micro warehouse was a computer software and hardware online and catalog sales company. A 1996 wall street journal article disclosed the following.

Micm Warehouise Inc, announced a "significant reoreaniration" of its maragement, including the resienation of three aenior etecutives The mone comes yust u few weeks after the Norwalk. Conn computer catalogue sales compary said it oventated earnings foy 518 million since 1992 as a result of accounting irregularities. That provious disclosure prompled a flurry of ahareholder lawvults against the company In. addition. Micro Warehouse said it is cooperating with an "informal inguiry" by the Securities and Eschange Commisuen. Its Iorm 100 quarterly report filed with the Securities and Fxchange Commission two days before indicated that inaccuracies involving undertatement of purchases and accounts payable in current and prior periods amounted to 547.3 million. It also indicated thint, as a result. $22 million of executive bonuscs for 1995 would be rescinded. Micro. Warehouse's total tax rate is apprnimately 40 , percent. Both cost of poods aold and executive bonuses are fully deductible for tax purposes. Reguined: As a new staff mernber at Micro. Warchousc's auditing firm. jou are assigned to write a memo outhining the elfects of the underitatement of purchases and the rescindine of the bonuses. In your report, be sure to include the following: 1. The total cifect on pretax and aftertax carnings of the understatement of purchases. 2. The total effect on pretax and aftertax carnangs of the receinding of the bonuses. Its Form. If.Q quarterty report filed whth the Securties and Exchange Commission two days before indicated that inaccunicies involving undentatement of purchases and accounts payable in current and prior periods amounted to 547.3 million. It also indicated that, as a result. 52.2 million of executive bonuses for 1995 would be reseinded. Micro Warehouse's total tax rate is apperximately 40.4 persent. Both cost of goods sold and exocutive bonuses are fully deductible for tax purposes. Rrywind: As a new ntaff member at Miero Warehouse's auditing firm, you are assegned to write a memo outining the effects of the understatement of purchases and the rescinding of the bonuses. In your report, be sure to include the following: 1. The total effect on pretax and aftertax carnings of the understatement of purchases. 2. The total effect on pretax and aftertax carnings of the rescinding of the bonuses. 3. An estimate of the pereentage of aftertax carnings management is receiving in bonuses. 4. A discussion of why Micro Warehouse's board of directors may have decided to tie managers' compensation to reported earnings and the possible relation between this type of bonus scheme and the accounting error