Case: Wyly Waste Management
Wyly Waste Management ("WWM") is an SEC registrant and your firm is its auditor. Overall materiality for the audit is $100,000. Shortly after the end of the year, WWM's CFO is meeting with your audit partner to review the preliminary results of the audit. The engagement partner presents a copy of the draft unadjusted error summary to the CFO, which contains only one error. During the year, WWM did not capitalize individual expenditures of less than $10,000, which is in accordance with its company policy. In the past, WWM's capital expenditures have been relatively constant each period and the expensing of the items has not caused any material errors. In the prior two years, the expensed items totaled $7,500 and $5,000, respectively. However, in the current year, WWM undertook significant development of a new waste disposal plant. As a result, WWM incurred eight capital expenditures of less than $10,000 each that were not capitalized. These purchases totaled $75,000.
Required:
a. Should your partner require WWM to record an adjustment for the expensed items in the current year?
b. Suppose the facts were changed and the expensed items for the prior two years totaled $22,500 and $15,000, respectively. Should your partner require WWM to record an adjustment for the expensed items in the current year?
c. Given the facts as presented in (b), above, how much of an adjustment should the auditor require before being willing to issue an unqualified audit opinion?