The audit staff of Adams, Barnes & Co. (ABC), CPAs, reported the following audit findings in their 20X5 audit of Keystone Computers & Networks (KCN), Inc.:
1. Unrecorded liabilities in the amount of $6,440 for purchases of inventory. These inventory items were counted and included in the year-end total.
2. Projected misstatement from confirmation of accounts receivable in the amount of $2,042 understatement.
3. Projected misstatement from price tests of inventory of $9,510 overstatement.
4. The staff of ABC believes that the amount of KCN’s allowance for uncollectible accounts should be increased by $5,000.
In addition, the audit staff has decided that for evaluating a material misstatement of the financial statements, the following guidelines should be used:
Current assets—$50,000
Noncurrent assets—$75,000
Current liabilities—$50,000
Noncurrent liabilities—$75,000
Total owners’ equity—$100,000
Net income before taxes—$65,000
a. Prepare a schedule modeled after Figure 16.5 on page 642 to be used to evaluate the above audit findings, assuming that KCN’s marginal tax rate is 25 percent.
b. Decide whether the results indicate that there is a sufficiently low risk of material misstatement to justify ABC’s audit opinion.