Module XI -

In Module IV, you applied MUS sampling procedures in evaluating the correctness of a subset of debits to the "Factory Equipment" account. You will recall that the debits to account 1530 totaled $89,860,000 for 2009. You will also recall that Derick decided to stratify the population of debits such that $77,260,000 of major additions, representing replacements of worn-out equipment, was to be audited in detail. In Module XI, you will analyze this subset of additions, as well as disposals. You will also complete the "Plant Assets" lead schedule.

Requirements

1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Plant." Locate the following documentation in this file: ?WP 11-Plant assets and accumulated depreciation-lead schedule (note that AJE 1 from Module IV has already been posted); and ?WP 11.4-Factory equipment-additions and disposals. ?Scroll to WP 11.4,"Factory Equipment-Additions and Disposals." What is the nature of the "underlying documentation" referred to in the explanation of audit legends E and W?

2. In recording the 2009 disposals, Janel James, Biltrite's plant assets accountant, miscalculated the accumulated depreciation on the assets sold and thereby overstated the gain on disposal by $3,090,000. Draft Audit Adjustment 10 at the bottom of WP 11.4 to correct for this misstatement. In addition, James did not change the standard journal entry for monthly depreciation to reflect additions and disposals during the year. As a result depreciation expense for the year is understated by $800,000. Biltrite depreciates factory equipment on a straight-line basis over a ten-year esti- mated useful life with zero salvage value. One-half year's depreciation is taken on all additions and disposals. Draft Audit Adjustment 11 at the bot- tom of WP 11.4 to reflect the depreciation understatement. In recording the under-depreciation, debit account 5300,"Cost of Goods Sold-Pike's Peak Mountain Bike," inasmuch as all overhead accounts have been closed. Any further adjustments, therefore, must be reflected in the cost of sales accounts. Although in Module IV we allocated the adjustment to the five product cost of sales accounts, the present adjustment is less significant in amount, and therefore we will reflect the entire amount in account 5300. (Note: Don't forget to enter Audit Adjustments 1, 10, and 11 in the body of the document to arrive at correct adjusted balances.)

3. Scroll to WP 11,"Plant Assets and Accumulated Depreciation-Lead Schedule." Post Audit Adjustments 10 and 11 to the lead schedule.

4. Print documentation 11 and 11.4.

Allowance for Sampling Risk" schedule by ranking the projected misstatements as appropriate. (Hint: If you forgot how to do this, refer to Chapter 8.)

5. Print the document.

6. Explain the meaning of the following amounts: a. Basic precision; b. Incremental allowance for sampling error; c. Allowance for sampling risk; and?d. Upper misstatement limit.

7. Evaluate the sampling results. Do they support Derick's concerns regarding possible material misstatement? Note the audit adjustment based on misstatements discovered while examining the sample. Is this adjustment adequate to bring the population into acceptable bounds? If not, what alternate actions might you choose to pursue, based on the sampling results?

Module XV: Audit Report

The Denise Vaughan audit team completed its audit field work on February 15, 2010. A conference was held on that date involving members of the audit firm and Biltrite management. Participants in the conference were Denise Vaughan, partner in charge of the Biltrite engagement; Carolyn Volmar, audit manager; Richard Derick, in-charge auditor; Trevor Lawton, Biltrite's CEO; Gerald Groth, Biltrite's controller; and Marlene McAfee, Biltrite's treasurer. The Biltrite representatives agreed to all of the audit adjustments and reclassifications proposed by the audit team, and they agreed to reflect them in the December 31, 2009, financial statements. They also agreed to modify and/or add footnote disclosures as recommended by the audit team.

At the conclusion of the conference, the audit team obtained a client representation letter from Biltrite management and presented management with a copy of the "significant deficiencies" letter outlining discovered internal control deficiencies. The original of this letter was sent to Biltrite's audit committee.

The legal action initiated against Biltrite by Rollfast, a competitor, for alleged patent infringement, was not yet settled as of February 15. Because the letter obtained by Derick from Biltrite's outside legal counsel was inconclusive as to the probable outcome of this action, Derick requested an informal conference with the attorney handling Biltrite's case. This conference was convened on February 12, and the participants were Joel Haskins, the attorney, Gerald Groth, Denise Vaughan, and Richard Derick.

Haskins exhibited a degree of pessimism that produced considerable uncertainty as to the probable outcome of the litigation. Inasmuch as the amount of loss could be quite substantial, and the probability of an unfavorable outcome was more than remote but less than likely, Groth agreed to disclose the matter in a footnote to the 2009 financial statements.

Notwithstanding the liquidity problems and loan default, Biltrite has been assured by Bank Two management that the bank plans no foreclosure action, provided Biltrite can restore the minimum required bank balance and continues to earn profits. Moreover, management's expressed plans for dealing with the crisis and continued sales growth during January 2010 have convinced Denise Vaughan that an explanatory paragraph expressing substantial doubt as to continued existence is not necessary.

No scope restrictions were encountered during the audit, either imposed or otherwise. Also assume that Biltrite did not change accounting principles in either 2008 or 2009.

Requirements

1. Using the spreadsheet program and downloaded data, retrieve the file labeled "Report."

2. Modify the report as appropriate to conform to the Biltrite audit results.

Attachment:- Assignment Files.rar