Alicia Keys, CPA was conducting the audit of Kendrick Lamar, Inc. for the year ended December 31, 2023. Alicia evaluated the accounts receivable of Kendrick Lamar and determined that there is a 95% probability that the true population misstatement is less than or equal to $220,694. Alicia decided that she should conclude that accounts receivable is not materially misstated, since the upper misstatement limit of $220,694 is less than the tolerable misstatement of $250,000. Alicia also concluded that no other accounts in Kendrick Lamars financial statements were materially misstated, so she was planning to issue an unqualified audit opinion.

However, one of Alicias coworkers mentioned that she should probably review SEC Staff Accounting Bulletin 108 before issuing the audit report. After reading the bulletin, Alicia decided that she needed to consider the misstatements in Kendrick Lamars financial statements over the past several years and, consequently, constructed the following table to better help her analyze the situation. The table shows uncorrected, immaterial misstatements from years 2017 2022 and how they would have impacted the financial statements of those years, if corrected (e.g., net income in 2017 was overstated by $523,171 and would have been reduced by this amount if the 2017 misstatements had been corrected).

Year			Effect on Net Income		Effect on Assets		Effect on Liabilities		Effect on Equity
	2017	(523,171)		(1,743,902)		(1,220,731)		(523,171)
	2018	(831,687)		(2,376,248)		(1,544,561)		(831,687)
	2019	(473,803)		(1,579,342)		(1,105,539)		(473,803)
	2020	(1,167,225)		(3,071,644)		(1,904,419)		(1,167,225)
	2021	796,208		2,274,881		1,478,673		796,208
	2022	(572,581)		(1,908,603)		(1,336,022)		(572,581)

Alicia has identified several misstatements in the 2023 financial statements, none of which exceed planning materiality of $3,000,000. The impacts of the 2023 misstatements on the 2023 financial statements, if corrected, are:

Net Income $ (333,918)

Assets $ (1,335,672)

Liabilities $ (1,001,754)

Equity $ (333,918)

Required:

1.Evaluate the materiality of the uncorrected misstatements on Kendrick Lamars financial statements using (a) the rollover method and (b) the iron curtain method, making sure to identify the $ amount of the misstatement to consider under each method. Do not give more than one $ amount as your answer for either 1(a) or 1(b).

2.Given your results in part 1, should Alicia conclude that the financial statements are materially misstated? Why or why not?

3.Refer to SEC Staff Bulletin 108. What is the primary weakness of the rollover method? What is the primary weakness of the iron curtain method? Why does the SEC recommend using both methods when evaluating financial statement misstatements?