Question

II. Pretend you are an auditor (I know, I know, this is an amazing dream). Imagine that you are performing the 12/31/20 financial statement audit of Curly's Coffee and Vinyl Shop. During the substantive procedures, you discovered the situations listed below. If it is a misstatement, then you will need to communicate these to the client and request that they be fixed. In that case, write the correcting journal entry that the client should book to correct (all years with errors). Include date, accounts debited and credited, and amounts. If no correcting entry is needed, then write: “no correcting entry necessary” and provide a brief explanation.

Answer 1

I would like to communicate the following 2 misstatements found during the audit procedures and ask client to pass the following correcting entries :

Misstatement #1 : No accrual of utility expenses of December 2020 :

Since Utility expenses pertain to the month of December 2020, i.e., they fall within the period covered under financial statements ending 31st December, 2020, they should be recorded as an expense in the current year only irrespective of whether the invoice is received in the current or the next year.

In the current case, client has booked the invoice on 3rd January, 2021 which is incorrect as an accrual liability along with a corresponding debit to expense should have been booked in 2020. Hence the correcting journal entry to be passed in the financial statements ending 31st December, 2020 is as follows :

Date	Account	Dr. ($)	Cr. ($)
31-12-2020	Utility Expense a/c ..Dr	1,000
	To Provision for Expenses a/c		1,000

Misstatement #2 : Booking espresso machine as repair & maintenance expense instead of capitalizing the same :

Espresso machine is an asset for us which should be capitalized and shown in the Balance sheet under the head "Property, Plant & Equipment" and which should be depreciated over it's useful life. In the current scenario the client has mistakenly expensed it off in the income statement as repairs & maintenance expense which is incorrect. Hence correcting entries to be passed for the above are as follows :

Date	Account	Dr. ($)	Cr. ($)
31-12-2020	Asset (Espresso Machine) a/c ..Dr	5,000
	To Repairs & Maintenance Expense		5,000
Date	Account	Dr. ($)	Cr. ($)
31-12-2020	Depreciation a/c ..Dr	1,000
	To Asset (Espresso Machine) a/c		1,000
Note 1 : Since Espresso machine was purchased on 1st January, 2020, the whole year depreciation is to be charged on the same.
Note 2 : The above mentioned depreciation entry is to be passed in the next 4 years as well.