Question

Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover effects of prior-year uncorrected misstatements. Which of the following statements regarding this process is false?

a. Adjustments made to correct the financial statements are referred to as booked.
b. Possible adjustments to the financial statements that are left uncorrected are referred to as waived.
c. Tax effects are not shown on schedules of correcting errors.
d. The nature of the misstatement, as well as the quantitative amount, is considered in the judgment of materiality.

Answer 1

The false statement in relation to the accumulation of misstatements in audits is that tax effects are not shown on error correction schedules, as they are usually considered given their impact on financial outcomes.

Step-by-step explanation:

A student asked which statement regarding the process of accumulating known and projected misstatements and the carryover effects of prior-year uncorrected misstatements in an audit is false. The answer is c. Tax effects are not shown on schedules of correcting errors. This is because tax effects are typically considered when preparing a schedule of misstatements, given that correcting errors will often have tax implications. When dealing with misstatements:

• Financial statement adjustments that are made to correct identified misstatements are referred to as booked.
• Adjustments that are identified but not corrected are referred to as waived.
• The consideration of materiality involves both the nature of the misstatement and its quantitative amount.

Thus, the false statement is the claim that tax effects are not considered on the error schedules.