Zero and 11,000 are incorrect
Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements follows. (To illustrate, in 2015, the misstatements would have reduced net income by $13,200 if corrected:) Year 2015 2016 2017 2018 2019 Effect on Net Income $ (13,200) 5,000 (9,250) (2,000) 1,000 Effect on Assets $ (20,000) 12,000 (11,000) (5,500) 1,000 Effect on Liabilities $ (6,800) 7,000 (1,750) (3,500) Effect on Equity $(13,200) 5,000 (9,250) (2,000) 1,000 During the most recent audit, Rivers concluded that service revenue totaling $11,000 was recognized as of December 31, 2020 and it did not meet the criteria for recognition until 2021. When Rivers discussed this issue with Chris Turner, Charger Company's chief financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this, Turner remarked, "Then there's no need to worry ... it's not a material amount. Why should we bother with this item?". Required: a. What is the dollar impact of the misstatement identified in 2020 on each of the following (assume a 21% tax rate for Charger)? 8,690 Net income Assets 11,000 2,310 Liabilities Equity Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements follows. (To illustrate, in 2015, the misstatements would have reduced net income by $13,200 if corrected:) Year 2015 2016 2017 2018 2019 Effect on Net Income $ (13,200) 5,000 (9,250) (2,000) 1,000 Effect on Assets $ (20,000) 12,000 (11,000 (5,500) 1,000 Effect on Liabilities $ (6,800) 7,000 (1,750) (3,500) 0 Effect on Equity $(13,200) 5,000 (9,250) (2,000) 1,000 During the most recent audit, Rivers concluded that service revenue totaling $11,000 was recognized as of December 31, 2020 and it did not meet the criteria for recognition until 2021. When Rivers discussed this issue with Chris Turner, Charger Company's chief financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this, Turner remarked, "Then there's no need to worry ... it's not a material amount. Why should we bother with this item?". Required: a. What is the dollar impact of the misstatement identified in 2020 on each of the following (assume a 21% tax rate for Charger)? Answer is complete but not entirely correct. Net income Assets 8,690 11,000 2,310 8,690 Liabilities Equity Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements follows. (To illustrate, in 2015, the misstatements would have reduced net income by $13,200 if corrected:) Year 2015 2016 2017 2018 2019 Effect on Net Income $ (13,200) 5,000 (9,250) (2,000) 1,000 Effect on Assets $ (20,000) 12,000 (11,000) (5,500) Effect on Liabilities $ (6,800) 7,000 (1,750) (3,500) 0 Effect on Equity $(13,200) 5,000 (9,250) (2,000) 1,000 1,000 During the most recent audit, Rivers concluded that service revenue totaling $11,000 was recognized as of December 31, 2020 and it did not meet the criteria for recognition until 2021. When Rivers discussed this issue with Chris Turner, Charger Company's chief financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this, Turner remarked, "Then there's no need to worry ... it's not a material amount. Why should we bother with this item?". Required: a. What is the dollar impact of the misstatement identified in 2020 on each of the following (assume a 21% tax rate for Charger)? Answer is complete but not entirely correct. Net income 8,690 Assets 11,000 2,310 Liabilities Equity (8,690) X
