Ethical Obligations and Decision-Making in Accounting 2nd Edition by Steven Mintz, Roselyn Morris

Exercise 16

Kinetics, Inc. included the following footnote in its December 31, 2009 financial statements:

We corrected the misstatement of capitalized advertising costs recorded in 2008 by adjusting operating expenses for 2009, and crediting the asset account. The result of this correction is to reduce income by $500,000 for 2009 [a material amount] and reduce recorded assets by a like amount.

Assume the company failed to mention the change in its audit report.

Evaluate Kinetics’ accounting for the correction and footnote disclosure. Do you think the company should have made reference to the correction in its audit report? Why or why not?

Step 1 of 2

Audit:

The audit is the process of checking the financial statements of a company `to ensure that it is 100% authentic and free from any kind of bias or fraud.

Audit report:

It is a report prepared by the auditor after checking all the financial statements of the company properly.

Purpose of audit report:

• This report contains the opinion of the auditor about financial statements.

• This helps investors in investment decisions.

• A clear audit report helps the company is taking a loan from a bank or financial institution.

• A clean audit report means the company is following all the rules and regulations under GAAP.

Expense:

Expense is defined as the cost incurred to acquire something or to earn revenue; it is expired during the accounting period.

Example: Cash paid for salaries, rent, and depreciation.

Capitalizing the expense:

It is the process in which the cost incurred in a process is not recorded in the financial statement of one accounting year. The expense is recorded by dividing the expense by the number s of years that are affected by the expense.