Question - During the conduct of an audit, auditors may identify misstatements as a result of the completion of their substantive procedures. An important activity performed in the completion stages of the audit is considering the materiality of misstatements identified during the audit.
|
Year
|
Effect on Net Income
|
Effect on Assets
|
Effect on Liabilities
|
Effect on Equity
|
|
2011
|
$(82,500)
|
$(100,000)
|
$(17,500)
|
$(82,500)
|
|
2012
|
(22,500)
|
(25,500)
|
(3,500)
|
(22,000)
|
|
2013
|
30,000
|
30,000
|
0
|
30,000
|
Required:
a. What is an uncorrected misstatement? What is the auditors' responsibility for uncorrected misstatements during the completion stage of the audit engagement?
b. How do auditors use the rollover method and iron curtain method to evaluate uncorrected misstatements?
c. Assume that auditors have identified misstatements during the current audit that had a net impact of $100,000 on expenses and payables (both were understated). If the cumulative effect of prior uncorrected misstatements was $120,000 (overstatement of net income and understatement of liabilities) and materiality was $150,000, what would the auditors' conclusion be with respect to the misstatements under the rollover method and iron curtain method?
d. Based on your response to (c), what adjustments (if any) would the auditors propose to the client's financial statements?
e. What requirements do auditors have for communicating uncorrected misstatements identified during the audit engagement?