During the course of the audit of Omicron Sporting Goods for the year ending Dec

Question

During the course of the audit of Omicron Sporting Goods for the year ending December 31,20X3 the auditor discovered the following errors (with the documentation references in parentheses) Assume the auditor has made no adjustments to the trial balance numbers for these errors. OMICRON SPORTING GOODS ERRORS FOUND DURING AUDIT OF ACCOUNTS FOR YEAR ENDING DECEMBER 31, 20X3 (a) The accounts receivable confirmation work revealed one pricing error. The book value of S12,956 should be ,984. The projected error based on this difference is $14,465 (Workpaper B-9) 0-11) (1) Accrued vacation pay was understated by $9,000. (b)Omicron Sporting Goods hadunderstated the accrued vacation pay by S13,000. (Workpaper (c) A review of the prior year documentation indicates the following uncorrected errors. Sales and accounts receivable were overstated by an estimated S60,000 due to cutoff errors (2) REQUIRED: (1) Using the attached forms, prepare a summary working paper of possible adjustments for the items listed above. Assume that all items are considered material. The company's average income tax rate is 35% for both the current year and prior year. Indicate the effects the errors will have on both the balance sheet and income statement if they remain uncorrected. (2)

Explanation / Answer

Accounts receivable overstatement:

Due to overstatement of accounts receivable the net present income gets hiked which increases the tax rate of 35% of it and also mainly it ignores the debts to be received known as bad debts which affects the income statement and thereby the currents assets side of balance sheet.

Accrued payment understatement:

Due to the understatement of accrued payment, the net incomes gets affected in an increased way affecting thereby the income statement and asset side of the balance sheet.

Accrued payment overstatement:

Due to the overstatement in accrued payment, the net income gets affected in an increased way affecting thereby the income statement and the balance sheet.

Sales and accounts receivable overstatement:

Due to the overstatement of sales and accounts receivable, the net income gets increase with higher tax rate and thereby affecting the income and assets side of the balance sheet.

Also, as explained above the bad debts which are to be considered will get ignored due to the overstatement of the receivables as this could affect the firm in record keeping aspect.

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