A company discovers that its Cost of sales is understated by an insignificant amount.They do NOT need to correct the error because of the conservatism principle.

Question

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The conservatism principle states that when in doubt, accountants should choose the option that will result in lower profits or higher liabilities. However, in this scenario, the error in understating the cost of sales is not insignificant enough to be immaterial. If the error is material, then it must be corrected for the financial statements to provide accurate and reliable information. Therefore, the company needs to correct the error even if it is immaterial.

A Company Discovers That Its Cost of Sales Is Understated