Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards

Auditing P 3-31

Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards. This standard reads, "The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period." Assume that the following list describes changes that have a material effect on a client's financial statement for the current year:
1. Correction of a mathematical error in inventory pricing made in a prior period.
2. A change from prime costing to full absorption costing for inventory valuation.
3. A change from presentation of statements of individual companies to presentation of consolidated statements.
4. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.
5. A change from the completed-contract method to the percentage-of completion method of accounting for long-term construction contracts.
6. A change in the estimated useful life of previously recorded fixed assets based on newly acquired information.
7. A change to including the employer share of Social Security (FICA) taxes as "retirement benefits" on the income statement from including it with "other taxes."
8. A change from FIFO method of inventory pricing to the LIFO method of inventory pricing.

Identify the type of change described in each item above, and state whether any modification is required in the auditor's report as it relates to the second standard of reporting. Organized your answer sheet as shown. For example, a change from the LIFO method of inventory pricing to the FIFO method in inventory pricing would appear as shown.
Assume that each item is material.

Item No. Type of Change Should Auditors report be modified?
Example An accounting change from one GAAP "Yes" to another GAAP


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You have accepted a job as the controller of a start-up company–a consulting firm, called Sheila Shaw Consulting

You have accepted a job as the controller of a start-up company–a consulting firm, called Sheila Shaw Consulting. Sheila is an excellent consultant, but not a good accountant. She has attempted to prepare the first month’s financial statements, however, the statements do not balance. Her financial statements are a good starting point, but your job is to correct the errors.

The statements are presented here.

SHEILA SHAW CONSULTING
Balance Sheet
August 31, 2007

Assets Liabilities
Current assets: Current liabilities:
Cash................................ $ 21,300 Accounts payable........ $ 1,250
Accounts receivable....... 3,800 Prepaid rent................. 2,050
Supplies........................... 875 Unearned fees.............. 1,150
Salaries payable.............. 150 Total liabilities................ $ 4,450
Prepaid insurance.......... 1,670
Total current assets..... $ 27,795
Property, plant, and
Equipment:...................... Owner's Equity
Office equipment............ $ 21,250 Sheila Shaw, capital....... 47,720
Less accum. depr............ 675
Total Property, plant,
and equipment............. 20,575 Total liabilities and
Total assets......................... $ 48,370 owner's equity............. $ 52,170

SHEILA SHAW CONSULTING
Income Statement
For the Month Ended August 31, 2007

Fees earned.................................................................................... $ 24,325
Expenses:
Salary expense....................................................................... $1,550
Rent expense.......................................................................... 1,200
Supplies expense.................................................................... 1,250
Insurance expense................................................................. 1,000
Miscellaneous expense.......................................................... 715
Interest expense..................................................................... 65
Bad Debt expense.................................................................. 150
Repairs and Maintenance.................................................... 200
Utilities expense..................................................................... 150
Payroll Tax expense.............................................................. 125
Office expense....................................................................... 525
Total expenses................................................................... 6,930
Net income..................................................................................... $ 17,395

SHEILA SHAW CONSULTING
Statement of Owner's Equity
For the Month Ended August 31, 2007

Sheila Shaw, capital, August 1, 2007........................................... $ 0
Additional investments during the month................................... 36,000
Total............................................................................................... $ 36,000
Net income for the month............................................................. $ 17,395
Less withdrawals........................................................................... 5,000
Increase in owner's equity............................................................ 12,395
Sheila Shaw, capital, August 31, 2007......................................... $ 48,395

SHEILA SHAW CONSULTING
Statement of Cash Flows
For the Month Ended August 31, 2007

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the month:................................................... $17,395
Adjustment for depreciation....................................... 675
Cash provided by operating activities................................. 18,070
(Increase) in working capital items
Accounts receivable.......................................................... (3,800)
Supplies.............................................................................. (875)
Prepaid expenses............................................................... 3,720
Accounts payable.............................................................. 1,250
Salaries payable................................................................. 150
Unearned fees.................................................................... 1,150
Cash flows from operating activities........................................... $18,990
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of office equipment........................................... (21,250)
Cash flows from investing activities............................................ $(21,250)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from shareholder (net of withdrawals).............. 31,000
Cash flows from financing activities........................................... $31,000
Net increase in cash....................................................................... $28,740
CASH-BEGINNING OF PERIOD............................................. 0
CASH-END OF PERIOD............................................................ $21,300

Sheila is grateful to have you on board as her controller, and you are eager to make a good impression on her by finding the errors in her statements. Download Sheila’s statements and make the changes to them. All the information you need to find the errors is contained in these statements.

Hint: There are 2 errors in the Balance Sheet, 1 error in the Income Statement, 1 error in the Statement of Owner’s Equity, and 2 errors in the Statement of Cash Flows. You will want to keep in mind all that you have learned in terms of the items on financial statements which are duplicated and flow from one statement to another.

Assignment Checklist:
1. Report 2 balance sheet errors
2. Produces 1 statement of owner’s equity errors
3. Report 2 errors on the statement of cash
4. Prepare corrected financial statements


Click here for the solution: You have accepted a job as the controller of a start-up company–a consulting firm, called Sheila Shaw Consulting