Part 1 Sammy Smith is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory

Part 1

Sammy Smith is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory. Smith is reviewing the audit documentation that was prepared to support the firm’s opinion on Blue’s financial statements and wants to be certain that essential audit procedures are well documented. Referencing this week’s lecture, respond to the following:

• What evidence should Smith expect to find indicating that the observation of the client’s physical count of inventory was well planned and that assistants were properly supervised?
• What substantive procedures should Smith find in the audit documentation of management’s balance assertions about existence and completeness of inventory quantities at the end of the year? Refer to Appendix 9B for the audit plan’s procedures. Part 2
• You have been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 2020. During the year, Broadwall obtained a long-term loan from a local bank pursuant to a financing agreement, which provided the following:
  • The loan is to be secured by the company’s inventory and accounts receivable.
  • The company is to maintain a debt to equity ratio not to exceed 2:1.
  • The company is not to pay dividends without permission from the bank.
  • Monthly installment payments commenced on July 1, 2020.
  • During the year, the company also borrowed, on a short-term basis, substantial amounts just prior to the end of the year-end from the president of the company.
  Referencing this week’s reading, lecture, and other learning activities, address the following questions:
  • How do the financing agreements influence the auditor’s assessment of risk?
  • What audit procedures should you use in evaluating and testing the loan agreements?
  • What sort of disclosures should the company make related to the agreements?