The TLC case is constructed with two parts:

1. Accounting Issues, and
2. Evaluating the Importance of all Uncorrected Misstatements.

The case requires students to address accounting issues from their previous accounting courses from the perspective of an auditor.

Part A addresses six (6) accounting issues, some with definite answers some less definite.

For each issue, prepare a short memo that summarizes relevant professional standards (standard and paragraph should be cited). Discuss information that would be included in any note disclosures related to each of the six items (you need not draft formal note disclosures). Also, prepare entries for all misstatements you identify, regardless of the amount involved. That is, dont simply say no entry is needed because any amount involved would be immaterial. For purposes of preparing journal entries, you may ignore income tax implications as any changes in taxes will be reflected later in the audit process after any entries have been posted to the working trial balance.

Part B (5620 students only) requires the completion of a Summary of Uncorrected Misstatements schedule. The relationship between the aggregated misstatement and materiality is often documented in a working paper similar to that shown below. Complete the provided excel schedule by considering the effects of the aggregated misstatements from Part A on net income and other components of the financial statements. Then, reach materiality conclusions on questions 2 and 3 from Part B.

Tremendous Leeds Company

Accounting Issues Case

Part A

On February 20, 20X4 you are well into the field work of the 12/31/20X3 audit and the following issues have arisen during the audit of Tremendous Leeds Company (TLC).

1. Service revenue
2. Account receivable from officers
3. Prepaid advertising
4. Alan Almond Company receivable
5. Inventory
6. Bring Your Daughters and Sons to Work Day litigation

Linda Wilson the president of TLC wants you to present your position on each of these issues as she would like your judgment as to good GAAP numbers. But, she has also pointed out that she understands that GAAP often does not provide a precise answer, and in such cases, she would rather error on the side of maintaining income rather than being an overly pessimistic doomsayer. The attitude of Board of Directors members is consistent with that of Linda.

Summarize the income effects (before taxes) of any entries that you propose on a schedule such as the following (make clear over and understatements of income):

Income Effect

1. Unearned service revenue ____________
2. Account receivable from officers ____________
3. Prepaid advertising ____________
4. Alan Almond Company receivable ____________
5. Inventory ____________
6. Bring your Daughters and Sons to Work Day litigation ____________

Issue 6: Bring Your Daughters and Sons to Work Day Litigation

On Bring Your Daughters and Sons to Work Day at Winglo Corporation not only did Sandy Gilhaus, a Winglo employee, bring her ten year old daughter Sarah to work, but TLC also installed Winglos new computer system on that day. After installation, when Sandy attempted to adjust the monitor connected to her new computer, she inadvertently knocked the monitor off the desk and onto the floor. The screen shattered with a piece of the glass striking Sarahs right big toe. To make a long story short, Sarahs toe needed four stitches to stop the bleeding and Sandy has blamed the installer of the system for placing the monitor in a dangerous position near the back edge of her desk. The damages to this point have been minimal as Sandy drove Sarah to their HMO and paid the $20 copay for an office visit. Yet, the Gilhaus family has sued TLC for the following:

Likely future plastic surgery $ 5,000

Emotional distress to Sarah 500,000

Emotional distress to Sandy 1,200,000

Total $1,705,000

TLCs lawyers believe that this case, with the possible exception of the plastic surgery (for which the HMO wont pay), is frivolous. TLC has no insurance to cover this sort of liability. If this case goes to court, TLCs on staff attorneys will handle the case. To eliminate any possible bad press from this case, TLCs lawyers suggested settling for a nuisance value of $10,000. Sarahs family rejected this offer out of hand and asked for $200,000 to settle this out of court. TLC has decided, at least at this point, to refuse any further settlement offer.

In their lawyers letter to you TLCs lawyers indicated that they believe that TLC has just and meritorious defense available to fight this case. Furthermore, TLCs legal counsel for the case indicated that while she agrees that this case is largely frivolous, litigation involving a young child is somewhat of a crap shoot and that making a definite prediction on the outcome of the case is impossible. In the end she believes the judgment will likely be $5,000 for the plastic surgery. What entry or disclosure, if any, is necessary in this circumstance?