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    Audit of Aviary Industries for calendar year 2007

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    In your audit of Aviary Industries for calendar year 2007, you found
    a number of matters that you believe represent possible adjustments to the company's
    books. These matters are described below. Management's attitude is that "once the books
    are closed, they'e closed," and management does not want to make any adjustments.
    Planning materiality for the audit was $100,000, determined by computing 5% of expected
    income before taxes. Actual income before taxes on the financial statements prior to any
    adjustments is $1,652,867.
    Possible adjustments:
    1. Several credit memos that were processed and recorded after year-end relate to sales
    and accounts receivable for 2007. These total $23,529.
    2. Inventory cutoff tests indicate that $22,357 of inventory received on December 30,
    2007, was recorded as purchases and accounts payable in 2008. These items were
    included in the inventory count at year-end and therefore were included in ending
    inventory.
    3. Inventory cutoff tests also indicate several sales invoices recorded in 2007 for goods
    that were shipped in early 2008. The goods were not included in inventory but were
    set aside in a separate shipping area. The total amount of these shipments was
    $36,022. (Ignore cost of sales for this item.)
    4. The company wrote several checks at the end of 2007 for accounts payable that were
    held and not mailed until January 15, 2008. These totaled $48,336. Recorded cash and
    accounts payable at December 31, 2007, are $2,356,553 and $2,666,290, respectively.
    5. The company has not established a reserve for obsolescence of inventories. Your tests
    indicate that such a reserve is appropriate in an amount somewhere between $20,000
    and $40,000.
    6. Your review of the allowance for uncollectible accounts indicates that it may be
    understated by between $25,000 and $50,000.
    a. Determine the adjustments that you believe must be made for Aviary's financial state -
    ments to be fairly presented. Include the amounts and accounts affected by each
    adjustment.
    b. Why may Aviary Industries' management resist making these adjustments?
    c. Explain what you consider the most positive way of approaching management personnel to convince them to make your proposed changes.
    d. Describe your responsibilities related to unadjusted misstatements that management
    has determined are immaterial individually and in the aggregate.
    e. Assuming Aviary Industries is a public company, describe how the noted adjustments
    might impact your audit report on internal control over financial reporting.

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    Solution Preview

    Audit effects schedule entries:

    .......Assets.................Liab.................Equity................Rev......................Exp..............
    (1) (23,529)....................................(23,529).............(23,529)...........................
    (2) (22,357).........(22,357)............................................................................................
    (3) (36,022)....................................(30,622).............(36,022)................................
    (4) 48,336............(48,336).........................................................................................
    (5) (20,000)....................................(20,000).......................................20,000........
    (6) (25,000)....................................(25,000).......................................25,000........

    Net impact on assets:
    overstated $78,000 (using lower estimates for reserves for bad debts and obsolete inventories) - would be $123,572 with higher end of the range estimates.

    Net impact on liabilities:
    $70,693 understated.

    Net impact on profits and equity:
    Profits are overstated by $104,551 using ...

    Solution Summary

    Your tutorial is 488 words and gives a sample effects schedule showing the proposed adjustments and a discussion of the seriousness of the errors as well as responding to the questions posed.

    $2.19

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