Tolerable Misstatement

If an auditor were to have the same tolerable misstatement for each account the cost of the audit would be extremely high due to the large amount of testing that would need to be conducted. Certain accounts will be given a high threshold, therefore requiring less evidence gathering. Accounts that need more evidence require a lower tolerable misstatement. By setting low and high tolerable misstatements the auditor will save money and time. For example, Smith & Jones when testing the total asset account for tolerable

In today’s world, the role of IT has turned accounting estimated critical in financial reporting and disclosure. Houghton and Fogarty have said that non-accurate or incorrect estimates have often caused to misstatements in audit report (Gray & Manson, 2007).

The error would’ve been correct on the current period first quarter results. To correct the overstatement of 8 million in inventory, a credit or decrease for $8 mill should’ve been done on the inventory account, and the retained earnings should’ve been debited for the same amount:

Mathematics is a logical and precise subject. Without precision in math everything is imprecise. A modest inaccuracy can produce a catastrophe. For example, if a doctor fails to calculate the correct amount of medicine to give a patient, it could result in a serious complication, such as death. A further example is the logic and precision it takes to construct a building. If there is one minor miscalculation the whole building could collapse, causing mass destruction.

The requirements of the applicable financial reporting framework relevant to accounting estimates, including related disclosures

Why are different materiality bases considered when determining planning materiality? Why are different materiality thresholds relevant for different audit engagements? Why is the materiality base that results in the smallest threshold generally used for planning purposes? Why is the risk of management fraud considered when determining tolerable misstatement? Why might an auditor not use the same tolerable misstatement amount or percentage of account balance for all fmancial statement accounts? Why does the combined total of individual account tolerable misstatements commonly exceed the estimate of planning materiality? Why might certain trial balance amounts be projected when considering planning materiality?

To enhance a user’s ability to understand and compare an entity’s operating results, reporting entities are required to describe all significant accounting policies in their financial statements. As such to decide if an accounting principal is significant, is the management’s decision.

When measures of central tendency are not affected by extremely low or extremely high values?

If a material accounting error is discovered, accounting standards require companies to restate their historical financial statements (FASB ASC 250-10-45-23)

Because of the complexities involved in financial accounting, errors do occur. Errors may result from a change in accounting principle, mathematical mistakes, changes in estimates not prepared in good faith, an oversight, a misuse of facts, or an incorrect classification. These errors can cause serious financial report misstatements. When errors are discovered, adjustments must be made to prior periods. These adjustments result in a change in the retained earnings balances for those periods. The company goes back to the earliest period affected by the error when calculating these adjustments (Kieso, Weygandt, & Warfield, 2007).

Accurate accounting and the understanding can make or break your company or organization; not to mention possible jail time in the worse cases. The first way of ensuring accurate accounting is understanding the objectives. The second way is to understand the terminology of the accounting process and in the financial reporting aspects. The third way is to understand the ethics behind the accounting and reporting process. The forth way is to impement your role in the accounting process.

The account with the greatest risk of material misstatement is the inventory account. Two other accounts that have risk, but do not have as much risk as the inventory account are: accounts receivable and the property and equipment account. Finally, another account that should be monitored is the short-term investments account.

Reports the variance in the main income statement and balance sheet accounts and the reasons thereof.

An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide

A company prepares financial statement to provide information about its financial position and performance. This information is in turn used by a wide range of stakeholders (such as investors, banks, customers, suppliers etc) in making economic decisions with respect to respective economic interest in the company. Typically, in terms of ownership by investment in shares of the company, shareholders though own the company but do not manage it. Therefore, the shareholder and other such stakeholders to get comfort in taking sound decision need independent assurance from the auditors that the financial statements reflect true and fair view of the company affairs in all material respects. Hence, in order to enhance the level of