As a new staff member at micro warehouses auditing firm-, Accounting Basics

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As a new staff member at micro warehouses auditing firm-

As a new staff member at Micro Warehouse's auditing firm, you are assigned to write a memo outlining 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 after-tax earnings of the understatement of purchases.

2. The total effect on pretax and after-tax earnings of the rescinding of the bonuses.

3. An estimate of the percentage of after-tax earnings 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 errors.

Micro Warehouse declared bankruptcy in 2003.

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Accounting Basics: As a new staff member at micro warehouses auditing firm-

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