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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 Net Effect on Effect on Liabilities $ (6,800) 7,000 (1,750) (3,500) Effect on Assets $ (20,000) 12,000 (11,000) (5,500) 1,000 Equity $ (13,200) 5,000 (9,250) (2,000) 1,000 Year Income $ (13,200) 5,000 (9,250) (2,000) 1,000 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?". Required: a. What is the dollar impact of the misstatement identified in 2020 on each of the following (assume a 21% tax rate for Charger)? Answer is complete but not entirely correct. Net income 8,690 Assets 11,000 Liabilities 2,310 Equity (8,690) 8

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 Net Effect on Effect on Liabilities $ (6,800) 7,000 (1,750) (3,500) Effect on Assets $ (20,000) 12,000 (11,000) (5,500) 1,000 Equity $ (13,200) 5,000 (9,250) (2,000) 1,000 Year Income $ (13,200) 5,000 (9,250) (2,000) 1,000 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?". Required: a. What is the dollar impact of the misstatement identified in 2020 on each of the following (assume a 21% tax rate for Charger)? Answer is complete but not entirely correct. Net income 8,690 Assets 11,000 Liabilities 2,310 Equity (8,690) 8

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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11,000 8,690, and 0 are all incorrect answers. Thanks!

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:) MTI Effect on Net Effect on Effect on Effect on Liabilities Equity $ (13, 200) Year Income Assets $ (6,800) 7,000 (1,750) (3,500) $ (13,200) 5,000 2015 $ (20,000) 2016 (9,250) (2,000) 1,000 12,000 (11,000) (5,500) 1,000 5,000 (9,250) (2,000) 1,000 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?". Required: a. What is the dollar impact of the misstatement identified in 2020 on each of the following (assume a 21% tax rate for Charger)? Answer is complete but not entirely correct. Net income 8.690 O Assets 11,000 O Liabilities 2,310 O Equity (8,690) X
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:) MTI Effect on Net Effect on Effect on Effect on Liabilities Equity $ (13, 200) Year Income Assets $ (6,800) 7,000 (1,750) (3,500) $ (13,200) 5,000 2015 $ (20,000) 2016 (9,250) (2,000) 1,000 12,000 (11,000) (5,500) 1,000 5,000 (9,250) (2,000) 1,000 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?". Required: a. What is the dollar impact of the misstatement identified in 2020 on each of the following (assume a 21% tax rate for Charger)? Answer is complete but not entirely correct. Net income 8.690 O Assets 11,000 O Liabilities 2,310 O Equity (8,690) X
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What is the dollar impact of the misstatement identified in 2023 on each of the following (assume a 21 percent tax rate for Charger)?

Note: Enter amounts to be deducted with a minus sign.

b. Comment upon Turner’s remark to Rivers. Is Turner’s reasoning correct?

d. What is the total misstatement amount to consider when evaluating materiality under each of the following methods:

e. Under each method, what is the minimum amount of adjustment Rivers would propose to Chargers Company's financial statements?

 

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