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Accounting Audit Case Scenario




Question;1. 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?2. 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#41429 | Written in 18-Jul-2015

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