In your audit of Aviary Industries for calendar year 2013, you founda number of matters that you believe represent possible adjustments to the company’sbooks. These matters are described below. Management’s attitude is that “once the booksare closed, they’re closed,” and management does not want to make any adjustments.Planning materiality for the audit was $100,000, determined by computing 5% ofexpected income before taxes. Actual income before taxes on the financial statementsprior to any adjustments is $1,652,867.Possible adjustments:1. Several credit memos that were processed and recorded after year-end relate tosales and accounts receivable for 2013. These total $26,451.2. Inventory cutoff tests indicate that $25,673 of inventory received on December 30, 2013,was recorded as purchases and accounts payable in 2014. These items were included inthe inventory count at year-end and therefore were included in ending inventory.3. Inventory cutoff tests indicate several sales invoices recorded in 2013 for goods thatwere shipped in early 2014. The goods were included in inventory even though theywere set aside in a separate area. The total amount of these shipments was $41,814.4. The company wrote several checks at the end of 2013 for accounts payable thatwere held and not mailed until January 15, 2014. These totaled $43,671. Recordedcash and accounts payable at December 31, 2013, are $2,356,553 and $2,666,290,respectively.5. The company has not established a reserve for obsolescence of inventories. Yourtests indicate that such a reserve is appropriate in an amount somewhere between$15,000 and $30,000.6. Your review of the allowance for uncollectible accounts indicates that it may beunderstated by between $35,000 and $55,000.a. Determine the adjustments that you believe must be made for Aviary’s financialstatements to be fairly presented. Include the amounts and accounts affected by eachadjustment.b. Why may Aviary Industries’ management resist making these adjustments?c. Explain what you consider the most positive way of approaching management personnelto convince them to make your proposed changes.d. Describe your responsibilities related to unadjusted misstatements that managementhas determined are immaterial individually and in the aggregate.e. Assuming Aviary Industries is an accelerated filer public company, describe how thenoted adjustments might impact your audit report on internal control over financialreporting
In your audit of Aviary Industries for calendar year 2013, you found
a number of matters that you believe represent possible adjustments to the company’s
books. These matters are described below. Management’s attitude is that “once the books
are closed, they’re closed,” and management does not want to make any adjustments.
Planning materiality for the audit was $100,000, determined by computing 5% of
expected income before taxes. Actual income before taxes on the financial statements
prior to any adjustments is $1,652,867.
Possible adjustments:
1. Several credit memos that were processed and recorded after year-end relate to
sales and
2. Inventory cutoff tests indicate that $25,673 of inventory received on December 30, 2013,
was recorded as purchases and accounts payable in 2014. These items were included in
the inventory count at year-end and therefore were included in ending inventory.
3. Inventory cutoff tests indicate several sales invoices recorded in 2013 for goods that
were shipped in early 2014. The goods were included in inventory even though they
were set aside in a separate area. The total amount of these shipments was $41,814.
4. The company wrote several checks at the end of 2013 for accounts payable that
were held and not mailed until January 15, 2014. These totaled $43,671. Recorded
cash and accounts payable at December 31, 2013, are $2,356,553 and $2,666,290,
respectively.
5. The company has not established a reserve for obsolescence of inventories. Your
tests indicate that such a reserve is appropriate in an amount somewhere between
$15,000 and $30,000.
6. Your review of the allowance for uncollectible accounts indicates that it may be
understated by between $35,000 and $55,000.
a. Determine the adjustments that you believe must be made for Aviary’s financial
statements to be fairly presented. Include the amounts and accounts affected by each
adjustment.
b. Why may Aviary Industries’ management resist making these adjustments?
c. Explain what you consider the most positive way of approaching management personnel
to convince them to make your proposed changes.
d. Describe your responsibilities related to unadjusted misstatements that management
has determined are immaterial individually and in the aggregate.
e. Assuming Aviary Industries is an accelerated filer public company, describe how the
noted adjustments might impact your audit report on internal control over financial
reporting
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