Conducting the Audit of Snoop Dogg Essay
Ice Cube, CPA was conducting the audit of Snoop Dogg, Inc. for the year ended December 31, 201 7. Ice Cube evaluated the accounts receivable of Snoop Dogg and determined that there is a 95% probability that the true population misstatement is less than or equal to $ 384,415. Ice Cube decided that he should conclude that accounts receivable is not materially misstated, since the upper misstatement limit of $ 3 84,415 I s less than the tolerable misstatement of $ 400,000. Ice Cube also concluded that no other accounts in Snoop Dogg ’s financial statements were materially misstated, so he was planning to issue an unqualified audit opinion.
However, one of Ice Cub e ’s coworkers mentioned that he should probably review the SEC Staff Accounting Bulletin 108 before issuing the audit report. After reading the bulletin, Ice Cube decided that he needed to consider the misstatements in Snoop Dogg’s financial statements over the past several years and, consequently, constructed the following table to better help him analyze the situation. The table shows uncorrected, immaterial misstatements from years 20 1 2 – 201 6 and how they would have impacted the financial statements of those years, if corrected (e.g., net income in 20 1 2 was overstated by $ 484,917 and would have been reduced by this amount if the 20 1 2 misstatements had been corrected).
Year Effect on Net Income Effect on Assets Effect on Liabilities Effect on Equity 20 12 (484,917) (1, 731,846) (1,2 46, 929) (484,917) 20 13 (767, 482) (2, 192,805) (1, 425,323) (767,482) 201 4 (529,722) (1, 891, 864) (1, 362, 142) (529,722) 201 5 884 ,208 2, 526, 308 1, 642,100 884,208 201 6 (635, 185) (1, 814,814) (1, 179, 629) (635,185)
Ice Cube has identified several misstatements in the 201 7 financial statements, none of which exceed planning materiality of $ 3,250 ,000. The impacts of the 201 7 misstatements on the 201 7 financial statements, if corrected, are:
Net Income $ (371,219)
Assets $ (1,325,782)
Liabilities $ (954,563)
Equity $ (371,219)
- Evaluate the materiality of the uncorrected misstatements on Snoop Dogg ’s financial statements using (a) the rollover method and (b) the iron curtain method, making sure to identify the amount of the misstatement to consider under each method.
- Given your results in part 1, should Ice Cube conclude that the financial statements are materially misstated? Why or why not?
- Refer to SEC Staff Bulletin 108. What is the primary weakness of the rollover method? What is the primary weakness of the iron curtain method? Why does the SEC recommend using both methods when evaluating financial statement misstatements?