Financial Audit: Revenue, Expenses, and Subsequent Events

School: Sheridan College - Course: ACCOUNT AUDITING - Subject: Accounting

CHAPTER 15 REVIEW RC 15-1 Q) Certain revenue and expense accounts usually are audited in conjunction with related balance sheet accounts. List the most likely related balance sheet accounts for these revenue and expense accounts: lease revenue, franchise revenue, royalty and licence revenue, amortization expense, repairs and maintenance expense, and interest expense. Lease revenue- fixed assets and account receivables. Franchise revenue- intangibles and receivables. Royalty and licence revenue- receivables and investments Amortization expense- fixed assets Repairs and maintenance- fixed assets and liabilities Interest expense- long term liabilities. RC 15-10 Q) What are the two types of subsequent events? How are they treated differently in the financial statements? The first type are those events that existed at year-end but are coming to light after the year-end date; these actually require adjustment of the dollar amounts of one or more financial statement line items (along with the addition of any related explanatory disclosure required in the notes). May require adjustment. The second type are those events arising after year-end that should not be reflected in the year-end financial statement numbers, but that need to be disclosed in the notes to those statements. May require disclosure, rare adjustment. RC 15-11 Q) What treatment is given stock dividends and splits occurring after the balance sheet date but before the audit report is issued? Explain. Retroactive recognition of the effect of stock dividends and splits is an exception covered in the box below. The issue here is timely and informative communication to financial statement users; the stock dividend or split will have been completed by the time the financial statements reach users and to report financial data as if they had not occurred might be considered misleading. SUBSEQUENT EVENT STOCK SPLIT

On February 15, the company approved a two-for-one stock split to be effective on that date. The fiscal year-end was the previous December 31, and the financial statements as of December 31 showed 50 million shares authorized, 10 million shares issued and outstanding, and earnings per share of $3. Audit Resolution.Note disclosure was made of the split and of the relevant dates. The equity section of the balance sheet showed 100 million shares authorized, 20 million shares issued and outstanding. The income statement reported earnings per share of $1.50. Earnings per share of prior years were adjusted accordingly. The note disclosed comparative earnings per share on the predividend shares. The audit report was dual dated, with February 1 as the report date except for the note disclosure, which was dated February 15. RC 15-12 Q) What is the purpose of a management representation letter? It's a way that you are recieving acknowledgement that ultimately the management is responsible for this. RC 15-13 Q) What representations would you request that management make in the representation letter with respect to related parties? receivables? inventories? minutes of meetings? subsequent events? Related parties- nature, amount, measurement. Receivables- collectability, existence, bad debt, ownership/collateral. Inventory- ownership, valuation, location, existence. Minutes- board meeting, minute book, to find out the type of shares, how many outstanding, when dividends are done. Subsequent events- the ceo and cfo that all subsequent events have been disclosed and signed, like if cfo had cancer.