Item
Total
Amount
Current
Assets
Noncurrent
Assets
Current
Liabilities
Noncurrent
Liabilities
Income
Before Tax
1 125000 (125,000) 125,000
2 85,000 (85,000) 60,000 (25,000)
3 44,000 (44,000) (44,000)
4 52,000 52,000 52,000
5 43,000 0
6 Not known 0 0
(129,000) 112,000 (125,000) 0 108,000
POSSIBLE MISSTATEMENT ―
OVERSTATEMENT (UNDERSTATEMENT)
The net effect of the adjustments to the balance sheet and income statement
are material to the financial statements. Pretax income would be overstated by
$108,000, which is in excess of the income statement materiality, as a result of
these items if they are not properly reflected in the accounting records.
Likewise, current assets are misstated by more than materiality. Even though
the net effect of adjustments to current assets and noncurrent assets is less
than materiality for total assets, the fact that a major financial statement line
item, such as current assets, is misstated by more than materiality, indicates the
adjustments would need to be made for the financial statements to be fairly
stated. Note that the problem fails to provide information about the dollar
amounts involved in Item 6. Most likely the nature of that item consists of a
large dollar amount, which would need to be reflected in the financial
statements given the impact it would have on noncurrent assets and noncurrent
liabilities.