16-49 The audit staff of Adams, Barnes, & Co (ABC), CPAs reported the following audit findings in their 20X5 audit of Keystone Computers and Networks (KCN), Inc.

1. Unrecorded liabilities in the amount of $6440 for purchase of inventory. These inventory items were counted and included in the year end total

2. Projected misstatement from confimation of accounts receivable in the amount of $2042 understatement

3. Projected misstatements from price tests of inventory of $9510

4. The staff of ABC believes that the amount of KCN's allowance for uncollectable accounts should be increased by $5000

In addition the audit staff has decided that for evaluating a material misstatement of the financial statements, the following guidelines should be used:

current assets- $50,000

Noncurrent assets-$75,000

Current Liabilities- $50,000

Noncurrent liabilities- $75,000

Net income before taxes-$65000

Required:

1. Prepare a schedule modeled after Figure 16.4 to be used to evaluate the above audit findings, assuming that KCN's marginal tax rate is 25 percent

2. Decide whether the results indicate that there is sufficient low risk of material misstatement to justify ABC's Audit opinion

16-49 Keystone Computers & Networks, Inc. Total Likely Misstatement Decembr 31, 20X5 Overstatements (Understatements) Assets Liabilities Income Statement Selling, Gen. Admin. Current Non-current Non-current Current (6,440) Revenue Cost of Sales 6,440 Income 6,440 (2,042) Number Type 1 Factual 2 Projected Misstatement 3 4 Total Uncorrected Tax effect at 25% After Tax Effect Prior year misstatements After tax and prior year's effects Totals per financial statement Percent of unrrecorded to f.s. 9,941,620 1,938,547 8,184,489 456,700 96,459,566 74,122,435 20,624,115 989,275