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Chapter 123 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
related to goods received before the year-end. These are not included in
the accruals balance. The total of the invoices is $25,000.
2 A misstatement of $5,000 has occurred when depreciation has been
calculated.
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.
Total assets are $200,000.
The misstatement relating to accruals is material individually at 12.5% of
assets. 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 of $5,000 represent
2.5% of assets. In aggregate this is 5% of assets which may be considered
material in the auditor’s judgement.
Management should be asked to correct all three misstatements.
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