In your audit of Aviary Industries for calendar year 2019, you found a number of matters that
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Question:
In your audit of Aviary Industries for calendar year 2019, 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 does not want to make any adjustments. Planning materiality for the audit was $100,000, determined by computing 5 percent of expected income before taxes. Actual income before taxes on the financial statements prior to any adjustments is $1,652,867.
Possible adjustments:
- Several credit memos that were processed and recorded after year end relate to sales and accounts receivable for 2019. These total $26,451.
- Inventory cutoff tests indicate that $25,673 of inventory received on December 30, 2019, was recorded as purchases and accounts payable in 2020. These items were included in the inventory count at year end and therefore included in ending inventory.
- Inventory cutoff tests indicate several sales invoices recorded in 2019 for goods that were shipped in early 2020. The goods were included in inventory even though they were set aside in a separate area. The total amount of these shipments was $41,814. Contract terms specified that transfer of control of the goods occurs at the point of shipment.
- The company wrote several checks at the end of 2019 for accounts payable that were held and not mailed until January 15, 2020. These totaled $43,671. Recorded cash and accounts payable at December 31, 2019, are $2,356,553 and $2,666,290, respectively.
- The company has not established a reserve for obsolescence of inventories. Your tests indicate that such a reserve is appropriate in an amount somewhere between $15,000 and $30,000.
- Your review of the allowance for uncollectible accounts indicates that it may be understated by between $35,000 and $55,000.
Required:
- What adjustments must be made for Aviary's financial statements to be fairly presented?Include amounts and accounts affected by each adjustment.
- Management has stated that they do not want to make any adjustments, explain to the audience why they should make the proposed changes.
- Assuming Aviary Industries is an accelerated filer public company, describe how the noted adjustments might impact your audit report on internal control over financial reporting.
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