Precision Vision Corporation (PVC) is a Canadian firm selling high quality glass lenses to individual eye wear customers by mail order For 2019, recorded revenue was $1,950,000, and total assets were $1,550,000, while gross profit was $950,000 and net earnings were $550,000 PVC wants to expand, and is seeking to raise capital in the United States To enhance the credibility of its financial statements, PVC has hired a prominent CPA firm, Dewey, Chetum Howe LLP, (DCH LLP), to audit its 2019 financial statements PVC management wants to show the best earnings and financial position possible to maximize its prospects to raise capital Your H A team audit of PVC reveals the following items Your team selected a sample of 80 accounts from approximately 8,000 customer receivables The total book value of PVC receivables is $525,000 Your team found that two sampled accounts had exceptions a $500 account had an audited value of $300, and a $15 account had an audited value of $3 The sample was stratified projecting the errors to the population of PVC receivables, your team finds support for the range of $475,000 to $515,000 after adjusting for sampling error PVCs beginning inventory was understated by $7,500 due to a waived (as immaterial) audit adjustment in 2016 by the previous auditor The current year audit sample consisted of items comprising about 20 percent of the $810,000 book value of PVCs ending inventory, and the sample was not stratified Your team found various errors in inventory costs Some errors were over statements and some were under statements Over the set of sample items examined, the net impact was a $125 over statement PVC management changed the useful life for depreciation of certain production equipment This change reduced depreciation expense by $8,000 compared to what it would have been using the previously estimated useful life PVC management asserts warranty expense to be $50,000 The team estimates it to be $75,000, but the evidence supports a range of $65,000 to $85,000 A clerical error related to a prepaid insurance contract resulted in an overstatement of insurance expense of $1,000 Assume there are no tax effects for any of these items Management desires a clean (unqualified) audit report to help PVC raise capital in U S markets, and has a target net income of at least $525,000 Capital market users will rely on the audited financial statements to determine whether they provide funds to PVC If reported income is large enough, it will convince them that the return from investment is worth the risk of the investment If the reported income is not sufficient, PVC wont gain access to U S capital and will not be able to pursue its U S expansion plans On the other hand, if the reported net income is too high, the users will provide capital to PVC, but a subsequent review by some very highly trained analysts may lead them to conclude that PVCs financial statements are misstated Your task Your team has called PVCs CFO (me) to DCHs local office to discuss adjustments to the financial statements in class Please do the following What should be the actions taken by DCH to prepare for and discuss each item with management Be detailed in your response How would management respond to each in your opinion if you were in their shoes Why is proposing adjustments in financial statements typically a hard process In your opinion, name one item that you think is the most important thing you need to have to be successful and keep a good working relationship with your clients as you work through these tough adjustment conversations In the process of preparing for this meeting, you should consider what materiality level your team is willing to live with, both overall and at the transaction level (Your team, of course, chose a materiality level in the planning stage, but you must re assess it at the final stages as well For purposes of this exercise, choose using a back of the envelope approach The focus of the exercise is on the adjustment process, not on the estimation of materiality )

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Precision Vision Corporation (PVC) is a Canadian firm selling high-quality glass lenses to individual eye-wear customers by mail order. For 2019, recorded revenue was $1,950,000,

Precision Vision Corporation (PVC) is a Canadian firm selling high-quality glass lenses to individual eye-wear customers by mail order. For 2019, recorded revenue was $1,950,000, and total assets were $1,550,000, while gross profit was $950,000 and net earnings were $550,000. PVC wants to expand, and is seeking to raise capital in the United States. To enhance the credibility of its financial statements, PVC has hired a prominent CPA firm, Dewey, Chetum & Howe LLP, (DCH LLP), to audit its 2019 financial statements. PVC management wants to show the best earnings and financial position possible to maximize its prospects to raise capital.

Your H&A team audit of PVC reveals the following items:

Your team selected a sample of 80 accounts from approximately 8,000 customer receivables. The total book value of PVC receivables is $525,000. Your team found that two sampled accounts had exceptions a $500 account had an audited value of $300, and a $15 account had an audited value of $3. The sample was stratified; projecting the errors to the population of PVC receivables, your team finds support for the range of $475,000 to $515,000 after adjusting for sampling error.
PVCs beginning inventory was understated by $7,500 due to a waived (as immaterial) audit adjustment in 2016 by the previous auditor. The current year audit sample consisted of items comprising about 20 percent of the $810,000 book value of PVCs ending inventory, and the sample was not stratified. Your team found various errors in inventory costs. Some errors were over-statements and some were under-statements. Over the set of sample items examined, the net impact was a $125 over-statement.
PVC management changed the useful life for depreciation of certain production equipment. This change reduced depreciation expense by $8,000 compared to what it would have been using the previously estimated useful life.
PVC management asserts warranty expense to be $50,000. The team estimates it to be $75,000, but the evidence supports a range of $65,000 to $85,000.
A clerical error related to a prepaid insurance contract resulted in an overstatement of insurance expense of $1,000.

Assume there are no tax effects for any of these items.

Management desires a clean (unqualified) audit report to help PVC raise capital in U.S. markets, and has a target net income of at least $525,000.

Capital market users will rely on the audited financial statements to determine whether they provide funds to PVC. If reported income is large enough, it will convince them that the return from investment is worth the risk of the investment. If the reported income is not sufficient, PVC wont gain access to U.S. capital and will not be able to pursue its U.S. expansion plans.

On the other hand, if the reported net income is too high, the users will provide capital to PVC, but a subsequent review by some very highly trained analysts may lead them to conclude that PVCs financial statements are misstated.

Your task: Your team has called PVCs CFO (me) to DCHs local office to discuss adjustments to the financial statements in class. Please do the following:

What should be the actions taken by DCH to prepare for and discuss each item with management? Be detailed in your response.
How would management respond to each in your opinion if you were in their shoes?
Why is proposing adjustments in financial statements typically a hard process? In your opinion, name one item that you think is the most important thing you need to have to be successful and keep a good working relationship with your clients as you work through these tough adjustment conversations?

In the process of preparing for this meeting, you should consider what materiality level your team is willing to live with, both overall and at the transaction level. (Your team, of course, chose a materiality level in the planning stage, but you must re-assess it at the final stages as well. For purposes of this exercise, choose using a back of the envelope approach. The focus of the exercise is on the adjustment process, not on the estimation of materiality.)