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.
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?
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