Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements follows. (To illustrate, in 2018, the misstatements would have reduced net income by $13,200 if corrected:)

During the most recent audit, Rivers concluded that service revenue totaling $11,000 was recognized as of December 31, 2023 and it did not meet the criteria for recognition until 2024. When Rivers discussed this issue with Chris Turner, Charger Company’s chief financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this, Turner remarked, “Then there’s no need to worry . . . it’s not a material amount. Why should we bother with this item?” 

Required: 

a. How does the misstatement identified in 2023 affect net income, assets, liabilities, and equity in 2023? (Assume a 21 percent tax rate for Charger.) 

b. Comment upon Turner’s remark to Rivers. Is Turner’s reasoning correct? 

c. Upon doing some research, Rivers learned of the rollover method and iron curtain method for evaluating the performance materiality of misstatements. Briefly define each of these methods. 

d. How would Rivers evaluate the performance materiality of the $11,000 sales cutoff error in 2023 under the rollover method and iron curtain method? 

e. Based on your response to part (d), what adjustments (if any) would Rivers propose to Charger Company’s financial statements under the rollover method and iron curtain method?

Transcribed Image Text:

Year 2018 2019 2020 2021 2022 Effect on Net Income ($13,200) 5,000 (9,250) (2,000) 1,000 Effect on Assets ($20,000) 12,000 (11,000) (5,500) 1,000 Effect on Liabilities ($6,800) 7,000 (1,750) (3,500) 0 Effect on Equity ($13,200) 5,000 (9,250) (2,000) 1,000