As a recently appointed auditor for Gibbs Manufacturing Co., the Manager of the audit, asked you to examine selected accounts before issue the financial statement of 12/31/10, to be audited. Gibbs Manufacturing Co. was incorporated on 1/2/10 but was unable to begin manufacturing activities until 8/1/10 because new factory facilities were not completed until that date. The Land and Building accounts at 12/31/14 per books was as follows:
Date Item Amount
1/31/10 Land and dilapidated building $200,000
2/28/10 Cost of removing building 4,000
4/1/10 Legal fees 6,000
5/1/10 Fire insurance premium payment 5,400
5/1/10 Special tax assessment for streets 4,500
5/1/10 Partial payment of new building construction 170,000
8/1/10 Final payment on building construction 170,000
8/1/10 General expenses 30,000
12/31/10 Asset write-up 75,000
Total$624,900
Additional information:
1. To acquire the land and building on 1/31/10, the company paid $100,000 cash and 1,000 shares of its common stock (par value = $100/share) which is very actively traded and had a market value per share of $140.
2. When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but also received $1,500 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization $2,500
Examination of title covering purchase of land 2,000
Legal work in connection with the building construction 1,500
Total $6,000
4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2010.
5. General expenses covered the following for the period 1/2/10 to 8/1/10.
President's salary $20,000
Plant superintendent covering supervision of new building 10,000
Total $30,000
6. Because of the rising land costs, the president was sure that the land was worth at least $75,000 more than what it cost the company.
7. The straight method is used to depreciation fixed assets. The useful life of building is 40 years, with residual value of $20,000.
Based on the preliminary review, the manager lists the issues to be solved before the meeting with the management of Gibbs Manufacturing:
1. Prepare a brief explanation of each management assertion related to misstatement for the period under audit.
2. Determine the proper balances as of 12/31/10, and prepare an analysis and present recommendation for each of the situations above.
3. Prepare a draft of the correct presentation in the financial statements as of 12/31/10.
4. Mention the audit objectives that are directly related with the management assertions that are affected.