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Auditing: Restatement of financial statements. Define the deficiency.

PROBLEM:
The company has found it necessary to restate its financial statements for the past two years due to a material overstatement of revenues two years ago and an equal understatement last year. The errors are due to sales of certain software that allowed the purchasers extremely lenient rights of return. The errors were discovered shortly after the end of the current accounting year. Members of management indicated that the misstatements occurred because they simply didn't know the accounting rules. Now they know the rules, and they won't let it happen again.

REQUIRED:

(1) State the highest level of deficiency that you think the circumstances represent. Is it a control deficiency, significant deficiency, or material weakness?

(2) Explain your decision in the case.

Solution Preview

ACCT/auditing
PROBLEM:

-The company has found it necessary to restate its financial statements for the past two years due to a material overstatement of revenues two years ago and an equal understatement last year.

-The errors are due to sales of certain software that allowed purchasers extremely lenient rights of return.

-The errors were discovered shortly after the end of the current accounting year.

-Members of management indicated that the misstatements occurred because they simply didn't know the accounting rules.

-Now they know the rules, and they won't let it happen again.

REQUIRED:

(1) State the highest level of deficiency that you think the circumstances represent. Is it a control deficiency, significant deficiency, or material ...

Solution Summary

The cited solution explains the differences between control deficiency, significant deficiency, and material weakness. It also concludes the type of deficiencies presented in the problem.

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