ACCT 101Assignment Question(s): (Marks15)
Q1. Suppose you are an auditor who has been tasked with looking into the internal controls at a company. How can you evaluate the company’s internal controls to see if they are sufficient? (5Marks)
Q2. Why do companies use the allowance method to account for bad debts? Describe the diverse methods used to estimate bad debts in an accounting system. Provide examples for each method. (5Marks)
Q3. Consider that you own a business that purchases equipment for 50,000SR. How would you calculate this asset’s depreciation? Use the different methods to depreciate the equipment.
Note: To calculate depreciation, you must provide the salvage value, useful life, and annual units produced. (5Marks)
Q1. Evaluating a company’s internal controls to determine if they are sufficient can be done by following these steps:
Review the company’s policies and procedures: Look for the presence of documented policies and procedures for key financial processes, such as cash handling, inventory management, and accounts payable. This will give you an idea of the company’s commitment to internal control.
Assess the risk of material misstatement: Identify the key risks that could impact the accuracy and completeness of the company’s financial statements. Consider factors such as the complexity of the business, the size of transactions, and the level of judgment involved in the process.
Test the internal controls: Perform tests to assess the effectiveness of the company’s internal controls. This could include walk-throughs, observations, and substantive testing.
Evaluate the results: Based on your tests, evaluate the results to determine if the internal controls are sufficient to mitigate the risk of material misstatement. Consider the scope and frequency of testing, the results of the tests, and any deficiencies found.
Document the results: Finally, document your findings and any recommendations for improvement.
Q2. Companies use the allowance method to account for bad debts because it provides a more accurate picture of their financial health. Bad debts are a normal part of doing business and can have a significant impact on a company’s financial statements.
There are several methods used to estimate bad debts in an accounting system, including:
Percentage of Sales Method: This method involves estimating the amount of bad debts based on a percentage of the company’s sales. For example, if a company has historically experienced a 2% bad debt rate, they would estimate bad debts for the current period by multiplying 2% by the total sales.
Aging of Receivables Method: This method involves reviewing the accounts receivable and estimating the likelihood of collecting the amounts due based on the length of time the accounts have been outstanding. For example, a company might estimate that it is unlikely to collect on accounts that have been outstanding for more than 90 days.
Historical Loss Method: This method involves estimating bad debts based on the company’s historical experience. For example, if a company has experienced a 2% bad debt rate over the last 5 years, they might estimate bad debts for the current period based on that 2% rate.
Q3. To calculate the depreciation of a business asset, the following information is required: the cost of the asset, the salvage value, the useful life, and the annual units produced.
There are several methods used to depreciate an asset, including:
Straight-line Method: This method involves dividing the cost of the asset less its salvage value by its useful life to determine the annual depreciation amount. For example, if an asset has a cost of 50,000SR, a salvage value of 5,000SR, and a useful life of 10 years, the annual depreciation would be (50,000 – 5,000) / 10 = 4,500SR per year.
Double-declining Balance Method: This method involves multiplying the straight-line rate by two to calculate the depreciation rate, which is then applied to the asset’s net book value each year. The net book value is the cost of the asset less accumulated depreciation. This method results in a higher amount of depreciation in the early years and a lower amount in later years.
Units-of-Production Method: This method involves dividing the cost of the asset less its salvage value by its expected useful life in units of production. For example, if an asset has a cost of 50,000SR,
