Question :

Suppose you are the audit manager for the 2012 audit of Fisher Aquarium Supply, an SEC registrant. This is your firm's third year with Fisher, a company that produces and sells products such as fish food, aquarium cleaners and decorations. Fisher's unaudited 2012 pretax earnings were $25 million.

It is now mid-February 2013, and your audit team is computing the subsequent misstatements.

Allowance for uncollectible accounts. Fisher has had great success in current years collecting from customers. Therefore, Fisher reduced the percentage of credit sales it uses for evaluating the allowance for uncollectible accounts through 2012. Both the board of directors and your firm agree with this change. Fisher uses the allowance technique for accounting for bad debts, and despite the reduction in the allowance account itself, still need a bad debt replenishment of $295,000. Thus, Fisher did not record this year-end adjusting entry.

Income tax liability. Fisher's tax attorney informed you that it is possible that the client will have to pay $875,000 in taxes regarding a tax dispute that started four years ago. The tax professionals at your firm agree with the tax attorney's assessment. Fisher's CEO told you that the company can't estimate an amount, noting that he is not aware of any similar cases that would give a good estimate. Thus, the company did not record any contingent liability for income taxes in the 12/31/12 financial statements. Thus, Fisher did disclose the situation in a financial statement footnote.

Inventory. The audit team conducted counts of Fisher's inventory on a sample basis. The book value of the sample was 10 percent of the net inventory book value of $3.6 million. The sample items were overstated by $23,000.

Wages Payable. Workers at one of Fisher's three manufacturing centers were on strike in November 2012. The company did not pay them through this time, and is presently finalizing negotiation with the workers' union. One of the final negotiation issues is how much to pay the workers for missed time in November. A corporate lawyer at Fisher told you it is very possible that Fisher can have to pay up to $162,000 in wages for the period in which the strike occurred. The company has ready a financial statement footnote to disclose the situation.

Notes Payable. Fisher obtained a loan in March 2012.

Questions:

1. (a) Evaluate the aggregate misstatement? Show all calculations.

(b) Does the aggregate misstatement understate or overstate net income?

2. (a) How much of an overall adjustment could you need to issue an unqualified opinion? Describe your reasoning.

(b) How would you assign your adjustment from 2(a) to the several accounts? Describe your reasoning. If you did not make an adjustment in part 2(a), consider the partner asked you to make an $800,000 adjustment and allocate it to the accounts in question.