Reference no: EM13150617
Homework Extra Credit
Prince Publishing Company sell trade books to all major retailers & wholesalers booksellers
on a returnable bases. The bulk of returns of current book sales come back over a
six month lag. Thus, sales for any 6 month period are returned in the subsequent
six months.
Prince Publishing has on it's balance sheet at December 31, 2012 a liability account labeled
"Reserve for Returns" with a balance of $1,020,000.00
Returns are a major issue in the publishing industry. An overstatement or understatement of
of returns can cause a material misstatement in the financials. Thus, Audit Risk is high
for this account
You have set a TOLERABLE MISSTATEMENT in this account at $50,000.00
You decide the best type of evidence you can gather is by recalculation the reserve
for returns.
You request the following information:
Sales for the six months ending December 31 & returns for the subsequent
six months for the past FIVE YEARS & sales for the six months ending
December 31, 2012. c
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Actual |
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of Returns |
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Sales 7/1 - 12/31/2007 |
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$51,58,604 |
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Returns 1/1 - 6/30/2008 |
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$16,62,796 |
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Sales 7/1 - 12/31/2008 |
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$73,67,053 |
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Returns 1/1 - 6/30/2009 |
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$23,58,689 |
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Sales 7/1 - 12/31/2009 |
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$58,34,712 |
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Returns 1/1 - 6/30/2010 |
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$17,59,836 |
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Sales 7/1 - 12/31/2010 |
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$49,26,051 |
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Returns 1/1 - 6/30/2011 |
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$12,98,450 |
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Sales 7/1 - 12/31/2011 |
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$45,63,943 |
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Returns 1/1 - 6/30/2012 |
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$7,75,241 |
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Sales 7/1 - 12/31/2012 |
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$50,94,107 |
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Project Return |
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$10,20,000 |
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20.0% |
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Requirements: |
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1) Set your Tolerable Misstatement |
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2) Determine the actual percent of RETURNS for each of the 5 Years (above). |
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3) Using the above return percentages, derive a projected return percentage for 2012. |
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4) Based on your return percentage, WHAT is an adequate Reserve for Returns |
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$0 |
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5) Does it fall into your Tolerable range. Draw a conclusion based on your finding. |
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6) If you are the client and you disagree with the audit findings, what rebuttal, would you have for the auditor ????+B25 |
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