Problem # 4

 

In connection with your examination of the financial statements of Welch Manufacturing Corporation for the year ended December 31, your post balance- sheet substantive procedures disclosed the following items:

 

Required:

 

Assume that the preceding items came to your attention prior to completion of your audit work on February 15. For each item

 

a. Give the substantive procedures, if any, that would have brought the item to your attention. Indicate other sources of information that could have revealed the item.

 

1. January 3. The state government approved a plan for the construction of an express highway. The plan will result in the appropriation of a portion of the land area owned by Welch. Construction will begin late next year. No estimate of the condemnation award is available.

 

2. January 4. Yang Welch (president of Welch Manufacturing Corporation) loaned the company $ 25,000. He obtained these funds on July 15 by borrowing against a personal life insurance policy. The loan from Welch to Welch Manufacturing Corporation was recorded in the account Loan Payable to Officers. Welch’s source of the funds was not disclosed in the company records. The corporation pays the premiums on the life insurance policy, and the president’s wife is the owner and beneficiary of the policy.

 

3. January 7. The mineral content of a shipment of ore in transit on December 31 was determined to be 72 percent. The shipment was recorded at year- end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $ 20,600. The final liability to the vendor is based on the actual mineral content of the shipment.

 

4. January 15. A series of personal disagreements have arisen between Welch and Zane Tweedy, his brother- in- law, the treasurer. Tweedy resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31. Payment is to be made in two equal amounts in cash on April 1 and October 1. In December, the treasurer had obtained a divorce from Welch’s sister.