Part 1

Imagine that you are the manager of the general accounting section of the finance department. Your team prepares the stockholders’ equity section of the balance sheet, along with long-term liabilities and receivables. You are in the process of closing the books for the period ending December 31, 2010.

Your staff accountant was calculating the interest expense for a note payable that had the following terms: amount of $40,000, interest rate of 10% with a term of 5 years, and interest paid semiannually to the bank. The staff accountant calculated interest expense to be $7,500 as of December 31, 2010. Unfortunately, the senior accountant did not catch it before it came to you.

Using PCOAB Standard 5 as a reference, recommend some steps that should be implemented to ensure the error is detected before it comes to you for posting to the general ledger.

Part 2

You reviewed the notes to the financial statements and noted that none of the information related to the bonds payable was listed.

Using PCAOB Standard 5 and APB 26 as references, what would you tell the accounting manager about the adequacy of the disclosure of long-term liabilities? Justify your position.
As the auditor, what process would you suggest that the accounting manager implement to improve the accuracy of the financial statements?