PRE AUDIT MEMO Harvard Case Solution & Analysis

PRE AUDIT MEMO Case Solution

Findings and their rectification

During the year end there are some observations and inaccuracies noted which are not in accordance with the GAAP framework, which are suggested to the management for rectification:

  1. Petty Cash account for $ 1000, has ineffective record status with receipts rarely tying to the cash box. Further, it contains Office supplies which is a capital expenditure/asset being expensed out of the profit and loss account. Office Supplies according to the GAAP is a capital asset if exceeds certain amount, further details are needed. The report will remain unqualified as this is not material, but this will be discussed in the audit report.
  2. The year-end inventory was not observed by the auditor which provides a threat to completeness, and accuracy for the cut-off for the year. The management is required to provide details, and evidence that the year-end inventory was counted and a representation according to the GAAP. Further, this will be mentioned in the Audit report as notes without changing the opinion.
  3. A purchased Delivery truck worth $ 7000, was expensed rather than capitalized. This is a material misstatement in the financial statements as the profit and assets would be understated for the year. This has to rectified, or the auditor will be forced to provide a “Qualified Opinion” in this aspect.
  4. Account payable invoices and aging schedules are destroyed by the water, thus unavailable for audit. This will create an adverse opinion, if they are material in aspect. Soft copies or other confirmatory evidence has to be taken and provided by the management on the missing records.
  5. The owner’s drawing of $ 50,000 was used for Cash bonuses in the financial statements. This is recorded as an owner’s expense, rather than the cost of expenditure to the organization. This needs to be identified under the GAAP, and has to be correctly treated as this will create a “Qualified Opinion”.

Conclusion

The findings and their rectifications are provided to the management, failure to do so will lead to the audit report being “QUALIFIED” or “ADVERSE”. Timely rectifications are needed to be met as these findings are material and regulatory in nature.........

 

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