Error Correction

Question 1

Prior Period Error vs Current Period Error

Answer 1

Prior Period - retrospective (adjust beg RE) = correcting as if it never happened

Current Period - prospective (adjust P/L)

Question 2

Type of Errors

Answer 2

1. Balance Sheet (no effect in P/L)
2. Income Statement (no effect in P/L)
3. Mixed Errors (current period errors)
   - Counterbalancing
   - Noncounterbalancing

Question 3

Counterbalancing vs Noncounterbalancing

Answer 3

Counterbalancing (IPADS)
- Inventory
- Prepayment
- Accruals
- Deferrals
- Sales

Noncounterbalancing (through ommision of JE or incorrect capitalize/expense)
- Depreciation
- Bad Depts
- Deferrals (Asset and Liability method)

These are real accounts

Question 4

Relationship of Items With Net Income

Answer 4

• Asset - Direct
• Liability - Inverse
• Ending Inventory - Direct
• Beginning Inventory / Purchase - Inverse

Question 5

Balance Sheet / Income Statement Errors

What to do if discovered in error year? In subsequent year?

Answer 5

Error year - reclassify
Subsequent year - restate BS/IS of prior year for comparative purpose

Question 6

Remember in Purchase and Ending Inventory

Answer 6

Both wrong - Balance sheet error (no P/L)
Only one wrong - will affect net income

Question 7

Steps in Solving Error Correction

3 Steps

Answer 7

1. Adjust NI (unadjusted to adjusted)

2. Analyze if
- Counterbalancing = mirror effect
- Noncounterbalancing

3. Adjust RE (unadjusted NI vs adjusted NI)