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Sammy Smith is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory. Smith is reviewing the audit documentation that was prepared to support the firmâ€™s opinion on Blueâ€™s financial statements and wants to be certain that essential audit procedures are well documented. Referencing this weekâ€™s lecture, respond to the following:
- What evidence should Smith expect to find indicating that the observation of the clientâ€™s physical count of inventory was well planned and that assistants were properly supervised?
- What substantive procedures should Smith find in the audit documentation of managementâ€™s balance assertions about existence and completeness of inventory quantities at the end of the year? Refer to Appendix 9B for the audit planâ€™s procedures
Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, Nebraska. The railroad operator is the owner of the cityâ€™s largest building, the Union Pacific Center. Under an initial operating lease, Union Pacific guaranteed 89.9 percent of all construction costs through the buildingâ€™s completion date. After completing the building, the company signed a new operating lease, which guarantees 85 percent of the buildingâ€™s cost. Both were â€œsynthetic â€œ leases, which allows the company to take income tax deductions for interest and depreciation while maintaining complete operational control (Weil, 2004).
- Explain why Union Pacific would want to structure the lease to be an operating lease.
- What audit evidence would you require for testing the appropriate accounting for this lease?