Question

Ice Cube, CPA was conducting the audit of Snoop Dogg, Inc. for the year ended December 31, 2019. Ice Cube evaluated the accounts receivable of Snoop Dogg and determined that there is a 95% probability that the true population misstatement is less than or equal to $384,415. Ice Cube decided that he should conclude that accounts receivable is not materially misstated, since the upper misstatement limit of $384,415 is less than the tolerable misstatement of $400,000. Ice Cube also concluded that no other accounts in Snoop Dogg’s financial statements were materially misstated, so he was planning to issue an unqualified audit opinion. However, one of Ice Cube’s coworkers mentioned that he should probably review the SEC Staff Accounting Bulletin 108 before issuing the audit report. After reading the bulletin, Ice Cube decided that he needed to consider the misstatements in Snoop Dogg’s financial statements over the past several years and, consequently, constructed the following table to better help him analyze the situation. The table shows uncorrected, immaterial misstatements from years 2014 – 2018 and how they would have impacted the financial statements of those years, if corrected (e.g., net income in 2014 was overstated by $484,917 and would have been reduced by this amount if the 2014 misstatements had been corrected). Year Effect on Net Income Effect on Assets Effect on Liabilities Effect on Equity 2014 (484,917) (1,731,846) (1,246,929) (484,917) 2015 (767,482) (2,192,805) (1,425,323) (767,482) 2016 (529,722) (1,891,864) (1,362,142) (529,722) 2017 884,208 2,526,308 1,642,100 884,208 2018 (635,185) (1,814,814) (1,179,629) (635,185) Ice Cube has identified several misstatements in the 2019 financial statements, none of which exceed performance materiality of $3,250,000. The impacts of the 2019 misstatements on the 2019 financial statements, if corrected, are: Net Income $ (371,219) Assets $ (1,325,782) Liabilities $ (954,563) Equity $ (371,219) Required: 1. Evaluate the materiality of the uncorrected misstatements on Snoop Dogg’s financial statements using a. the rollover method and b. the iron curtain method. c. Identify the amount of the misstatement to consider under each method.

Answer 1

A. Rollover Method

Under Rollover Method, the auditor mainly focuses on the current year’s misstatement ignoring the misstatements in the earlier years. The Rollover method adjusts the P&L misstatements ignoring the accuracy of the balance sheet. It follows Income statement focused approach.

In the given case, under the Rollover method, the misstatements of current year i.e. 2019 will be considered by the auditor. So, the amount of the misstatement to be considered by the auditor will be:

1. Overstatement of the Net income by $ 371,219

B. Iron Curtain Method

Under this method, the auditor focuses on correcting the misstatements irrespective of the year to which the misstatement belong. The Iron Curtain method follows the Balance sheet approach by adjusting the Balance sheet misstatements ignoring the P&L misstatements.

In the given case, under the Iron Curtain method, all the misstatements will be considered by the auditor irrespective of the year to which it belongs. So, the amount of the misstatement to be considered by the auditor will be:

Year	Effect on Assets	Effect on Liability	Effect on Equity
2014	1731846	1246929	484917
2015	2192805	1425323	767482
2016	1891864	1362142	529722
2017	2526308	1642100	884208
2018	1814814	1179629	635185
2019	1325782	954563	371219