9B Error Correction Flashcards
What error will affect only one period?
Errors in classification (e.g. sales expense instead of R&D expense) affect only one period.
Two period errors?
non-systematic errors in adjusting entries (e.g. an error in ending inventory of one period) affect two periods and are known as self-correcting (counterbalancing) errors.
Example of two period error
Overstating ending inventory of year 1 will overstate the income of year 1 and understate the income of year 2
Errors that affect several periods
Misrecording the cost of a long-lived asset
What happens when an error is discovered in a period subsequent to the period when the error occurred?
Entry must be made to correct the accounts as if the error had not been made.
What are accounting errors?
Errors in recognition, measurement, presentation, or disclosure in the financial statements. An error can occur from mathematical mistakes, mistakes in applying GAAP, or oversight of facts that existed when the financial statements were prepared. A change in accounting principle from non-GAAP to GAAP is also a correct of an error.
How are errors in the financial statements treated?
As a prior period adjustment by restating the prior period financial statements. The cumulative effect of the error is reflected in the carrying value of assets and liabilities at the beginning of the first period presented with an offsetting adjsutment to hte opening balance in retained earnings for that period. Financial statements for each period are then adjsuted to reflect the correction of the period specific effects of the error.
What should footnote disclosures say about an error?
1) Disclose that previously issued statements were restated along with description of error
2) line item effects of the error and any per share amoutns must also be disclosed for each period presented
3) the gross effects and net effects from applicable income taxes on the net income of the prior period must be disclosed, as well as the effects on retained earnings and net income.
4) FN disclosures must also indicate the cumulative effect of the change on retained earnings or other components of equity or net assets at the beginning of the earliest presented. Once the correction of the error is disclosed, the FS of subsequent years do not need to repeat the disclosures.
What impact does inventory error have?
Include a mistatement of ending inventory balance, misstatement of beginning balance for the next period
How to analyze inventory errors in a periodic inventory system?
Through statemente of CoGS as it shows the relationship between inventory and the purchases accounts and impact of the incorrect amounts.
IFRS error correction
1) Similar to GAAP, requires entity to correct the error by restating the comparative amounts for prior periods.
2) IF error occurred before the earliest period presented, then the opening balances of the assets, liabilities, equity would be restated for the earliest period presented.
3) Similar to GAAP if it is impracticable to determine the period effects of the error, comparative finroatmion is restated from the earliest date practicable.
How are errors corrected?
Errors discovered in the same year, are covered by
1) Determining the entry that was made
2) Determining the correct entry
3) Analyzing increases or decreases needed in affected accounts
4) Making the correct entry
