Lec 9: Completing the audit plan

Phase 1 : plan+ risk assess

Phase 2+3: test (toc,stot,sap,stdb) => collect evidence
Phase 4: evidence=> evaluate=> need addition test for presentation and disclosure
Review overall presentation of FS +footnote
=> contigent lia + subsequent event

Subsequent events happen after FS/YE

1. FINDING OUT ACTIVELY
2. CONTACT TO CLIENT TO ADJUST AFTER CLIENT PUBLIC FS
3. REVISE FS
IN CASE, THE CLIENT’S COMPANY OUT OF BIZ=> HARLY TO ADJUST => IGNORE
Probability of the debt :
remove (ignore, NO DISCLOSURE).
reasonable (co kha nang phai tra mot khoang tien khoang 50% , FOOTNOTE DISCLOSURE).
probable ( kha nang cao bi kien , boi thuong , need to estimate amount by 2 ways: If NO (footnoot
disclose), If YES (adjust)).

23-23 (OBJECTIVES 23-4, 23-8) The field work for the June 30, 2019, audit of Tracy Brewing
Company was finished August 19, 2019, and the completed financial statements, accompanied by the
signed audit reports, were mailed September 6, 2019. In each of the highly material independent
events (a. through h.), state the appropriate action (1 through 4) for the situation and justify your
response. The alternative actions are as follows:
1. Adjust the June 30, 2019, financial statements.
2. Disclose the information in a footnote in the June 30, 2019, financial statements.
3. Request the client to recall the June 30, 2019, statements for revision.
4. No action is required.
The events are as follows:

Group a b c

a. On December 14, 2019, the auditor discovered that a debtor of Tracy Brewing went
bankrupt on July 15, 2019, due to declining financial health. The sale generating the
receivable had taken place January 15, 2019. (3)
b. On December 14, 2019, the auditor discovered that a debtor of Tracy Brewing went
bankrupt on October 2, 2019. The sale had taken place April 15, 2019, but the amount
appeared collectible at June 30, 2019, and August 19, 2019. (4)
c. On August 15, 2019, the auditor discovered that a debtor of Tracy Brewing went
bankrupt on August 1, 2019. The most recent sale had taken place April 2, 2018, and
no cash receipts had been received since that date. (1)

d. On July 20, 2019, Tracy Brewing settled a lawsuit out of court that had originated in
2016 and is currently listed as a contingent liability. (1) adjust
e. On September 14, 2019, Tracy Brewing lost a court case that had originated in 2018
for an amount equal to the lawsuit. The June 30, 2019, footnotes state that in the opinion of legal
counsel, there will be a favorable settlement.(4) boi vi phan anh trung thuc tai thoi diem review
f. On July 20, 2019, a lawsuit was filed against Tracy Brewing for a patent infringement
action that allegedly took place in early 2019. In the opinion of legal counsel, there is
a danger of a significant loss to the client. (2)
g. On May 31, 2019, the auditor discovered an uninsured lawsuit against Tracy Brewing
that had originated on February 28, 2019. (2)
h. On August 6, 2019, the auditor discovered that a debtor of Tracy Brewing went bankrupt on July 30,
2019. The cause of the bankruptcy was an unexpected loss of a major lawsuit on July 15, 2019,
resulting from a product deficiency suit by a different customer (4)

23-22 (OBJECTIVE 23-3) Yu is performing the audit on leases of Tipu Company for the year
ended December 31. While examining the client’s ledger, she noticed that there are three
items on lease, a van, a lathe machine, and an oven. As part of the audit, Yu plans to send
standard confirmation letters to the lessors.
Two days before the end of fieldwork, Yu received confirmation from the van’s lessor
and saw that the client has short taken the van lease by $10,000. Yu sent a second reminder
confirmation to the other two lessors and received a confirmation from the lathe machine’s
lessor, which states that the lease would only start on January 1. Yu is yet to receive any confirmation
pertaining to the leasing of the oven.
a. What should Yu do in the future to make sure that that confirmation letters are received and
answered promptly?
b. Given the discrepancies in at least two of the items, what further action should Yu
take?

23-21 (OBJECTIVE 23-2) In an audit of the Marco Corporation as of December 31, 2019, the
following situations exist. No entries have been made in the accounting records in relation
to these items.
1. During the year 2019, the Marco Corporation was named as a defendant in a suit for
damages by the Dalton Company for breach of contract. An adverse decision to the
Marco Corporation was rendered and the Dalton Company was awarded $4,000,000
damages. At the time of the audit, the case was under appeal to a higher court.
=> probable yes adjust $4000 if this the number is materials, we need to adjust, if not, we may nott
disclosure,
(neu ma la immaterial thi ignore , not adjust
2. On December 23, 2019, the Marco Corporation declared a common stock dividend of
1,000 shares with a par value of $1,000,000 of its common stock, payable February 2,
2020, to the common stockholders of record December 30, 2019.
=> Dividen k phai la mot khoan lia nhung affect retain earning acc (not adjust but needt to
disclosure to investors)
Pay divident, issuess bond,stock affect investor benefit and those also have significant in4 so it is
necessary to disclosure to investor.

3. The Marco Corporation has guaranteed the payment of interest on the 10-year, first mortgage
bonds of the Newart Company, an affiliate. Outstanding bonds of the Newart Company amount to
$5,500,000 with interest payable at 5 percent per annum, due June 1 and December 1 of each year.
The bonds were issued by the Newart Company on December 1, 2017, and all interest payments have
been met by that company with the exception of the payment due December 1, 2019. The Marco
Corporation states that it will pay the defaulted interest to the bondholders on January 15, 2020.
=>
Having Lia & ensuring estimate amount $5,500,000 with interest payable at 5 percent per annum =>
need to adjust
a. Define contingent liability.
A contingent liability is a potential future obligation to an outside party for an unknown
amount resulting from activities that have already taken place. Material contingent liabilities must be
disclosed in the footnotes. Three conditions are required for a contingent
liability to exist:
1. There is a potential future payment to an outside party or the impairment of an
asset that resulted from an existing condition.
2. There is uncertainty about the amount of the future payment or impairment.
3. The outcome will be resolved by some future event or events.

b. Describe the audit procedures you would use to learn about each of the situations
listed.

c. Describe the nature of the adjusting entries or disclosure, if any, you would make for
each of these situations.