Question

Wyly Waste Management. Wyly Waste Management (“WWM”) is an SEC registrant and your firm is its auditor. Overall materiality for the audit is $100,000. Shortly after the end of the year, WWM’s CFO is meeting with your audit partner to review the preliminary results of the audit. The engagement partner presents a copy of the draft unadjusted error summary to the CFO, which contains only one error. During the year, WWM did not capitalize individual expenditures of less than $10,000, which is in accordance with its company policy. In the past, WWM’s capital expenditures have been relatively constant each period and the expensing of the items has not caused any material errors. In the prior two years, the expensed items totaled $7,500 and $5,000, respectively. However, in the current year, WWM undertook significant development of a new waste disposal plant. As a result, WWM incurred eight capital expenditures of less than $10,000 each that were not capitalized. These purchases totaled $75,000.

Required:

a. Should your partner require WWM to record an adjustment for the expensed items in the current year?

b. Suppose the facts were changed and the expensed items for the prior two years totaled $22,500 and $15,000, respectively. Should your partner require WWM to record an adjustment for the expensed items in the current year? Note: We have ignored the effect of depreciation in this example.

c. Given the facts as presented in (b), above, how much of an adjustment should the auditor require before being willing to issue an unqualified audit opinion?

Answer 1

Answer to Qn a-

yes, The adjustment for the current year expensed items totalling to $75,000 is necessary, as the amount is spend for significant development of new waste disposal plant and hence needs to be mandatorily capitalized as per the Accounting Standards.

Audit materiality of $100,000 is not applicable in the present case since amount is incurred for significant development of Waste disposal Plant.

Expenses of $7500 and $5000 not capitalized during the previous two years are not spend for any significant development of Capital Asset.

b)Amount spend in previous two years towards capital expenditure of $22,500 and $15,000 expensed during the years does not rewuire any adjustment during the current year as the same fell within the Audit Materiality for those years. Only the current years amount of $75,000 needs to be capitalized as this is incurred for significant development of Plant, though the amount is within the Audit Materiality amount of $100,000

c) Adjustment is required for the current year expensed amount of $75,000. This needs to be capitalized.