Auditing Chap. 5

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Trend analysis, common-size financial statements, and ratios are presented for the Brody Corporation in Figure 5.4. Assume that you are auditing Brody's financial statements for the year ended 12/31/X8. You have performed tests of controls over the recording of gross sales and believe that the system is operating effectively and that 7 percent represents an accurate estimate of the increase in gross sales for 20X8 over the amount for 20X7. You should also assume that the financial statements for 20X6 and 20X7 are not misstated. Required

a.|   | Analyze Figure 5.4 and identify any accounts that appear to represent significant variations from what one might expect. For each of the accounts, identify another account that might also be out of line due to the manner in which the double-entry bookkeeping system records transactions.Financial statements produced under the cash basis of accounting cover cash receipts plus receivables within a specified period from the end of the period (complementary period); cash disbursements plus payables within a specified period from the end of the period (complementary period). Some countries that use the cash basis of accounting for their budget operations also produce financial statements under a modified accrual basis (e.g., France, Spain). The modified accrual basis of accounting (sometimes called “expenditure basis”) recognizes transactions and events when they occur, irrespective of when cash is paid or received. However, there is no deferral of costs that will be consumed in future periods. Physical assets that will provide services in the future are “written off” (or “expensed”) in the period acquired. Full accrual and modified accrual accounting therefore have the same accounting framework. The major difference lies in the time between the acquisition of goods and assets and their utilization. Under modified accrual accounting, supplies are considered consumed and assets are written off as soon as they are...
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