Star Company Ltd.,is a private company that started on January 1,2017.During an external audit that was conducted at the end of the second year of the company's operation (2018),the following information was presented:
The company used the completed contract method for revenue recognition in 2017.Management now believes that the percentage of completion method would be better.If the percentage of completion method had been used,the incomes for 2017 and 2018 would have been $5,500,000 and $5,700,000 respectively.
The accounts receivable on December 31,2017 included a $50,000 account that was not provided for but subsequently was written off during 2018 as the customer went bankrupt after the issuance of the financial statements.Star Company would like to adjust 2017 for this oversight as it sees this as an error.
Required:
a.As the auditor on this engagement,what is your recommended treatment for each of these matters in terms of whether they are errors,changes in accounting policy,changes in estimate? Explain your conclusion.
b.Assume that management of Star Company agrees with your recommendations.How would the balances above be presented in the corrected income statements for 2017 and 2018?

Question

Star Company Ltd.,is a private company that started on January 1,2017.During an external audit that was conducted at the end of the second year of the company's operation (2018),the following information was presented:
  The company used the completed contract method for revenue recognition in 2017.Management now believes that the percentage of completion method would be better.If the percentage of completion method had been used,the incomes for 2017 and 2018 would have been $5,500,000 and $5,700,000 respectively.
The accounts receivable on December 31,2017 included a $50,000 account that was not provided for but subsequently was written off during 2018 as the customer went bankrupt after the issuance of the financial statements.Star Company would like to adjust 2017 for this oversight as it sees this as an error.
Required:
a.As the auditor on this engagement,what is your recommended treatment for each of these matters in terms of whether they are errors,changes in accounting policy,changes in estimate? Explain your conclusion.
b.Assume that management of Star Company agrees with your recommendations.How would the balances above be presented in the corrected income statements for 2017 and 2018?

Quizplus · Accepted Answer

The Answer of Star Company Ltd.,is a private company that started on January 1,2017.During an external audit that was conducted at the end of the second year of the company's operation (2018),the following information was presented:
  The company used the completed contract method for revenue recognition in 2017.Management now believes that the percentage of completion method would be better.If the percentage of completion method had been used,the incomes for 2017 and 2018 would have been $5,500,000 and $5,700,000 respectively.
The accounts receivable on December 31,2017 included a $50,000 account that was not provided for but subsequently was written off during 2018 as the customer went bankrupt after the issuance of the financial statements.Star Company would like to adjust 2017 for this oversight as it sees this as an error.
Required:
a.As the auditor on this engagement,what is your recommended treatment for each of these matters in terms of whether they are errors,changes in accounting policy,changes in estimate? Explain your conclusion.
b.Assume that management of Star Company agrees with your recommendations.How would the balances above be presented in the corrected income statements for 2017 and 2018?