Eyemax Corp. Case

EyeMax Corp.

• An unqualified opinion on financial statement only gives reasonable assurance that those financials are free from material error. This opinion does not guarantee that the financials are totally free from error. The key aspect of an unqualified opinion is the detection of material misstatements. An unqualified opinion can still be granted even if there are errors found, as long as these errors do not sum the threshold of materiality assigned by the auditor. This threshold is crafted using past knowledge and professional judgement. Overall the threshold of materiality is an amount significant enough to effect the decision making of a reasonable person.
• Journal Entries/Effects:

• Warranty Expense: 130,000 Understated

D: Warranty Expense: 130,000

                                    C: Warranty Liability:              130,000

• Other Effects:

-Expenses: Understated 130,000

-Liabilities: Understated 130,000

-Net Income: Overstated 130,000

-Assets: Understated 130,000

-Current Assets: Understated 130,000

-Revenues: No Effect

Repair & Maintence Expense: 200,000 Understated

                                    D: Repair & Main. Expense: 200,000

                                    C: Production Process Asset:             200,000

• Other Effects:

-Expenses: Understated 200,000

-Liabilities: No Effect (Acc. Dep. Contra asset)

-Net Income: Overstated 200,000

-Assets: Overstated 200,000

-Current Assets: No Effect

-Revenues: Overstated 200,000

                        Litigation Expense: 50,000 Overstated

                                                D: Product Liability: 50,000

                                                                    C: Product Liability Expense:          50,000

• Other Effects:

-Expenses: Overstated 50,000

-Liabilities: Understated 50,000

-Net Income: Understated 50,000

-Assets: No Effect

-Revenues: Understated 50,000

                Accounts Receivables: 8,662 Overstated

                                                          D: Sales (A/R Sales): 8,662

                                                          C: Accounts Receivable:     8,662

• Other Effects:

-Expenses: No Effect

-Liabilities: No Effect

-Net Income: Overstated 8,662

-Assets: Overstated 8,662

-Current Assets: Overstated 8,662

-Revenues: Overstated 8,662

• Projected misstatement: 1545/40 x 8662 = 334,569

• No, you cannot only consider the misstatement of 8,662. This is the misstatement found in only the sample. This misstatement must be PROJECTED onto the remaining A/R. This sample is to estimate the total errors present in total as long as the sample is representative of the total population of the A/R.
• Materiality is set at 625,000. If I add the projected misstatement from A/R of 334,569 + (50,000) + 200,000 + 130,000 of the other errors = 614,569. This is BELOW the stated materiality of 625,000. Now it must be considered if sample risk is low enough to fit in this “buffer”. No Adjustments are needed for an unqualified opinion.
• If management refused to make proper adjustments I would not give a qualified opinion. It is my reputation that is on the line and with my professional judgement implementing materiality if an error is material it must be adjusted. If they refuse they could find a new auditor who may have a different level of materiality. This is especially true considering the fact that they have had past issues with misstatement.