01 Jul Auditing schedule

Question Description
Part 1 – 300 words

Prepare an unadjusted misstatement audit schedule with a comment on your judgment of the audit findings based on the following audit results for Bovar. Bovar has the following misstatements (any amount more than 5% of current assets, total assets, and income before taxes):

Understated allowance for uncollectible accounts: $95,000 estimated based on analytical procedures
Accounts receivable or sales cutoff misstatements: $60,000 estimated population misstatements based on the sample, including sampling error ($60,000 accounts receivables or sales were not included in the cutoff reporting period.)
Difference between physical inventory and book figures: $120,000 actual population misstatements. (The physical inventory is higher than the book figures by $120,000.)
Unrecorded liabilities: $285,000 estimated population misstatements based on the sample, including sampling error
Repairs or expense items that should have been capitalized: $90,000 estimated based on analytical procedures
part 2 – 1 page

The general manager at the Overall Manufacturing Company has submitted the following information for a specific line of heat exchangers with the recommendation to discontinue the round style heat exchanger because of its continued net operating income losses.

Overall Manufacturing Company

Heat Exchangers

Total

Round

Rectangular

Octagonal

Sales

$1,000,000

$140,000

$500,000

$360,000

Less variable expenses

$410,000

$60,000

$200,000

$150,000

Contribution margin

$590,000

$80,000

$300,000

$210,000

Less fixed expenses:

Advertising

$216,000

$41,000

$110,000

$65,000

Depreciation

$95,000

$20,000

$40,000

$35,000

Line supervisors’ salaries

$19,000

$6,000

$7,000

$6,000

General factory overhead*

$200,000

$28,000

$100,000

$72,000

Total fixed expenses

$530,000

$95,000

$257,000

$178,000

Net operating income (loss)

$60,000

$(15,000)

$43,000

$32,000

*A common fixed cost that is allocated on the basis of sales dollars

Analyze the above information to determine if the round heat exchanger should be discontinued. The special equipment that is used to produce the round heat exchanger has no resale value. If the round heat exchanger is discontinued, the two line supervisors who are assigned to the model would be discharged. Overall Manufacturing Company has no other use for the capacity that is now being used to produce the round heat exchanger.

Include the following in your analysis:

Should the production and sale of the round heat exchanger be discontinued? Show your analysis to support your answer.
How might this same information be presented to make it more useful to management in assessing the long-run profitability of its various product lines?
What policy change would you recommend to management?