Week 4 Dis 2 - result of the error are retrospectively...

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1. Why will bonuses be negatively affected? What is the effect on pretax earnings? Overstating the ending inventory would is why bonuses would be negatively affected. This would result in a lower net income. After operating expenses, interest and depreciation is what pretax earnings are for business earnings. A decrease in pretax earnings would cause a lower net income, and bonuses are what their company is based on. Once this is corrected them their bonuses will decrease by more than 20% of what they had expected. 2. If the error is not corrected in the current year and is discovered by the auditors during the following years’ audit, how will it be reported in the company’s financial statements? Journal entries are also necessary to show the corrections. If these errors are not corrected and discovered until the next year then the “financial statements that are incorrect as a
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Unformatted text preview: result of the error are retrospectively restated to reflect the correct inventory amount, cost of goods sold, net income, and retained earnings when those statements are reported again for the comparative purposes in the current year’s annual report” (Spiceland, Sepe, & Nelson, 2011). 3. Discuss the ethical dilemma John Howard faces. Regardless of what the negative impact would be on bonuses, John Howard’s responsibility is to report any errors immediately. After all, it is what is expected and it is John’s job as the controller to do what is right for the company, it is the right thing he should do. Also, he could be facing many consequences when the error has been found when he could have brought it to the company’s attention. As it is stated in our book, “Accounting errors must be corrected when they are discovered” (Spiceland, Sepe, & Nelson, 2011)....
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