Linda Tanner, CPA, is auditing the Carson Company. For the current year, Carson is presenting December 31, 20X5, financial statements with comparative financial statements for the year ended December 31, 20X4. In the prior year audit, Linda identified an understatement of prepaid expenses of $100,000 at December 31, 20X4, that was not corrected. In the current year, Linda found that prepaid expenses were understated by another $50,000 at December 31, 20X5.
a. Using the iron curtain approach, describe how Tanner would consider whether an adjustment is required.
b. Using the rollover approach, describe how Tanner would consider whether an adjustment is required.
c. Describe what SEC Staff Accounting Bulletin No. 108 requires in this situation.