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Analytical Procedures and Interest Expense

a. The audit estimate of interest expense for these notes is about $24,400.

Notes Payable BalancesAuditors Interest Calculation

Date Balance Rate Time InterestJan 1 $150,000 10.0% 1 month 1 $1,250Feb 1 $200,000 10.0% 2 months 2 $3,334Apr 1 $225,000 10.0% 1 month 1 $1,875May 1 $285,000 10.0% 1 month 1 $2,375Jun 1 $375,000 10.0% 1 month 1 $3,125Jul 1 $375,000 9.5% 1 month 1 $2,969Aug 1 $430,000 9.5% 1 month 1 $3,404

Sep 1 $290,000 9.5% 1 month 1 $2,296Oct 1 $210,000 9.5% 1 month 1 $1,663Nov 1 $172,000 9.5% 1 month 1 $1,362Dec 1 $95,000 9.5% 1 month 1 $752

Weighted Average $250,583 9.75% 12 months 12 $24,405

Calculated on Average Balance and Average Rate $24,432

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b. The type of analytical procedure is study of the relationships of current-yearaccount balances with relevant nonfinancial information. While the interest ratemay not seem to be an item of nonfinancial information, it is not a direct entry

or element in the clients financial statements. Three of the other four types ofanalytical procedures do not describe the estimate (because it does not compare toprior periods, to budget, or to industry information). However, a case might bemade that the estimate is an evaluation of a relationship of current-year accountbalances (notes payable) to other current-year balances (related interest expense)for conformity with a predictable pattern (interest rate relation) based on thecompanys experience.

c. The recorded interest expense appears to be too small. The company may haveforgotten or miscalculated the year-end interest expense accrual. (In fact, thisamount was specified because the missing amount is approximately the $750 of

the accrual for the December interest.)

d. The recorded interest expense is about right. Some differences in timing andcalculation might explain the small difference, but it is not material enough towarrant further work.

e. The recorded interest expense appears to be too large. Maybe the company hasother debt on which interest is being paid, but the debt is not recorded in theaccounts. (In fact this amount was specified in terms of an extra $100,000 beingborrowed in July at 9.5% interest, not recorded, but paid back by August 1 beforethe next recorded borrowing. This would account for about $800 additional

interest: $100,000 x 9.5% x 1/12 = $792.) Could be that Weyman found he couldborrow the companys cash for himself, earn interest, and then pay back theprincipal!) Actually, this kind of maneuver could have been carried out in anymonth and not noticed by auditors who saw only the first-of-the-month balances.