Kadex Corporation, a small manufacturing company, did not use the services of independent auditors during the first two years of its existence. Near the end of the third year, Kadex retained Jones & Scranton, CPAs, to perform an audit for the year ended December 31. Officials of the company requested that the CPA firm perform only the audit work necessary to provide an audit report on the financial statements for the current year.
During the first two years of its operation, Kadex had erroneously treated some material acquisitions of plant and equipment as revenue expenditures. No such errors occurred in the third year.
a. Under these circumstances, would Jones & Scranton, CPAs, be likely to learn of the transactions erroneously treated as revenue expenditures in years 1 and 2? Explain.
b. Would the income statement and balance sheet prepared at the end of year 3 be affected by the above accounting errors made in years 1 and 2? If so, identify the specific items. Explain fully.