Chapter 9 Materiality and Risk - HCC Learning Web

9-36 (continued)increased by only 16.1 percent. This could indicate that depreciationon the new assets was not recorded, but may not, depending ondates of acquisition and depreciation method used. Depreciationmust be tested considering these facts as determined.Goodwill Goodwill also increased significantly, by $855,000. Thisimplies that the Company made an acquisition during the year. Thiscould explain the increase in operating assets, and any suchtransaction must be examined in detail as part of the audit. Also,the goodwill from prior transactions must be considered duringeach audit as to its amortization and recoverability.Accounts Payable Accounts payable went down from 2008 to 2009.This doesn't seem reasonable at all given an increase in businessactivity. It is very possible there are unrecorded liabilities at the endof 2009, and this must be an area of major emphasis during theaudit.Bank Loan Payable It seems somewhat strange for the Company tohave an outstanding balance on its bank loan payable at the end of2009 given its excellent operating results. It is possible this was theresult of an acquisition, or they simply haven't paid it off. In anycase, verifying this balance is a relatively easy audit procedure.Federal Income Taxes Payable and Income Tax Expense TheCompany's effective tax rate for 2006 was 34 percent. Income taxexpense is only 22.5 percent of income before taxes. Federalincome taxes payable on the balance sheet is significantly lower at12-31-09 than would be expected based on 2008. These bothindicate that the Company has not made its final tax accrual for2008, and this area will require careful attention during the audit.Common Stock Common stock increased by 25 percent. It ispossible that this occurred in connection with an acquisition (seeGoodwill), or in some other way. The issuance of new shares andsurrounding circumstances will need to be understood and examined.Sales Whenever there is a drastic increase in business activity,there is an increased risk of problems. It is possible that controlswill lapse or not be carefully observed. It is possible thattransactions will not be carefully accounted for. Therefore, in asituation such as Stanton's it is important to understand the natureof the changes that took place and to do a careful review ofcontrols. It will be especially important to thoroughly test cutoffs ifboth sales and purchase transactions.9-16