 2019a for firearms in the amount of $30,000 and PO 2019b for uniforms in the amount of $20,000, all charged to the appropriation for police—supplies. (Enter these POs as one transaction.) 7. After receiving PO 2019a, the supplier notified the police department that a change in the design of the weapons would increase the cost to $32,000. The department sent the supplier an amended PO, increasing it by $2,000. 8. The police department received the uniforms ordered on PO 2019b, together with an invoice for $20,000. The department approved the invoice for payment. Record the transactions and events applicable to the appropriations for police—fringe benefits and police—supplies in the following appropriations ledger. NOTES: Use a negative sign with your answers if: 1. the amount entered in the Appropriation column is a debit (Dr.) rather than a credit (Cr.); or 2. the amount entered in the Expenditures column is a credit (Cr.) rather than a debit (Dr.). In the Available Appropriation column, enter the appropriate balance after every transaction/event, even if a transaction isn't recorded in a particular ledger for that transaction. For Transaction 6, enter both purchase orders (POs) as one combined transaction. Appropriations Ledger Appropriation: Police - fringe benefits Appropriation Encumbrances Expenditures Available Transaction Cr. Dr. Cr. Dr. Appropriation 1 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 2 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 3 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 4 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 5 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 6 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 7 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 8 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 Appropriations Ledger Appropriation: Police - supplies Appropriation Encumbrances Expenditures Available Transaction Cr. Dr. Cr. Dr. Appropriation 1 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 2 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 3 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 4 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 5 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 6 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 7 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 8 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0 Answer 0

Relationship between budgetary fund balance and actual fund balance The Village of Albert’s Alley recorded the following budgetary journal entry at the beginning of fiscal 2019: Estimated revenue 5,000,000 Appropriations 4,950,000 Budgetary fund balance 50,000 At the end of fiscal 2019, what would be the effect on the ending actual fund balance, assuming the following: a. Actual revenues are equal to estimated revenues, and actual expenditures are $7,000 less than appropriations. b. Actual revenues are equal to estimated revenues, and actual expenditures are equal to appropriations. c. Actual revenues exceed estimated revenues by $4,000, and actual expenditures are equal to appropriations. d. Actual revenues are $3,000 less than estimated revenues, and actual expenditures are $2,000 less than appropriations. NOTE: If there is no effect on the actual fund balance, leave Amount blank (zero) and select "N/A" as your answer.

• 6) ABC Company sold DEF company shoes for $67,000 on account. The shoes cost ABC $30,000. Write the journal entries for both ABC and DEF showing the sale by ABC followed by the receipt of payment & the purchase by DEF followed by the payment to ABC.
• 7) ABC Company sold DEF company shoes for $67,000 on account on terms 2/10 net 30. The shoes cost ABC $30,000. Write the journal entries for both ABC and DEF showing the sale by ABC followed by the receipt of payment & the purchase by DEF followed by the payment to ABC. They paid with the discount period.

Please create journal entries.  

1. Morningside Technologies Inc. uses flexible budgets that are based on the following data:

   Sales commissions	6% of sales
   Advertising expense	15% of sales
   Miscellaneous administrative expense	$1,450 per month plus 3% of sales
   Office salaries expense	$14,000 per month
   Customer support expenses	$2,050 plus 4% of sales
   Research and development expense	4,500 per month

2. Prepare a flexible selling and administrative expenses budget for April for sales volumes of $90,000, $115,000, and $135,000. Enter all amounts as positive numbers.

   Morningside Technologies Inc.
   Flexible Selling and Administrative Expenses Budget
   For the Month Ending April 30
   Total sales	$90,000	$115,000	$135,000
   Variable cost:
   Sales commissions	$	$	$
   Advertising expense
   Miscellaneous administrative expense
   Customer support expenses
   Total variable cost	$	$	$
   Fixed cost:
   Miscellaneous administrative expense	$	$	$
   Office salaries expense
   Customer support expenses
   Research and development expense
   Total fixed cost	$	$	$
   Total selling and administrative expenses	$	$	$

3. Personal Budget

   At the beginning of the school year, Katherine Malloy decided to prepare a cash budget for the months of September, October, November, and December. The budget must plan for enough cash on December 31 to pay the spring semester tuition, which is the same as the fall tuition. The following information relates to the budget:

   Cash balance, September 1 (from a summer job)	$6,730
   Purchase season football tickets in September	90
   Additional entertainment for each month	230
   Pay fall semester tuition in September	3,600
   Pay rent at the beginning of each month	320
   Pay for food each month	180
   Pay apartment deposit on September 2 (to be returned December 15)	500
   Part-time job earnings each month (net of taxes)	830

   a. Prepare a cash budget for September, October, November, and December. Enter all amounts as positive values except an overall cash decrease which should be indicated with a minus sign.

   KATHERINE MALLOY
   Cash Budget
   For the Four Months Ending December 31
   	September	October	November	December
   Estimated cash receipts from:
   Part-time job	$	$	$	$
   Deposit
   Total cash receipts	$	$	$	$
   Estimated cash payments for:
   Season football tickets	$
   Additional entertainment		$	$	$
   Tuition
   Rent
   Food
   Deposit
   Total cash payments	$	$	$	$
   Overall cash increase (decrease)	$	$	$	$
   Cash balance at beginning of month
   Cash balance at end of month	$	$	$	$

   b. Are the four monthly budgets that are presented prepared as static budgets or flexible budgets?
   c. Malloy can see that her present plan   sufficient cash. If Malloy did not budget but went ahead with the original plan, she would be $   at the end of December, with no time left to adjust.

4. Static Budget versus Flexible Budget

   The production supervisor of the Machining Department for Niland Company agreed to the following monthly static budget for the upcoming year:

   Niland Company Machining Department Monthly Production Budget
   Wages	$396,000
   Utilities	34,000
   Depreciation	57,000
   Total	$487,000

   The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows:

   	Amount Spent		Units Produced
   January	$460,000		121,000
   February	441,000		110,000
   March	422,000		99,000

   The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been less than the monthly static budget of $487,000. However, the plant manager believes that the budget should not remain fixed for every month but should “flex” or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows:

   Wages per hour	$15.00
   Utility cost per direct labor hour	$1.30
   Direct labor hours per unit	0.20
   Planned monthly unit production	132,000

   a. Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume that depreciation is a fixed cost. Enter all amounts as positive numbers. If required, use per unit amounts carried out to two decimal places.

   Niland Company-Machining Department
   Flexible Production Budget
   For the Three Months Ending March 31
   	January	February	March
   Units of production
   Wages	$	$	$
   Utilities
   Depreciation
   Total	$	$	$

   b. Compare the flexible budget with the actual expenditures for the first three months.

   	January	February	March
   Total flexible budget	$	$	$
   Actual cost
   Excess of actual cost over budget	$	$	$

   What does this comparison suggest?

   The Machining Department has performed better than originally thought.
   The department is spending more than would be expected.

5. Flexible Budget for Assembly Department

   Cabinaire Inc. is one of the largest manufacturers of office furniture in the United States. In Grand Rapids, Michigan, it assembles filing cabinets in an Assembly Department. Assume the following information for the Assembly Department:

   Direct labor per filing cabinet	30 minutes
   Supervisor salaries	$147,000 per month
   Depreciation	$20,000 per month
   Direct labor rate	$15 per hour

   Prepare a flexible budget for 14,000, 18,000, and 21,000 filing cabinets for the month of August in the Assembly Department, similar to Exhibit 5. Assuming that inventories are not significant. Enter all amounts as positive numbers.

   CABINAIRE INC-ASSEMBLY DEPARTMENT
   Flexible Production Budget
   For the Month Ending August 31 (assumed data)
   Units of production	14,000	18,000	21,000
   Variable cost:
   Direct labor	$	$	$
   Total variable cost	$	$	$
   Fixed cost:
   Supervisor salaries	$	$	$
   Depreciation
   Total fixed cost	$	$	$
   Total department cost	$	$	$

Given Information:          
Lincoln Corporation had no noncash investing and financing transactions for 2018. During the year, Lincoln sold equipment for $15,100, which had originally cost $12,700, with a book value of $10,700. Lincoln did not issue any notes payable during the year, but did issue common stock for $30,000. Note that the corporation's board of directors authorized the payment of dividends for the year.          
          
Lincoln Corporation          
Income Statement          
For the Period Ending December 31, 2018
          
Sales revenue $347,000
Cost of goods sold 78,000
Gross profit $269,000

Operating expenses:          
Salaries expense $26,500       
Depreciation expense 4,900       
Other operating expenses   12,500      43,900
Operating Income $225,100

Other incomes and expenses:          
Gain on Sale of equipment   $4,400       
Interest expense 9,900        5,500
Income before taxes $219,600
Income tax expense (36,600)
Net Income $183,000
          
          
          
Lincoln Corporation          
Balance Sheets          
          
Year ended December 31,      
Assets 2018       2017
Current Assets:          
Cash and cash equivalents $50,000        $23,500
Accounts receivable 32,100        29,100
Inventory 86,000 93,300
Prepaid insurance 3,300 2,800
Total current assets: $171,400        $148,700
Property, plant & equipment   153,000        136,000
Less: Accumulated depreciation(30,000)       (27,100)
Investments 113,000        -   
Total Assets $407,400        $257,600

Liabilities          
Current Liabilities:          
Accounts payable (Inventory purchases)   $33,200        $36,500
Salaries payable 2,900        7,400
Interest payable 2,400        -   
Taxes payable 5,300        -   
Other accrued operating expenses 18,800        22,100
Total current liabilities 62,600        66,000
Bonds Payable 78,000        113,000
Total Liabilities 140,600        179,000

Stockholders' Equity          
Common stock 107,000        77,000
Retained earnings 159,800        1,600
Total stockholders' equity 266,800        78,600
Total liabilites and equity $407,400        $257,600
          
Instructions: Prepare a statement of cash flows using the indirect method.           

What are the correct journal entries and adjusting entries for the below transaction? I'm having trouble identifying the journal and adjusting entries in 'bank situations'. The textbook doesn't come with answers.

3. Using the regular Treasury note of Problem 2:

a. What is its price if investors’ required rate of return is 6.0 percent on similar bonds? Treasury notes pay interest semiannually.

b. Erron Corporation wants to issue five-year notes but investors require a credit risk spread of 3 percentage points. What is the anticipated coupon rate on the Erron notes?

the treasuring note of problem 2

2. Judy Johnson is choosing between investing in two Treasury securities that mature in five years and have par values of $1,000. One is a Treasury note paying an annual coupon of 5.06 percent. The other is a TIPS that pays 3 percent interest annually.

a. If inflation remains constant at 2 percent annually over the next five years, what will be Judy’s annual interest income from the TIPS bond? From the Treasury note?

b. How much interest will Judy receive over the five years from the Treasury note? From the TIPS?

c. When each bond matures, what par value will Judy receive from the Treasury note? From the TIPS?

d. After five years, what is Judy’s total income (interest + par) from each bond? Should she use this total as a way of deciding which bond to purchase?