Effect on Effect Effect Effect Year Net Income on Assets on Liabilities on Equity $(82,500) (22,000) $(100,000) (25,500) $(17,500) (3,500) $(82,500) (22,000) 30,000 2014 2015 2016 30,000 30,000
Uncorrected Misstatements and Performance Materiality. Pat Colt is auditing the financial statements of Manning Company. The following is a summary of the uncorrected misstatements that Colt has identified during the past three years. These misstatements are immaterial and have related to isolated matters. In this summary, parentheses imply that the misstatements would have reduced balances if they had been corrected (e.g., in 2014, the misstatements would have reduced net income by $82,500, assets by $100,000, liabilities by $17,500, and equity by $82,500 if corrected).
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During the most recent audit, Colt concluded that expenses totaling $130,000 were recognized in January 2018 (when Manning paid them) but should have been recognized in 2017.
Required:
a. How does the misstatement identified in 2017 affect net income, assets, liabilities, and equity? (Assume a 35 percent tax rate for Manning.)
b. Describe the rollover method of evaluating uncorrected misstatements. Assume that performance materiality was set at $170,000. How would Colt evaluate the materiality of the misstatement under the rollover method? What adjustments (if any) would Colt propose to Manning’s financial statements?
c. Describe the iron curtain method of evaluating uncorrected misstatements. Assume that performance materiality was set at $170,000. How would Colt evaluate the materiality of the $130,000 misstatement in 2017 under the iron curtain method? What adjustments (if any) would Colt propose to Manning’s financial statements?
d. If performance materiality were established at $100,000 for Manning, how would Colt evaluate the materiality of the misstatement in 2017 under the rollover method and iron curtain method?
e. Based on your response to part (d), what adjustments (if any) would Colt propose to Manning’s financial statements under the rollover method and the iron curtain method?
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