Question

For your last assignment, which will be due next Thursday, before the last day of class, please refer back to the massage parlor business statement, attached herein. Given the way I have described what to do below I do not think this should take you more than an hour or two. Further, it should allow you to see the big picture of the audit. Here is what I want you to do.

STEP 1: For the following balance sheet items, as of the second year statements in the attachment, clearly mention how you could easily audit the amount shown with one procedure that would give you a pretty good comfort level if the amount is right or wrong (you might say we are looking at the assertions of existence and accuracy). The procedure may need to be done multiple times, but that is understood so you don't have to mention it. For example, there may be many bank accounts that are part of Cash. Your procedure would apply to all of those. I am looking for your answer for each account to be no longer than one or two sentences. So if you are writing more than that - don't. Go back and condense what you wrote. For example, and again for Cash, you could simply say "get Bank Confirmations from the bank(s)". You do not have to describe the full procedure of getting a bank confirmation. NOTE: it is understood that in a real audit your answers here will not be the only procedure, but you are looking for your answer to be one of the quickest and easiest ways to know if the balance sheet amount is most likely correct. Although confirmation may be an answer for several of the ones listed below, it is not for all since not all are easily subjected to being confirmed. This assignment requires you to use your judgement, which suggests that there may be more than correct approach (but not likely).

Here are the balance sheet accounts to address:

Cash = (now every one should get this one right!)

Loan Payable Bank

Payroll Tax Payable

Sales Tax Payable

Long Term Loans Payable

Plant Property and Equipment

Answer 1

Audit Procedures:

CASH : Obtain Balance Confirmation from Bank.

LOAN PAYABLE BANK : Obtain Balance Outstanding Confirmation from Bank.

PAYROLL TAX PAYABLE : Apply analytical procedure by multiplying Total Remuneration with Payroll Tax Rate to get Payroll Tax Payable and verify with Challan of Tax Paid.

SALES TAX PAYABLE : Apply analytical procedure by multiplying Total Sales with Sales Tax Rate to get Sales Tax Payable and verify with Challan of Tax Paid.

LONG TERM LOANS PAYABLE : Obtain Balance Confirmation from Creditors.

PLANT PROPERTY AND EQUIPMENT : Physical Verification of the plant property and equipment so as to verify existence.