Problem:
Aaron Raymond, CPA, is auditing the financial statements of Astro Company, a client for the past five years. During past audits of Astro, Raymond 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 2009, the misstatements would have reduced net income by $ 13,200 if corrected):
year --- effect on N/I ---- effect on asset --- effect on liability --- effect on eqyuity
2009 --- (13,200) ------ (20,000) ---------- (6,800) ------------(13,200)
2010 --- 5,000 ---- 12,000 ------ 7,000 ------------- 5,000
2011 --- (9,250) ----- (11,000) ----- (1,750) -------- (9,250)
2012 ---(2,000) ------(5,500) ------- (3,500) -------- (2,000)
2013 ----1,000 ----- 1,000 -------- 0 ------ 1,000
During the most recent audit, Raymond concluded that sales totaling $ 11,000 were recognized as of December 31, 2014, that did not meet the criteria for recognition until 2015. When Raymond discussed these sales with Chris Becker, Astro Company's chief financial officer, Becker asked Raymond about the performance materiality level used in the audit, which was $ 25,000. Upon learning of this, Becker remarked, "Then there's no need to worry . . . it's not a material amount. Why should we bother with this item?"
Required:
Q1. How does the misstatement identified in 2014 affect net income, assets, liabilities, and equity in 2014? (Assume a 35 percent tax rate for Astro.)
Q2. Comment upon Becker's remark to Raymond. Is Becker's reasoning correct?
Q3. Upon doing some research, Raymond learned of the rollover method and iron curtain method for evaluating the performance materiality of misstatements. Briefly define each of these methods.
Q4. How would Raymond evaluate the performance materiality of the $ 11,000 sales cutoff error in 2014 under the rollover method and iron curtain method?
Q5. Based on your response to (d), what adjustments (if any) would Raymond propose to Astro Company's financial statements under the rollover method and iron curtain method?