Problem:
Uncorrected Misstatement and Performance Materiality. Rivers, CPA is auditing the financial statements of Charger Company, a client for the past five years. During past audits of charger, River has only identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements is shown below (to illustrate, in 2005, the misstatements would have reduced net income by $13,200 if corrected).
Year effect on net income effect on Asset effect on liability effect on Equity
2005 ($13,200) ($20,000) ($6,800) ($13,200)
2006 $5,000 $12,000 $7,000 $5,000
2007 ($9,250) ($11,000) ($1,750) ($9,250)
2008 ($2,000) ($5,500) ($3,500) ($2,000)
2009 $1,000 $1,000 $0 $1,000
During the most recent audit, Rivers concluded that sales totaling $11,000 were recognized as of December 31,2010, that did not meet the criteria for recognition until 20011. When Rivers discussed these sales with turner, the chief financial officer of charger company, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this,Turner remarked, Then there's no need to worry, it's not a material amount. Why should we bother with this item?