Question

The following items are documented in the audit working papers:

1. Sales transaction included in the year ended December 31, 2016, but evidence from the cut-off procedure suggests that the sale should be dated January 2, 2017 ($1,250,000).

2. Warranty expenses in the trial balance for the year to December 31, 2016, total $150,000; the provision for warranty claims as at December 31, 2015, was $100,000. Evaluation of correspondence suggests that an additional $200,000 in warranty claims could result from ongoing disputes with customers. No provision for these claims has been made. Management has made a warranty provision for 2016 of $120,000.

3. Severance expenses related to reorganization of head office administration were incorrectly charged to rental expenses ($578,920). 4. Management has not recorded an impairment for assets. A drought-induced recession has hurt property values in regional cities where seven branch offices are located. (Head office and two branch offices are located in the capital city.) Total land and buildings in the trial balance is $5.5 million.

Required: Independently evaluate each item above and:

i. State whether it is an error or a judgemental misstatement and justify your reasoning.

ii. State the account(s) which would be affected.

Answer 1

1. i) It can be an error that the sale transaction was included in the statements of the year 2016 instead of the year 2017. The auditor has sufficient evidence that the sale transaction belongs to the year 2017. This evidence is a conclusive evidence and sufficient to prove the authenticity of the sale transaction. Hence it can be concluded as an error by the management to show the sale transaction in the year 2016 instead of the year 2017.

ii) The accounts that can get affected are:- Sales A/c, Debtors A/c, Cash/Bank A/c, Inventory A/c.

2. i) It can be a judgemental mistake by the management for not to provide for the likely warranty expense of $200,000 for the year. As per the given information, the provision for warranty for the year should be $250,000 for the year ended Dec 2016. Instead the management has made a provision for $120,000 only. The management has to provide for all likely losses that is going to happen in future in the current year itself.

ii) The accounts that can get affected are:- Provision for warranty A/c, Profit and Loss A/c.

3. i) It can be an error by the management while recording the severence expense related to reorganization of head office. It is an expense of liability nature and the same has been recorded as an expense of revenue nature of the branch.

ii) The acounts that can get affected:- Rent A/c, Head Office A/c.

4. i) It is a serious error from the management as the assets worth $5.5 million impaired has not been recorded. they should be revalued and recorded at their present values.

ii) The accounts that can get affected are :- Land and Building A/c, Revaluation Loss A/c.