You are the auditor of Bittern Inc. Bittern’s long standing policy is to capitalize all repairs and maintenance payments that exceed $10,000, without assessing the nature of the expenditure. Many of Bittern’s buildings and equipment are aging and repairs are becoming frequent and more expensive. You have concerns that a material amount of building repairs and maintenance expense is being capitalized, and undertake a detailed examination of all the building asset additions during the current year. Your analysis indicates that approximately $400,000 of repairs expense has been capitalized as buildings in the current year. Materiality for the audit is $500,000. In the prior year’s audit, the staff noted approximately $100,000 of repairs expenses had been capitalized, but no adjustment was recorded. The estimated useful life of Bittern’s buildings is 25 years, and the average remaining useful life of their buildings is approximately 8 years.

a. Describe the impact of the above error on the current year financial statements and the impact it will have on future periods’ financial statements when the error reverses, if it is not adjusted.
b. Describe the impact the unadjusted error from the prior year will have on the current year’s financial statements.
c. State whether you would require Bittern to adjust for this error, and support your conclusion. If you require an adjustment, provide the required journal entry.
d. What recommendation would you include in the management letter relating to the situation above?

  • CreatedJanuary 09, 2015
  • Files Included
Post your question