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Problem Set 2 A
Appropriateness of Evidence and Related Parties. Johnson & Company, CPAs, audited Guaranteed Savings & Loan Company. M. Johnson had the assignment of evaluating the collectability of real estate loans. Johnson was working on two particular loans: (1) a $4 million loan secured by Smith Street Apartments and (2) a $5.5 million construction loan on Baker Street Apartments now being built. The appraisals performed by Guaranteed Appraisal Partners Inc. showed values in excess of the loan amounts. On inquiry, Bumpus, the S&L vice president for loan acquisition, stated, “I know the Smith Street loan is good because I myself own 40 percent of the partnership that owns the property and is obligated on the loan.”
Johnson then wrote in the audit documentation: (1) the Smith Street loan appears collectible as Bumpus personally attested to knowledge of the collectability as a major owner in the partnership obligated on the loan; (2) the Baker Street loan is assumed to be collectible because it is new and construction is still in progress; and (3) the appraised values all exceed the loan amounts.
Do you perceive any problems with related-party involvement in the evidence used by Johnson? Explain.
Do you perceive any problems with Johnson’s reasoning or the appropriateness of evidence used in that reasoning?
Problem Set 2 B
Analytical Procedures. Kelly Griffin, an audit manager, had begun preliminary analytical procedures of selected statistics related to the Majestic Hotel. Her objective was to obtain an understanding of the hotel’s business in order to draft a preliminary audit plan. She wanted to see whether she could detect any troublesome areas or questionable accounts that could require special audit attention. Unfortunately, Griffin caught the flu and was hospitalized. From her sickbed, she sent you the schedule she had prepared (See the Table image attached) and has asked you to write a memorandum identifying areas of potential misstatements or other matters that the preliminary audit plan should cover.
Write a memorandum describing Majestic’s operating characteristics compared to the industry average insofar as you can tell from the statistics.
Do these analytical procedures identify any areas that could represent potential misstatements in the audit?
Requirements: 600 words