Page 170 - AAA Integrated Workbook STUDENT S18-J19

Chapter 103 4

Example 3

Evaluation of misstatements

During the audit of Severn Co you have identified the following misstatements:

1 A number of purchase invoices were received after the year-end which
relate to goods received before the year-end. These are not included in
the accruals balance. The total of the invoices is $25,000.

2 An error of $5,000 has occurred when depreciation has been calculated
resulting in overstatement of non-current assets.

3 The inventory balance includes damaged inventory valued at a cost of
$75,000. The damaged inventory can be sold for $80,000 if remedial
work costing $10,000 is undertaken. Therefore net realisable value is
$80,000 – 10,000 = $70,000 resulting in overstatement of $5,000.

Profit before tax is $200,000.

The misstatement relating to accruals is material at 12.5% of PBT. Material
misstatements cannot be offset by other misstatements to avoid a modified
opinion therefore this misstatement must be adjusted.

The misstatements relating to depreciation and inventory each represent 2.5%
of PBT. In aggregate this is 5% of PBT which may be considered material in
the auditor’s judgment.

Management should be asked to correct all three misstatements.

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