ATC 6-5 Business Applications Case Limitations of audit opinion

Internal Control and Accounting for Cash

ATC 6-5 Business Applications Case Limitations of audit opinion

The statement of financial position (balance sheet) of Omni-Pave Company reports assets of $7,800,000. Ellen Martin advises you that a major accounting firm has audited the statements and attested that they were prepared in accordance with generally accepted accounting principles. She tells you that she can buy the total owner’s interest in the business for only $5,400,000 and is seriously considering the opportunity. She says that the auditor’s unqualified opinion validates the $7,800,000 value of the assets. Ellen believes she would be foolish to pass up the opportunity to purchase the assets at a price of only $5,400,000.

Required
a. What part of the accounting equation is Ellen failing to consider?
b. Comment on Ellen’s misconceptions regarding the auditor’s role in providing information that is useful in making investment decisions.

ATC 6-6 Writing Assignment Internal control procedures

Sarah Johnson was a trusted employee of Evergreen Trust Bank. She was involved in everything. She worked as a teller, accounted for the cash at the other teller windows, and recorded many of the transactions in the accounting records. She was so loyal that she never took a day off, even when very sick. She routinely worked late to see that all the day’s work was posted into the accounting records and never took a day’s vacation because they might need her at the bank.

Adam and Jammie, CPAs, were hired to perform an audit, the first complete audit that had been done in several years. Johnson seemed somewhat upset by the upcoming audit, saying that everything had been properly accounted for and that the audit was a needless expense. When Adam and Jammie examined some of the bank’s internal control procedures, the firm discovered problems. In fact, as the audit progressed, it became apparent that a large amount of cash was missing. Numerous adjustments had been made to customer accounts with credit memorandums, and many of the transactions had been posted several days late. In addition, there were numerous cash payments for “office expenses.”

When the audit was complete, it was determined that more than $100,000 of funds was missing or improperly accounted for. All fingers pointed to Johnson. The bank’s president, who was a close friend of Johnson, was bewildered. How could this type of thing happen at this bank?

Required
Prepare a written memo to the bank president, outlining the procedures that should be followed to prevent this type of problem in the future.