The audit staff of Adams, Barnes & Co. (ABC), CPAs, reported the following audit findings in their 20X5 audit of Keystone Computers & Networks (KCN) Inc.: 1. Unrecorded liabilities in the amount of $6,440 for purchases of inventory. These inventory items were counted and included in the year-end total. 2. Projected misstatement from confirmation of accounts receivable in the amount of $2,042 understatement. 3. Projected misstatement from price tests of inventory of $9.510 overstatement. 4. The staff of ABC believes that the amount of KCN's allowance for uncollectible accounts should be increased by $5,000 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-S50.000 Noncurrent liabilities-$75.000 Net income before taxes-$65.000 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 $65.000 a 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. b Decide whether the results indicate that there is a sufficiently low risk of material misstatement to justify ABC's audit opinion. Page 740 FIGURE 16,4 Aggregated Misstatements Southmade Products Inc. Summary of Uncorrected Misstatements Decomber 31, 20x7 Debit (Credit) Misstatements Assets Liabilities Income Cost of Goods Sold Type Current Noncurrent Current Noncurrent Revenue Factual $ (50,000) Prepaid insurance Warranty liability Judgmental s (10,000) S (20,000) $ 30.000 Accounts receivable Projected $ (130,000) $ 130,000 Total uncorrected $(180,000) S (10,000) S (20,000) S 130.000 $ 30,000 Tax effect at 40% S 84.000 Tax effect at 40% $ 84.000 After tax effect $ (180,000) S 74.000 $ (20,000) s 130,000 $ 30,000 Effect of prior year's uncorrected misstatements $ (180,000) $ - $ 74.000 $ (20,000) S 130,000 $ 30,000 After-tax and prior year's effects Totals per financial $42,000,000 $ 22,000,000 $8.000.000 $ 63,000,000 $41,500,000 statements -0.43% 0.34% -0.25% 0.21% 0.07% Percent of uncorrected to financial statements