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John Dough Analysis

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Submitted By mrmeigoo
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After analyzing John's financial statements, the excessive amounts of Prepaid Insurance and severe lack of internal controls has prompted me to request more information regarding the following accounts:

1. Prepaid Insurance and Insurance Expense These accounts should be analyzed for all five years. The Prepaid Insurance account is much higher than the Insurance Expense account at year-end, which is unusual. We must first determine if John pays the insurance by placing a certain percentage down and makes equal monthly payments, or if he pays in full. Either way, the consistent overpayment draws concern. He should be able to estimate the amount more closely than shown. We must also verify that the remainder in the Prepaid Insurance account is credited and applied to taxable income appropriately.

2. Accumulated Depreciation and Depreciation Expense for Equipment, Furniture & Fixtures, and Buildings After recalculating the depreciation for these accounts, I found substantial errors. It appears that the first accountants under-depreciated these assets by around $9,000 in 2002 and 2003. These miscalculations caused material errors in the Accumulated Depreciation account as well. The straight-line method should have been used over the life of these assets, but was not used in 2002 or 2003. This error most likely resulted in an overpayment of taxes for those years. The second set of accountants correctly calculated the depreciation for the last three years. They did however misstate the depreciation expense in 2004 on the financial statements, but corrected said error the following year. An adjusting entry should take place to fix the original errors.

3. Miscellaneous There are very few instances when an expense should be placed in the Miscellaneous account. Each miscellaneous expense needs to be verified and possibly transferred to a different

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