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Question 1

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 firm’s opinion on Blue’s financial statements and wants to be certain that essential audit procedures are well documented. Referencing this week’s lecture, respond to the following:

  • What evidence should Smith expect to find indicating that the observation of the client’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 management’s balance assertions about existence and completeness of inventory quantities at the end of the year? Refer to Appendix 9B for the audit plan’s procedures

Question 2

Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, Nebraska. The railroad operator is the owner of the city’s largest building, the Union Pacific Center. Under an initial operating lease, Union Pacific guaranteed 89.9 percent of all construction costs through the building’s completion date. After completing the building, the company signed a new operating lease, which guarantees 85 percent of the building’s cost. Both were “synthetic “ 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?

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