Eyemax Corporation: Evalution of Audit Differences

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Completing the audit, Reporting to Management, and External Reporting C A S eS INC LU De D IN T h IS Se CTION

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369 379 385 391 395

12.1 EyeMax Corporation 12.2 Auto Parts, Inc. 12.3 K&K, Inc.

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Evaluation of Audit Differences
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Considering Materiality When Evaluating Accounting Policies and Footnote Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Leveraging Audit Findings to Provide Value-Added Insights
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12.4 Surfer Dude Duds, Inc.

Considering the Going-Concern Assumption
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12.5 Murchison Technologies, Inc.

Evaluating an Attorney’s Response and Identifying the Proper Audit Report

INStRUCtoR RESoURCE MaNUal — Do Not CoPy oR REDIStRIbUtE

INStRUCtoR RESoURCE MaNUal — Do Not CoPy oR REDIStRIbUtE

EyeMax Corporation
Evaluation of audit Differences
INS TR UC T IONAL O b je C T Ive S
[1] [2]

C aS E

12.1

Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt

[3]

To illustrate issues associated with completing the audit. To illustrate the degree of judgment and negotiation involved in requiring clients to book adjustments to their financial statements. To revisit the concepts of tolerable misstatement, materiality, and audit sampling.

[4]

[5] [6]

This case is designed to help students decompartmentalize their sampling knowledge from their general business and audit knowledge. To illustrate differences in “hard” versus “soft” (e.g., estimates based on judgment) adjustments. To illustrate the importance of projected misstatement and sampling risk in the evaluation of misstatements detected in sampling applications.

KEY FACTS
ƒƒ EyeMax is engaged in research and development, manufacture and sale of medical devices used by ophthalmologists during eye surgeries. Customers of the product lines are primarily doctors of ophthalmology and laser-eye clinics. ƒƒ EyeMax has been an audit client for 5 years. In the planning phase of the audit, both inherent risk and control risk were assessed at less than the maximum but the audit plan specifies an audit approach that relies primarily on substantive testing. ƒƒ Planned audit fieldwork has been completed and students are asked to consider four items posted to the summary of audit differences in order to determine the minimum adjustment (if any) to the financial statements they would require before issuing a “clean opinion.” ƒƒ All items posted to the Summary of Audit Differences have been discussed with the client and the client agrees with the auditors’ position on each item. However, because earnings have already been announced they would prefer not to book any of the items in the fiscal year under audit. ƒƒ Total financial statement materiality was set at $625,000, which is equal to approximately 5% of earnings before taxes. ƒƒ One of the four items posted to the Audit Summary is based on audit sampling. The case in the student’s casebook provides the aggregate total of the known misstatements (i.e., before misstatement projection or any consideration of sampling risk), which is $288,662. In the case extension or follow-up assignment (the case extension is located at the end of these teaching notes and can be used at the option of the instructor) students are also provided with aggregate projected misstatement which is $614,690.

The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. It was adapted from an article authored by D. Burgstahler, S. Glover, and J. Jiambalvo, Auditing: A Journal of Practice and Theory, (2000, Vol. 1, page 79). EyeMax is a fictitious company. All characters and names represented are fictitious; any...
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