2. Gabriela Company’s auditor discovered that the company inadvertently overstated ending Inventory for the prior year. If the error is not corrected, what effect will the error have on the following financial statement items for both the prior year and the current year? Indicate in each box a “+" (plus) if the item is overstated, a “-“ (minus) if the item is understated, and a "N/A" if there is no effect on the item. Prior Current Year Year Effect on Income Statement Goods Available for Sale Cost of Goods Sold Gross Profit Net Income Effect on Balance Sheet Inventory on 12/31 Retained Earnings

2. Gabriela Company’s auditor discovered that the company inadvertently overstated ending Inventory for the prior year. If the error is not corrected, what effect will the error have on the following financial statement items for both the prior year and the current year? Indicate in each box a “+" (plus) if the item is overstated, a “-“ (minus) if the item is understated, and a "N/A" if there is no effect on the item. Prior Current Year Year Effect on Income Statement Goods Available for Sale Cost of Goods Sold Gross Profit Net Income Effect on Balance Sheet Inventory on 12/31 Retained Earnings

Auditing: A Risk Based-Approach to Conducting a Quality Audit

10th Edition

ISBN:9781305080577

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter17: Other Services Provided By Audit Firms

Section: Chapter Questions

Problem 20MCQ

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Which of the following is not a characteristic of non-counterbalancing error? a. If not detected, this is not automatically corrected in the next accounting period. b. The income statement of the period in which the non-counterbalancing error is committed is misstated. c. The statement of financial position of the year of non-counterbalancing error and succeeding statement of financial position are incorrect until the error is corrected. d. If the net income of one year is understated due to non-counterbalancing error, the net income of subsequent year is also affected.
If the income statement error is discovered in a subsequent accounting period, what action is to be done by the entity? Group of answer choices a. Reclassify the item to its proper nominal account and restate the income statement of the prior year affected by the error. b. Restate the income statement of the prior year affected by the error. c. No reclassifying entry is necessary but restate the income statement of the prior year affected by the error. d. Reclassify the item to its proper nominal account. Recording of next year's sales as sales of the current year will Group of answer choices a. overstate net income of next year b. not affect retained earnings at the end of next year c. understate retained earnings at the end of the current year d. understate net income of the current year
If the statement of financial position error is discovered in the year of error, what action is to be done by the entity? Ignore the Reclassify the item to its proper real account. Adjust the effect to the retained earnings account. Reclassify the item to nominal account.
If the statement of financial position error is discovered in a subsequent accounting period, what action is to be done by the entity? A. Reclassify the item to its proper real account but do not restate the statement of financial position of the prior year affected by the error. B. Reclassify the item to its proper real account. C. Restate the statement of financial position of the prior year affected by the error. D. Reclassify the item to its proper real account and restate the statement of financial position of the prior year affected by the error
Subsequent Events can be classified as adjusting events and non-adjusting events. For the list of eventsbelow indicate whether the event is adjusting or non-adjusting?i. Insolvency of a receivable after year endii. Destruction of significant asset after year endiii. Sale of inventories after year end… evidence of Net Realisable Valueiv. Issue of shares/debt after year endv. Discovery of errors/fraud revealing Financial Statement incorrect after year endvi. Take-over of another business after year endvii. Purchases/sales of significant non-current assets after year endviii. Agreement of tax liability after year end
Problem 1. You were engaged for the first time to audit the FS of Bebeko Corporation for the period ended December 31, 2020. The company started its operation in 2018. In reviewing the books, the auditor discovered that certain adjustments had either been overlook or improperly recorded at the end of years to 2020. Omissions and other failures for each year are summarized below: December 31 2018 2019 2020 1. Omissions of the following year-end accruals/deferrals: a. Accrued utilities expense b. Accrued interest income c. Prepaid rent expense d. Unearned royalty income |2. Delivery of merchandise at year-end to customers, recorded as sales upon collection the following year. 3. Receipt of merchandise at year-end from suppliers, recorded as purchases upon payment the following year. 4. Cash received from customers at year-end, recorded as sales deliveries yet to be made the following year. In the year of collection, corresponding 5000 7000 6000 2000 4000 3000 2000 1000 8000 3000 5000…
Imagine that the auditor of QRS has expressed concerns that the bad debts expense recorded for the year is not high enough. What would be the impact on the reported value of the following items if the auditor requires an adjustment to be made? Select higher, lower or no effect from the drop down menu. Indicate higher/lower/no effect for: Cash Accounts Receivable Allowance for Doubtful Debts Bad debts expense Current Assets Net Profit
f. What is the effect of these errors on Net Income, Earnings per Share, Total Liabilities and Retained Earnings if they are not discovered (detected) before the publication of the annual report? t
If the income statement error is discovered in the year of error, what action is to be done by the entity? a. Reclassify the item to its proper nominal account. b. Reclassify the item to real account. c. Adjust the effect to the retained earnings account. d. Ignore the error.
According to IAS 8, how should prior period errors that are discovered in a subsequent reporting period be recognized in the financial statements? a. As an adjustment to beginning retained earnings for the reporting period in which the error was discovered. b. As a note in the financial statements that the error was previously made but has since been corrected. c. In the statement of comprehensive income. d. Retroactively for all periods presented.
34.Prior to the year-end adjustments of accounts, an entity's Allowance for Doubtful Accounts has a debit balance resulting from a significant amount of accounts receivable that was written off. Based on aging of the receivables and the entity's experience of the extent of uncollectibles, an amount was determined as the required credit balance in Allowance for Doubtful Accounts at year-end.Which of the following statements is true relating to the above-described situation? a. Doubtful accounts expense is equal to the amount determined by aging and analysis of the receivables. b. Doubtful accounts expense is the total amount determined by aging and analysis of the receivables plus the allowance balance before adjustment. c. Doubtful accounts expense is the amount determined by aging and analysis of the receivables less the allowance balance before adjustment. d. Doubtful accounts expense amount cannot be determined.
8. Which of the following is true of accounting for changes in estimates? a. A company recognizes a change in estimate by making a retrospective adjustment to the financial statements. b. A company accounts for changes in estimates only in the period of change, even though it affects the future periods. c. Changes in estimates are not carried back to adjust prior years. d. Changes in estimates are considered as errors.