The CPA firm auditing Mason Street Recording Studios found that total stockholders' equity was understated and liabilities were overstated. Which of the following errors could have been the cause?

Question

Quizplus · Accepted Answer

Failing to record the earned portion of fees received in advance would cause liabilities to be overstated and stockholders' equity to be understated. This is because the fees received in advance represent a liability to provide services to the customers in the future, and the revenue earned from providing those services would increase stockholders' equity. Therefore, failing to record the earned portion of these fees would result in an overstatement of the liability and a corresponding understatement of stockholders' equity.

The CPA Firm Auditing Mason Street Recording Studios Found That