ONE: Normally audit adjustments affect both and asset or liability account and an income statement account. Audit adjustment #13 does not affect an income statement. The best explanation for why this is an audit adjustment rather than a reclassification entry is ( )?

Answers:

he audit adjustment corrects an error made by the client

The auditor doesnt know what income statement account to use

An adjustment that increases a liability doesnt affect net income

The debits and credits are already equal

Feedback: When the auditor detects an error in an entry made by the client, the error must be corrected whether it affects net income or not

TWO: AU 240 addresses the auditors consideration of fraud in the financial statements. AU 240.57-58 specifically discussions the risk that revenues may be misstated. Of the 13 audit adjustments the one is most likely to be of greatest concern to Bronys Bikes auditors is ( )

Answers:

All 13 adjustments because they are all misstatements

Adjustment #5

Adjustment # 9

Adjustment # 10

Feedback: Adjustment # 5 reverses the effects of material revenue cutoff errors that occurred at the end of the accounting period.

THREE:If adjustment #13 had been recorded as a credit to interest expense rather than interest payable ( )

Answers:

WP 14 would have required and additional debit to interest expense and credit to interest payable

Notes payable would have been out of balance

Assets would have increased

Net income would have decreased in the audited financial statements

Feedback:WP 14 correctly reconciled interest payable to $5,000,000. If adjustment #13 had been a credit to interest expense instead of credit to interest payable, interest payable would not reconcile to WP 14 without an additional audit adjustment.

FOUR: Given the balance sheet and income statement materiality thresholds and the 13 audit adjustments( )

Answers:

The audit adjustments in total are immaterial

The audit adjustments are material as to income statement only

The audit adjustments are material as to balance sheet only

The audit adjustments are material as to both income statement and balance sheet

Feedback:Income statement materiality has been exceeded by approximately 20 times and balance sheet materiality has been exceeded by approximately 3 times.