14-56 1 During the course of the audit of Nature Sporting Goods, the auditor discovered the following: . The accounts receivable confirmation work revealed one pricing misstatement. The book value of $12,955.68 should be $11,984.00. The total misstatement based on this differ- ence is $14,465, which includes a $972 known misstatement and an unknown projected misstatement of $13,493. Nature Sporting Goods had understated the accrued vacation pay by $13,000. A review of the prior-year documentation indicates the following uncorrected misstatements: o Accrued vacation pay was understated by $9,000 o Sales and accounts receivable were overstated by an esti- mated $60,000 because of cutoff errors. Prepare a summary of a possible adjustments schedule and draw your conclusion about whether the aggregate effect of these misstatements is material. Use the trial balance numbers shown in Exhibit 14.1, but ignore the misstatements shown in the exhibit. The income tax rate is 40% for the current and prior year. (Note: Materiality must be considered in developing your answer.) ho Auditina in Practice feature "The PCAOB CHAPTER 4 * Activities Required in Complefing a EXHIBIT 14.1 Summary of Possible Adjustments Debit (Credit) Liabilities Assets Retained W/P Account Description Current Noncurrent Current Noncurrent Earnings Sales Accounts receivable Missatement from A/R confirmations (5972 known misstalement and $13,493 additional projected misstatement Accounts payable Cash Unrecorded check # 14,389 972 972 1,500 Projected Misstatements Sales Accounts receivable Projected pricing misstatements from sample (13,493) 13,493 Carryover Effect of Prior-Year Misstatements Retained earnings Salary expense Under accrual of prior year's salaries Subtotal: income before taxes 6,900 6 900 7,565 Tax Adjustment 4,918 Income taxes payable (13,493 + 972) x 0.34) Income tax expense (7,565 x 0.34) Retained earnings (6,900 x 0.34) Total Misstatements Balance from trial 2,572 2,346) 4,993 4,554993 19,073,000 1,997000 13,346,000 (13,048000] (4,676,000) 1.678,000 0.3% 0 115.965 Total misstatement as % of balance 0.08% 0.0% 0.19% 0.0% 0.1% Conclusion: In my opinion, the total likely misstatements are not material to the financial statements taken as a whole. The projected misstatements are quantitatively immaterial and do not reflect material weaknesses in internal control Therefore, no adjustments are required, nor is any additional audit work needed for these account balances. Marginal tax rate: 34% 2-17-16 2-1716 PREPARED BY REVIEWED BY: KMU DATE AAG DATE