Making A Decision as an Auditor: Effects of Errors on Income, Assets and Liabilities

Megan Company( not a Corporation) was careless about its financial records during its first year of operations, 2013. It is December 31, 2013, the end of the annual accounting period. An outside CPA has examined the records and discovered numerous errors, all of which are described here. Assume that each error is independent of each others.

Required: Analyze each error and indicate its effect on 2013 and 2014 net income, assets and liabilities if not corrected. Do not assume any other errors. Use these codes to indicate the effect of each dollar amount: O = overstated, U = understated, and NE = No Effect. Write an explanation of your analysis of each transaction to support each response. The first transaction is used as an example.

	Effects on
	Net Income		Assets		Liabilities
	2013	2014	2013	2014	2013	2014
Independent Errors
1) Depreciation Expense for 2013, not recorded in 2013, $950	O $950	NE	O $950	O $950	NE	NE
2)Wages earned by employee during 2013 not recorded or paidin 2013, but recorded and paid in 2014, $600
3) Revenue earned during 2013 but not collected or recorded until 2014, $600
4) Amount paid in 2013 and recorded as an expense in 2013 but not as an expense until 2014, $200
5) Revenue Collected in 2013 and recorded as revenue in 2013, but not earned until 2014, $900
6) Sale of Services and Cash Collected in 2013. Recorded as a debit to Cash and as a credit to Accounts Receivable, $300
7) On December 31, 2013, bought land on credit for $8,000; not recorded until payment was made on February 1, 2014

Following is the example of the first error.

Failure to record depreciation in 2013 caused depreciation expense to be too low; therefore, income was overstated by $950. Accumulated Depreciation also is too low by $950, which causes assets to be overstated by $950 until the error is corrected.