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audit quiz answer




Question;BACKGROUND;Notes payable to financial institutions are;confirmed as part of the confirmation of cash deposit balances. Standard;confirmation forms include a request that the financial institution confirm all;borrowings by the depositor.;McGraw CPA is the auditor for Dillon;Industries, a manufacturer of widgets. Dillon has debt (a mortgage and line of;credit) to ABC Bank, the same bank that holds its cash, lockbox, and money;market accounts. A standard AICPA confirmation was sent to ABC Bank, asking it;to confirm cash balances and debt terms and balances. The debt balances and;account numbers were listed on the confirmation sent to the bank. The client's;controller prepared the confirmation and mailed it to the bank. The bank gave;it back to the controller when he came to make the next day's deposit. The;controller then gave it to the auditor.;1What was wrong with filling out the debt;balance and account number on the confirmation?;2.What was wrong with the mailing of the;confirmation?;3.Was there a problem with the bank giving;the confirmation back to the client?;222222222222222.;Read the case. Then answer the questions;based on it.;BACKGROUND;Given current economic conditions and;individual operating results, companies may not comply fully with lender;restrictions on debt and, thus, fail to meet one of the debt covenant;requirements (e.g., to maintain a certain working capital ratio). The debt;agreement may have a trigger to make the debt due on demand and, therefore, a;current liability. Often, the client will be able to obtain a waiver of;compliance on this violation in order to comply with the provision. Certain;auditing procedures need to be performed to ensure this failure of a covenant;and subsequent waiver are properly documented and correctly reported.;Sunshine CPA is the auditor for Shumacher;Industries, a manufacturer of widgets. Shumacher has debt (a mortgage and line;of credit) to ABC Bank, the same bank that holds its cash, lockbox, and money;market accounts. The mortgage has certain covenants that must be complied with;at year-end. When the client did an initial analysis of the covenants with its;year-end numbers, the debt to equity required ratio, i.e. the "debt to;equity ratio," was not met. The CFO of Shumacher approached the bank and;received a covenant waiver from the audit date (12/31/XX) for a period of one;year.;1.What audit procedures are needed for;Sunshine CPA to test the failure of the covenant?;2.How should the waiver be dated in this;case?;3. What if the waiver were dated the same;date as it was received (12/31/XX year-end, dated 02/01/XX)?


Paper#41332 | Written in 18-Jul-2015

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