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Trolley Dodgers Case

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The Trolley Dodgers

1) It is the auditor’s objective to determine if management’s assertions are materially complete, valid and accurate. Auditors have various procedures and testing to achieve their objectives. The test of controls is used to determine the reliability of the financial statements by identifying the existence of internal controls, so it is important to understand how inaccuracies within the payroll system would affect accounts on the balance sheet and income statement. Wages are recorded as an expense on the income statement, so they reduce net income. In this Trolley Dodgers case, wages were being fraudulently inflated, so the affect would be understatement of net income on the income statement. Wages are also an accrued expense that require an adjusting entry; the wage amount would be recorded as a current liability on the balance sheet and an accrued expense on the income statement. Again, if wages are being fraudulently inflated, the current liabilities on the balance sheet would also be inflated and the overall result is a misrepresentation of the client’s performance on the financial statements. If it has been determined that the internal controls are ineffective, substantive testing is then necessary to verify accuracy of the dollar amounts. This is a more in-depth and analytical testing to verify the figures the client has provided. Auditors must test management’s assertions about account balances as they are reflected on the balance sheet. When testing account balances, auditors are testing management’s assertions of existence, rights and obligations, valuation and allocation, and presentation and disclosure. The completeness assertion says that all transactions are reported in the correct period in accordance with the matching principle. A substantive test for this might involve doing an analytical procedure to calculate a reasonable…...

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