 Hello and welcome to this session in which we would look at this CPA exam simulation and specifically deals with auditing and attestation topics. How would you approach a simulation? That's the first thing you need to know. The first thing you do is you browse the simulation. Just browse it. Just look something like this. Just go over it. And this looks like a document review. What does that mean? Well, we have many types of simulation, specifically five. Either it's a document review, journal entries, drop-down menu, or you have to compute a figure. This is one of those document review. So I know the type. The second thing you want to know is the topic of the simulation. Now, for the document review, you may not have a specific topic because document reviews, in my opinion, are the most intimidating for students, but they are the easiest. I'm gonna explain why. No one can teach you document review, not your college courses, not your CPA review courses. So document review is basically confirming information. I'm gonna show you what I mean in a moment because if you listen to my lectures, if you listen to my lessons, I always say a simulation is no more than a multiple choice framed differently. Well, I'm sorry, I'm gonna have to disagree with myself when it comes to document review. Most document review are easier than a multiple choice. So I cannot turn a document review into a multiple choice. All what you need with a document review question is basic understanding of what you are being asked, not to panic, not to panic, and just know where to look for the information. And I'm gonna illustrate in this document review how, I'm sorry to say this, how simple this is as long as you have basic knowledge because no one, not even your college courses, the only people that know how to solve this real quick are people who are working in auditing. So if you're a CPA staff and you are faced with a document review like this one and mostly most of them, they try to mimic the real world, then you'll say this is easy. Without any delays, let's go ahead and start to solve this simulation. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's gonna help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today. So we have a CPA firm that's preparing year six audit of Hiver Company, a calendar year. An audit staff member used the year five audit request list for this company as the basis for drafting year six request list. And this is usually what you do in an audit. You look at the prior year and you just basically start with the prior year. Additional client information was obtained during the audit planning meeting with the client. So we also gathered additional information. As the audit senior for this engagement, it's your responsibility to review and revise the year six request list as needed. Use the additional client information in the exhibits above to revise the draft request list, correcting any errors and removing any appropriate or unnecessary items given the overall context and purpose of the list. Ensure that the year six list is appropriate given the information provided. What happened is this? A staff prepared this list. This is what we need for the audit from the client. For example, we need a final trial balance to start the work, of course. Also, we need a bank reconciliation for March, September and December year six. Bank statement for December year six and January seven. Those you don't have to do anything about those. Those are 100% correct. You are doing an audit, you need the bank reconciliation, you need a trial balance, you need property, plant and equipment, roll forward, we have this. Then we have this document here, Edgewater Industrial Estate Lease Agreement. Well, is this a correct one? Should we request this or request something else? Furniture and fixture purchase documentation? Do we need to request this or request something else? So basically what the staff member did from a practical perspective, they took the old list and they just basically changed the years. This is what I used to do at least when I was a staff accountant. And this is usually what you do. Just kind of get it done, look at the digital information, give it to the senior accountant and let them review it. And this is what we need to do. So we're starting here, Edgewater Industrial Estate Lease Agreement. Here we have to do something about this. Now we can look at the exhibit. Now, because you don't wanna start to look at the exhibits before, I would say the policy is don't look at the exhibit unless it's needed, like don't waste your time, like don't browse them, that's my strategy. You might disagree, but that's my strategy. Here I would say, okay, I'm looking to see Edgewater Industrial Estate Lease Agreement. Now, if I look here, I don't have anything about a lease agreement. So if I have an exhibit says lease agreement with this company, I would say great, I would look at the lease agreement. I don't. So I don't know, where would I look? I might start to look in, for example, minutes of special meeting. Let's look in minutes of special meeting. Well, the agenda is loan to shareholder. That's it. Well, the minutes are not helpful for me. That's it, close it. But I know the minutes, if there's any loan issue, I'm gonna go to the minutes, but I already eliminated this exhibit for this purpose. Email from CFO. Email from CFO, controller. We have agreed on the terms of the purchase of our office in Edgewater Industrial Estate with a closing date of December 31st, year six. The agreed purchase price is 2,287,525. Kaboom, I'm done. I'm done. They purchased this building. They purchased this office building. So what does that mean? Well, here it says, Edgewater Industrial Estate Lease Agreement. It's not a lease agreement. And if you look at the options, it tells you, you have the option of industrial, Edgewater Industrial Estate Purchase Contract. So there is no way I can give you this. I can frame this question into a multiple choice. This is very simple concept to know this was not a lease agreement. There was not a lease agreement. It's a purchase contract. And I'm done. I just answered one question. And basically this exhibit, I no longer have to open this exhibit because it was all about. Let me just go back here. That's it. This exhibit is all about unless there is something about the price, which is, I don't know, but basically it's done. I would say it's done. The second issue is furniture and fixture purchase documentation. Now I know it's not in the minutes of special meeting because it was about loan to shareholder. It was not in the email for the CFO. The only thing that's left for me is competitive trial balance. So I'm gonna look at the competitive trial balance. Let me just make it a little smaller. Maybe you can see everything that I'm asking you to see. So 1605, I said the account is 1650. Year five, year six and year five are the same. Year six and year five are the same. And what the staff is saying, the staff when the staff prepared the document, the staff says, I need the documentation of purchases. Well, I'll tell you what the staff did. The staff copy and pasted the year five list. If you look at year, I'm sorry, year four and year five. Year five and year six, we did not purchase. How did I know this from the competitive trial balance? And this is where your analytical procedures, this is where your analytical procedures, I'm gonna just kind of go on a tangent here, will work for you. This is where you put that hat on. What does that mean? It means a furniture and fixture are the same. I would say your depreciation expense for furniture and fixture, so when they are using straight line should be the same. So just like the two things are related. So what does that mean? It means this document is not needed because they did not buy any furniture and fixture. Why? How do I know this? From the trial balance, there is no new furniture and fixture. Done. All what you have to do is know how to read the trial balance and know there was no changes, therefore no purchase. And as a result, you delete this document. We don't ask them. If we ask the client, gives us your documentation, they're gonna think, what are they talking about? Did they really look at my information? That's really bad, right? That's why a senior accountant would review this or a manager before we give it to the client. New motor vehicle purchase agreement. Again, here we already know that the only place that we have for this is the trial balance. So we're gonna go to the trial balance and what do we do? I'm gonna ask, what do you do? You're gonna go and look at the vehicle account or the car vehicle account, which is right here, account number 1700. Account number 1700 vehicles. Year five, we had a balance. In year five, we had a balance of 36,500. In year six, we have a balance of zero. Hold on a second, let me go back here. What did the staff do? The staff is asking for what? The staff is asking for, let me scroll down. The staff is asking for a purchase. There was no purchase. If we scroll down, there was no purchase because the vehicle account would have increased if there was a purchase. What are the other options? If there was not a purchase, documentation supporting the sale of the motor vehicle. Okay, possible. Documentation supporting the scrapping of a motor vehicle asset and new motor vehicle lease agreement. We know there's no lease agreement. We know if it's not purchased, there's no lease agreement. So what would I say? I would say the best option will be here is the sale. We sold it. We sold it, okay? Because if we had scraping, we should have more information. In the absence of anything, I would say documentation for the sale. Now scraping too, but scraping, did we get anything for it? That's the question. But if I have to choose between the two, I will choose the sale, okay? Because the vehicle account went to zero, okay? So what else do we have to see if there is a sale? Let's think about it. Again, from a analytical procedures. If you sell something, when we sell something, what else do we have to look for? We have to look for gain or loss. So before we make our final decision, how about, I'm gonna select this, how about we say, okay, let's go and see if there's a gain or a loss. If we sold it, okay, on the trial balance, we should have an account of a gain or a loss. So let's go to the gain and losses and see if we have a gain or a loss. And look at here. Gain on sale of a motor vehicle. We sold it, okay? Gain on sale. And we had a, that's great. We sold the vehicle and we made a gain. That's unusual, 8,925. We sold it more than the book value. So I confirmed to myself, it's a gain. Again, I was stuck between the two, scraping or sale, but I would say if I'm thinking about sale, I should have a gain or a loss, okay? So we're gonna scroll down. Let me close the trial balance. It's in our way. Let's scroll down further and look at documentation supporting issuance of 50,000 shares at 30 cent per share. At 30 cent per share, okay? So what are the other options? 30 cent per share issuing 150,000 shares. Okay, so before I go to the trial balance, which account am I gonna be looking at? Well, I'm gonna be looking at the common stock. See if that is correct. Look at my common stock account. Hopefully you know this. I'm gonna go to my trial balance and look at my common stock and additional paid in capital because there is an additional paid in capital with common stock. So let's take a look at the common stock account and analyze that account. Common stock, it's the account number 3000 and 3001. The par value was 10 cent, common stock. Oops, let me go back here. Increase the size again so you guys can see it. It's funny when I have to increase the size, I have to make it smaller so you guys can see everything, but okay, I'm gonna make it a little smaller so we can see year five and year six. So year five, so indeed we issued shares, went from 10,000 to 15,000. So we issued, definitely we issued shares. And the additional paid in capital, the additional paid in capital, which is the account number 3,100, also went from, it's so hard to click on these arrows. I hope it's not that hard on the exam day. It went from 100,000 to 110,000, okay? So how do we translate this? So now you know you issued shares. Did you issue 50,000 or did you issue 150,000 because you have many options, okay? Let's go with the first. First you wanna check the first document. Maybe the first, not the first document, the first statement to see if it is correct. So the common stock was increased by five, the other one was increased by 15, the additional paid in capital. How would you approach this exercise? How would you approach this issue? Okay, let's, let me close this again. Close, close, okay. So here's what I would do. I would say, okay, if I issued shares, so I would write on a piece of paper, if I issued 50,000 shares at 30 cent per share because we issued at 30 cent per share, how much would I get in return? If I issued 50,000 shares at 30 cent, I will get 15,000. Indeed my common stock, common stock and paid in capital in total were increased by 15,000. So this looks like a reasonable number, but I'm not, I will not be satisfied. I need to do a little bit more of work of basic accounting. If my par value is 10 cent, if my par value is 10 cent, 50,000 share times 10 cent, it should be 5,000. My common stock should increase by 5,000 and the remaining which is 20 cent should increase by 10,000, which is 50,000 times the remaining additional paid in capital and access of par which is 20 cent, that's 10,000. And voila, I'm done with this. Actually, I don't have to even look at the other options. I am confident knowing how to basically journalize basic common stock entries you can answer this question. And I would say the original information is correct. I mean, this is like basic accounting 101. Again, I'm not trying to make it look easy and like kind of discourage you from like, why am I getting this wrong? I'm trying to make it look easy to tell you if you know your basics, if you have confidence in your basic knowledge, those documents are not as difficult. This is my point, this is my point. And again, my point is far hat lectures can get you there. That's the other point I'm trying to make. Management review of third party loan interest rate. Management review of third party. And what other options do we have? We have copy of the loan agreement with Jay Hiver, copy of the loan agreement with M Moore, evidence of approval by D Chen, by the loan. Management due diligence work related to providing the loans. So we're looking for some sort of a document, okay? Management review of third party loan interest rate. Well, the interest rate will not be in the trial balance. We looked at the email. The email has to do with that industrial building that we purchased. So we have to look at the minutes of special meeting because we said there was something to do with loans when we looked at it originally. So here's what happened. The special meeting of the board of directors has been called for the purpose of proving a new loan to shareholder. So we approve a loan to shareholder. Management routinely provided loans to shareholder when requested in prior period. There's a current loan balance to M Moore. The outstanding balance will be 25,000 by December 31st, year six. The loan will be repaid and followed by six months later. Well, by July 31st, year seven. Okay, that's more. Jay Hover made a request to management for a loan. So this is another person, you know, Jay Hover or Hiver, I say, called him Hover. The monthly loan repayment will commence on January 1st over a period of 20 years. Payment will be equal, installment of 12,000. The loan will be interest-free. Motion, the loan to Hiver be approved as circulated and distributed. The loan was approved. Okay, so what loan agreement am I looking for here? Like, am I looking for not present was the Chen? Okay, so let's go back and see what I can eliminate from these options. What can I eliminate? Copy of the loan agreement, no. This loan was already approved by M. Moore. We don't need a copy of the loan agreement. The copy of the loan agreement would have been requested when the loan was originally made. Evidence of approval by the Chen, no way. The Chen, look, the Chen was not even present in the meeting, not present the Chen. So this is like, again, it's so hard to make this as a multiple choice. Evidence approval by the Chen. Now he was in there, management due diligence work related to providing the loan. There's no due diligence work, most likely Haver is a related party and a brother, sister, someone to the owners. So the only thing I can think of is copy of the loan agreement. That's all what they did. They made the loan to J. Haver and we're just looking for a copy. The loan to J. Haver to be approved and we'll come for the copy of the loan agreement because here they're telling us what the loan agreement, here they're telling us the agreement. Just give us a copy of the agreement. This is the minute, summarizing that. And it's interest-free. There's no interest involved. The loan will be interest-free. So even if you select this one, you're like, there's no interest, what should I select that one? So that's that. Let's go back to see what else do we have left. So prepaid expense analysis, accrued expense analysis, everything is correct. We'll get to account number 6900 expense analysis. We are asking for this account. Now let's go to... So we have to go back to the trial balance here because this is where the expense 6900. Comparative trial balance 6900. Let's look at that. Let's look at that account. And let's see. Should be toward the bottom. It's an expense 6900. Sundry expense went from 940, went from... And again, here you have to rely on your analytical procedures. This is where analytical procedure will become a critical component of your understanding. So went from 940 to 890. For one thing, this account is less than 1,000. It's a small account and there is no change in this account. So I'm suspecting this is not an important account. But so if I'm not keeping this, what other options do I have? Account or should I ask for account 6806? Let's look at 6806. 6806, payroll processing fees, 2,400, 2,400. There's nothing unusual and this is very normal. If you have a payroll company that's processing your payroll and they're charging you a fee, most likely it's gonna be the same from year to year. There's not... That's fine, just give me the document that support this. So I have it, but it doesn't look like there's any changes. That would not be an important account neither. Because they're giving us option, we're gonna look. Who knows, we might go back to that account. Account number 7115, postage. Postage expense went from $590 to 670. Again, it's a small account, but I don't know. It could be an important account, but I don't think so. Account number 7500, account number 7500, repayment maintenance went from 14,500 to 137. I would say I want the information about this account. So of all these accounts, basically what they're asking you, which account you will ask for more information? Now, maybe last year account, maybe the reason the staff accountant kept it 6,900 because between year four and year five, maybe there was a major change in that account. And that's why the staff kept it. But this year, they should not ask for this. They should ask for repair and maintenance. I would ask for repair and maintenance. I would also ask for utilities. Look, there was a 20 decrease in utilities, but it's not an option here. I'm just telling you, why did I chose that account? I would also, and back into expense, that's easy. I would also ask for a bad debt expense. It's not here, but it was like, wow, our bad debt expense went from 12,750 to 385. I was like, give me all the information that you have to confirm this. But here, the account number is 7500. It's not obvious. It's obvious once you read it, once you look at the other options and say, okay, this is what it is. Now, let's go back and just review real quick. Summarize what we did here, kind of just to keep track of things. Once again, I'm not trying to say this is easy under exam conditions. All what I'm trying to do is to tell you not to panic. If you don't panic, if you understand your basics, you'll be fine. Let's go back real quick. Here, all that we have to do, it's a purchase contract, not a lease agreement. Here, all we have to do is know that the furniture and fixture account did not change from year to year. Therefore, there was no purchase. Here, we had to know that they sold a car, not purchase a car, and how did we know they sold the car? The account from 36 to zero. It could have been scraped, but we look at the gain on the losses. There was a gain, therefore, we sold the car. The documentation for supporting the issuance of 50,000 shares, yes. At 30 cents per share, we were able to confirm this. That's exactly what happened, and we need to support and documentation. Copy of the loan agreement with Jay Hiver was in the minutes. And the expense account analysis, I already showed you how to do this. All what I'm gonna tell you once again, have confidence, invest in yourself, rely on four-hat lectures. I can help you understand the basics, have a strong knowledge. You'll be on the exam ready to go. Good luck, stay safe.