Question

a. Do you perceive &ny pluu Johnson? Explain. b. Do you perceive any problems with Johnson's reasoning or the appropriatenes dence used in that reasoning? 159 Chapter 4 Management Fraud and Audit Risk 4.53 Risk of Misstatement in Various Accounts. An auditor must identify the relevant asser- tions about cach significant financial statement account and disclosure and the gather evi- dence to conclude about whether a material misstatement exists for each assertion. The nature of each financial statement account and disclosure contributes to the likelihood that a material misstatement exists. a. In general, which accounts are most susceptible to overstatement? To understatement? b. Why do you think a company could permit asset accounts to be understated? c. Why do you think a company could permit liability accounts to be overstated? d. Which direction of misstatement is most likely: income overstatement or income understatement?

Answer 1

1. In Counting and pricing due to errors. Understatements of inventory may occur.

Due to the reason failure in capitalization of cost, the value of fixed assets may be understated.

(EX: - Some expenses like transportation cost may be charged expenses which are incurred at the time of acquisition of fixed assets)

Or due to wrong calculation of depreciation. In generally liability or expenses will be understated erroneously.

• Understatement of assets may result from errors in accounting.
• Wrong application of accounting principles, and errors in measurement (like undercounting of inventory).
• Companies might be motivated to evasion of tax through understated assets and income.

3. A company could permit liability accounts to be overstated for various reason. First of all to reduce the profit by increasing expenses and keeping the expenses as an unpaid liability. It would help to reduce the tax liability of the concern because of excess expenditure recognized. Secondly, by following prudence concept they might make liability at an overstated amount for booking the future foreseeable losses.
4. Most frequently overstatement of income will occur. Actually understatement of expenses will be the cause. (EX:- Expenses accrue.