In your audit of Aviary Industries for calendar year 20X0, you found a number of matters that

Question:

In your audit of Aviary Industries for calendar year 20X0, you found a number of matters that you believe represent possible adjustments to the company's books. These matters are described below. Management's attitude is that 'once the books are closed, they're closed', and management doesn't want to make any adjustments. Planning materiality for the engagement was $100 000, determined by calculating 5% of expected income before taxes. Actual income before taxes on the financial statements prior to any adjustments is $1 652 867.

Possible adjustments

1. Several credit memos that were processed and recorded after year-end relate to sales and accounts receivable for 20X0. These total $23 529.

2. Inventory cutoff tests indicate that $22 357 of inventory received on 30 December 20X0 was recorded as purchases and accounts payable in 20X1. These items were included in the inventory count at yearend and were therefore included in ending inventory.

3. Inventory cutoff tests also indicate several sales invoices recorded in 20X0 for goods that were shipped in early 20X1. The goods weren't included in inventory but were set aside in a separate shipping area. The total amount of these shipments was $36 022. (Ignore cost of sales for this item.)

4. The company wrote several cheques at the end of 20X0 for accounts payable that were held and not mailed until 15 January 20X1. These totalled $48 336. Recorded cash and accounts payable at 31 December 20X0 are $2 356 553 and $2 666 290, respectively.

5. The company hasn't established a reserve for obsolescence of inventories. Your tests indicate that such a reserve is appropriate in an amount somewhere between $20 000 and $40 000.

6. Your review of the allowance for doubtful accounts indicates that it may be understated by between $25 000 and $50 000.

REQUIRED

a. Determine the adjustments that you believe must be made for Aviary's financial statements to be fairly presented. Include the amounts and accounts affected by each adjustment.

b. Why might Aviary Industries' management resist making these adjustments?

c. Explain what you consider is the most positive way of approaching management personnel to convince them to make your proposed changes.

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