Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements follows. (To illustrate, in 2015, the misstatements would have reduced net income by $13,200 if corrected:) Year 2015 2016 2017 2018 2019 Effect on Net Income $ (13,200) 5,000 (9,250) (2,000) 1,000 Effect on Assets $ (20,000) 12,000 (11,000) (5,500) 1,000 Effect on Effect on Liabilities Equity $(13,200) $ (6,800) 7,000 (1,750) (3,500) 0 5,000 (9,250) (2,000) 1,000 During the most recent audit, Rivers concluded that service revenue totaling $11,000 was recognized as of December 31, 2020 and it did not meet the criteria for recognition until 2021. When Rivers discussed this issue with Chris Turner, Charger Company's chief financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this, Turner remarked, "Then there's no need to worry... it's not a material amount. Why should we bother with this item?". Under each method, what is the minimum amount of adjustment Rivers would propose to Chargers Company's financial statements?
Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements follows. (To illustrate, in 2015, the misstatements would have reduced net income by $13,200 if corrected:) Year 2015 2016 2017 2018 2019 Effect on Net Income $ (13,200) 5,000 (9,250) (2,000) 1,000 Effect on Assets $ (20,000) 12,000 (11,000) (5,500) 1,000 Effect on Effect on Liabilities Equity $(13,200) $ (6,800) 7,000 (1,750) (3,500) 0 5,000 (9,250) (2,000) 1,000 During the most recent audit, Rivers concluded that service revenue totaling $11,000 was recognized as of December 31, 2020 and it did not meet the criteria for recognition until 2021. When Rivers discussed this issue with Chris Turner, Charger Company's chief financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this, Turner remarked, "Then there's no need to worry... it's not a material amount. Why should we bother with this item?". Under each method, what is the minimum amount of adjustment Rivers would propose to Chargers Company's financial statements?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of
Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common
characteristics). A summary of these misstatements follows. (To illustrate, in 2015, the misstatements would have reduced net income
by $13,200 if corrected:)
Effect on
Equity
$ (13,200)
5,000
(9,250)
(2,000)
1,000
Effect on Net
Effect on
Effect on
Income
$ (13,200)
5,000
(9,250)
(2,000)
1,000
Year
Assets
Liabilities
$ (20,000)
12,000
(11,000)
(5,500)
1,000
$ (6,800)
7,000
(1,750)
(3,500)
2015
2016
2017
2018
2019
During the most recent audit, Rivers concluded that service revenue totaling $11,000 was recognized as of December 31, 2020 and it
did not meet the criteria for recognition until 2021. When Rivers discussed this issue with Chris Turner, Charger Company's chief
financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of
this, Turner remarked, "Then there's no need to worry . it's not a material amount. Why should we bother with this item?".
Under each method, what is the minimum amount of adjustment Rivers would propose to Chargers Company's financial statements?
Iron curtain method
Rollover method
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