The ending general ledger balance of $186,000 in notes payablefor the Sterling Manufacturing Company is made up of 20 notes to eight different payees.The notes vary in duration anywhere from 30 days to 2 years, and in amounts from $1,000to $10,000. In some cases, the notes were issued for cash loans; in other cases, the noteswere issued directly to vendors for the acquisition of inventory or equipment. The use ofrelatively short-term financing is necessary because all existing properties are pledged formortgages. Nevertheless, there is still a serious cash shortage.Record-keeping procedures for notes payable are not good, considering the largenumber of loan transactions. There is no notes payable master file or independentverification of ending balances; however, the notes payable records are maintained by asecretary who does not have access to cash.The audit has been done by the same CPA firm for several years. In the current year,the following procedures were performed to verify notes payable:1. Obtain a list of notes payable from the client, foot the notes payable balances on thelist, and trace the total to the general ledger.2. Examine duplicate copies of notes for all outstanding notes included on the listing.Compare the name of the lender, amount, and due date on the duplicate copy withthe list.3. Obtain a confirmation from lenders for all listed notes payable. The confirmationshould include the due date of the loan, the amount, and interest payable at thebalance sheet date.4. Recompute accrued interest on the list for all notes. The information for determiningthe correct accrued interest is to be obtained from the duplicate copy of the note.Foot the accrued interest amounts and trace the balance to the general ledger.a. What should be the emphasis in the verification of notes payable in this situation?Explain.b. State the purpose of each of the four audit procedures listed.c. Evaluate whether each of the four audit procedures was necessary. Evaluate thesample size for each procedure.d. List other audit procedures that should be performed in the audit of notes payable inthese circumstances.
The ending general ledger balance of $186,000 in notes payable
for the Sterling Manufacturing Company is made up of 20 notes to eight different payees.
The notes vary in duration anywhere from 30 days to 2 years, and in amounts from $1,000
to $10,000. In some cases, the notes were issued for cash loans; in other cases, the notes
were issued directly to vendors for the acquisition of inventory or equipment. The use of
relatively short-term financing is necessary because all existing properties are pledged for
mortgages. Nevertheless, there is still a serious cash shortage.
Record-keeping procedures for notes payable are not good, considering the large
number of loan transactions. There is no notes payable master file or independent
verification of ending balances; however, the notes payable records are maintained by a
secretary who does not have access to cash.
The audit has been done by the same CPA firm for several years. In the current year,
the following procedures were performed to verify notes payable:
1. Obtain a list of notes payable from the client, foot the notes payable balances on the
list, and trace the total to the general ledger.
2. Examine duplicate copies of notes for all outstanding notes included on the listing.
Compare the name of the lender, amount, and due date on the duplicate copy with
the list.
3. Obtain a confirmation from lenders for all listed notes payable. The confirmation
should include the due date of the loan, the amount, and interest payable at the
balance sheet date.
4. Recompute accrued interest on the list for all notes. The information for determining
the correct accrued interest is to be obtained from the duplicate copy of the note.
Foot the accrued interest amounts and trace the balance to the general ledger.
a. What should be the emphasis in the verification of notes payable in this situation?
Explain.
b. State the purpose of each of the four
c. Evaluate whether each of the four audit procedures was necessary. Evaluate the
sample size for each procedure.
d. List other audit procedures that should be performed in the audit of notes payable in
these circumstances.
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