Explain the effect of extensive misstatements found in the prior years’ audit.

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Chapter 9, Problem 18RQ

To determine

Explain the effect of extensive misstatements found in the prior years’ audit.

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Innovative Consulting Co. has the following accounts in its ledger: Cash, Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, Retained Earnings, Dividends, Fees Earned, Rent Expense, Advertising Expense, Utilities Expense, Miscellaneous Expense. Journalize the following selected transactions for October 2012 in a two-column journal. Journal entry explanations may be omitted. If an amount box does not require an entry, leave it blank. Oct. 1. Paid rent for the month, $2,500. 4. Paid advertising expense, $1,000. 5. Paid cash for supplies, $1,800. 6. Purchased office equipment on account, $11,500. 12. Received cash from customers on account, $7,500. 20. Paid creditor on account, $2,700. 27. Paid cash for miscellaneous expenses, $700. 30. Paid telephone bill for the month, $475. 31. Fees earned and billed to customers for the month, $42,400. 31. Paid electricity bill for the month, $900. 31. Paid dividends, $1,500.

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Debit Balances Credit Balances 20,350 37,000 1,100 200 171,175 36,000 26,000 Common Stock 50,000 Retained Earnings 94,150 Dividends 15,000 Fees Earned 429,850 Wages Expense 270,000 Rent Expense 63,000 Advertising Expense 25,200 Miscellaneous Expense 5,100 608,125 636,000

On October 1, 20Y6, Jay Crowley established Affordable Realty, which completed the following transactions during the month: Oct. 1 Jay Crowley transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $40,000. 2 Paid rent on office and equipment for the month, $4,800. 3 Purchased supplies on account, $2,150. 4 Paid creditor on account, $1,100. 10 5 Earned sales commissions, receiving cash, $18,750. 6 Paid automobile expenses (including rental charge) for month, $1,580, and miscellaneous expenses, $800. 7 Paid office salaries, $3,500. 8 Determined that the cost of supplies used was $1,300. 9 Paid dividends, $1,500.