The Jones Company, located in Chicago, has been your client for many years.

I really need someone to explain this assignment to me.  See attached.

18-1 (Substantive test of investment balances) The Jones Company, located in Chicago, has been your client for many years.  The company manufactures light machinery and has a calendar year closing.  At December 31, 20x1, and 20x2, the following items appeared in the accounts applicable to investment securities.  Investments in securities represent approximately 8 percent of total assets.  Income from securities represents approximately 3 percent of income before federal income tax.

Balance Sheet Accounts                             20x0     20x1

U.S. gov certificates of indebtedness, 3%     $300,000          $300,000
Series D dated May 15, 20x0, due May
15,20X2 at cost.

Available-for-sale equity securities (at fair value):
      50 shares of AP Company                         5,800               5,000
      100 shares of UC Corp.                              -----                8,000
        75 shares of IC Corp                              12,000                -----
Investment in a 60% owned subsidiary-SUB,
Inc.                                                               50,000            50,000
Unrealized gain (loss) on available-for-sale
Securities (equity account)                                1,450            (1,075)
Accrued interest receivable                                1,125            1,125

Income Statement Accounts

Interest income                                               9,000           9,000
Gain (loss) on sale of securities                        (-2,000)      3,000
Dividend income                                              13,000       14,000


The U.S. Government securities shown above are held at the Utah Banking Company.  The AP Company securities are held in the Jones Company's safe, and the UC Corporation securities are in the safety deposit box at the Chicago Bank Company, which is the company's bank.  Access to the company's safe is limited to the treasurer or his assistant.  Access to the safety deposit box is limited to any two of the treasurer, the assistant treasurer, or the controller.  The securities of SUB, Inc. are also held by the Chicago Bank Company as collateral for a loan that the Jones Company has outstanding.  Sub, Inc. has a June 30 closing and is audited by your firm.
Your tests of internal control indicate unusual strengths in the areas of cash receipts and cash disbursements.  The treasurer is responsible for the physical control of securities, whereas the controller is responsible for the assistant controller maintains an investment ledger that shows the name of each investment, the number of shares held or the face value of bonds, the date of purchase and sale, if applicable, the cost, the physical location of securities, and the income thereon.  This person prepares monthly statements of securities on hand showing their description and cost.  All purchases and sales of securities are authorized by the company's finance examination of securities at December 31, 20x1.

1. U.S. Government Securities
a. Prepare a schedule of the securities at December 31, 20x1
b. Obtain direct confirmation from the Utah Banking Company as to description and amount of securities held.
c. Trace the confirmation to the schedule and so indicate
d. Verify the interest earned for the year and accrued interest received at December 31, 20x1
e. Trace the appropriate totals to the general ledger accounts


2. Available-for-Sale Securities
a. Prepare an analysis of the securities account for the year under audit, including the market value of the securities at December 31, 20x1
b. Count AP Company securities at the company's office at the close of business on December 31, 20x1.  Inspection of the securities should be in the presence of client's representative.  Note the time of count, name of client's representative, and name of the auditor on the count sheet.  Accompanied by the client's representative, inspect the UC Corporation securities at the Chicago Bank Company. Inspection should be completed at the close of business on December 31, 20x1.  The same information should be shown on this count sheet as is indicated to be appropriate for the count sheet mentioned above.  The count sheets should show the number of shares, the full name of security, and the type of security (preferred on common shares).  
c. Vouch purchases and sales by reference to brokers' advices. Compare authorizations of the finance committee to the schedule
d. Compare dividends received for the year with a published dividend record.
e. Trace the appropriate totals on the schedule to the general ledger accounts.
3. Investment in 60% Owned Subsidiary - SUB, Inc.

a. Request the Chicago Bank Company to confirm that it holds the securities for SUB, Inc. as collateral for a loan.  The amount payable to the bank may be confirmed concurrently.
b. Review the monthly statements of SUB, Inc. since your last examination and compare them with the audited statements as June 30.  Obtain and explanation of all unusual transactions and fluctuations.
c. Discuss the December 31, 20x1, financial statements with the management of the company.  Inquire as to material amounts not recorded.
d. Establish that the intercompany accounts are in agreement at December 31.
e. Record the company's equity in the assets and net income of SUB, Inc., at December 31, 20x1.


Assignment:

1. List the substantive test that you believe are appropriate and identify the assertions to which each test relates
2. List the substantive tests that you believe are inappropriate and give the reasons for your conclusion.

Attached file(s):

WEEK 3 TEAM ASSIGNMENT.doc  View File