Uncorrected Misstatements and Performance Materiality. Pat Colt is auditing thefinancial statements of Manning Company. The following is a summary of the uncorrectedmisstatements that Colt has identified during the past three years. These misstatements areimmaterial and have related to isolated matters. In this summary, parentheses imply that themisstatements would have reduced balances if they had been corrected (e.g., in 2014, themisstatements would have reduced net income by $82,500, assets by $100,000, liabilitiesby $17,500, and equity by $82,500 if corrected).LO 11-4LO 11-4YearEffect onNet IncomeEffecton AssetsEffecton LiabilitiesEffecton Equity2014 $(82,500) $(100,000) $(17,500) $(82,500)2015 (22,000) (25,500) (3,500) (22,000)2016 30,000 30,000 0 30,000 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, andequity? (Assume a 35 percent tax rate for Manning.)b. Describe the rollover method of evaluating uncorrected misstatements. Assume thatperformance materiality was set at $170,000. How would Colt evaluate the materialityof the misstatement under the rollover method? What adjustments (if any) would Coltpropose to Manning’s financial statements?
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).
LO 11-4
LO 11-4
Year
Effect on
Net Income
Effect
on Assets
Effect
on Liabilities
Effect
on Equity
2014 $(82,500) $(100,000) $(17,500) $(82,500)
2015 (22,000) (25,500) (3,500) (22,000)
2016 30,000 30,000 0 30,000
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?
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