1 The Company relies on the its auditor to calculate its provision for depreciation. Using the straight-line method, depreciation on assets that existed as of the end of the prior year was $7 , 553 . 2 The Company book-keeper does not understand all the rules of accrual-basis accounting. As such, she books fixed asset additions to office supply expense. A review of the general ledger detail revealed the following items. The Company's capitalization policy\# is $1 , 000 and it uses the straight-lined method half-year convention+ for recording depreciation. \# A capitalization policy dictates a threshold for which purchases of long-term assets are recorded as PP\&E and depreciated. Amounts below the threshold are expensed as incurred, even if they have a long-term useful life. + Half-year convention means that 1/2 of a full year's worth of depreciation is taken in the year the asset is placed in service, regardless of the in-service date. 3 Another error that the book-keeper always makes is to record pre-payments of insurance directly to expense. On November 1 , the Company booked the payment of its annual liability insurance premium in the amount of $12 , 000 . (Hint: Determine the portion of this payment that should be a prepaid). 4 The Company received a $5 , 000 deposit of grant proceeds that was originally recorded as a debit to cash and credit to grant revenue on December 15. This grant will assist the Organization in providing charity-care in the subsequent year. (Hint. this receipt is unearned as of 12/31 ) 5 To test the completeness of accounts payable recorded by the client, the auditor reviewed a listing of checks written subsequent to 12/31 in excess of SI of $3 , 000 . None of these amounts have been accrued and were recorded as expenses when paid. (Hint In vour A.JE. accrue onlv those items that meet the criteria for expense recoanition) * ISI = Individual Significant Items. Auditors calculate a threshold for materiality purposes when searching for errors that may need adjusting. Amounts > ISI that are discovered to be in error require adjustment; the conclusion on amounts T\&E is a common abbreviation for "Travel \& Entertainment" expense, almost always considered a high-risk area for auditors b/c it is subject to abuse by management. It is in this account that we can often use to quantify "agency problems". .

1. 1 The Company relies on the its auditor to calculate its provision for depreciation. Using the
straight-line method, depreciation on assets that existed as of the end of the prior year was $7 ,
553 . 2 The Company book-keeper does not understand all the rules of accrual-basis accounting.
As such, she books fixed asset additions to office supply expense. A review of the general ledger
detail revealed the following items. The Company's capitalization policy# is $1 , 000 and it uses
the straight-lined method half-year convention+ for recording depreciation. # A capitalization
policy dictates a threshold for which purchases of long-term assets are recorded as PP&E and
depreciated. Amounts below the threshold are expensed as incurred, even if they have a long-
term useful life. + Half-year convention means that 1/2 of a full year's worth of depreciation is
taken in the year the asset is placed in service, regardless of the in-service date. 3 Another error
that the book-keeper always makes is to record pre-payments of insurance directly to expense.
On November 1 , the Company booked the payment of its annual liability insurance premium in
the amount of $12 , 000 . (Hint: Determine the portion of this payment that should be a prepaid).
4 The Company received a $5 , 000 deposit of grant proceeds that was originally recorded as a
debit to cash and credit to grant revenue on December 15. This grant will assist the Organization
in providing charity-care in the subsequent year. (Hint. this receipt is unearned as of 12/31 ) 5 To
test the completeness of accounts payable recorded by the client, the auditor reviewed a listing of
checks written subsequent to 12/31 in excess of SI of $3 , 000 . None of these amounts have been
accrued and were recorded as expenses when paid. (Hint In vour A.JE. accrue onlv those items
that meet the criteria for expense recoanition) * ISI = Individual Significant Items. Auditors
calculate a threshold for materiality purposes when searching for errors that may need adjusting.
Amounts > ISI that are discovered to be in error require adjustment; the conclusion on amounts
T&E is a common abbreviation for "Travel & Entertainment" expense, almost always
considered a high-risk area for auditors b/c it is subject to abuse by management. It is in this
account that we can often use to quantify "agency problems".