EyeMax Case
Company:
R&D, manufacture, sale of medical devises used by ophthalmologists during eye surgeries
Customer: doctors and laser-eye clinics
Wayne founded corporation
3rd largest supplier of optical equipment, 25% market share, 425 employees
Users:
30% owned by Wayne and family. 40% of stock owned by employees. Venture Capitalist, bankers, outside investors
Debt Covenant
Meet GAAP
Only adjust for material amount
Internal control problem:
1. lack of trained personnel
2. key controls appear to be functioning but not performed on a timely basis
3. RMM high => rely primarily on substantive
Client:
1. audited for 5 years
2. management follows the adjustment recommendations
3. Feb is deadline => now missing the deadline => management does not want any adjustment to reduce shareholder and creditor’s confidence
Materiality:
1. 625000 = 5% of earnings before taxes
2. performance materiality = 75% * 625000 = 468750
Misstatements (SUDS)
1. warranty expense, repair and maintenance expense, litigation expense and A/R
2. non-sampling procedures: warranty expense, repair and maintenance expense, litigation expense
3. sampled A/R
Warranty expense
Underestimate by 130000 (verbal commitment of extending warranty period to 2 years)
Repair
Understated by 200000; incorrectly capitalized 240000 of costs related to modification to production process
Modification is unsuccessful
Litigation expense
Overstated by 50,000 (with product liability insurance)
Excellent record
A/R
40 sample for positive confirmation four non-response => alternative procedures misstatements unintentional (incorrect pricing) overstated 8662
Answer:
1. support c reason: a. under overall performance materiality level => total misstatement = 614569 which is slightly less than overall materiality level and goes over the performance materiality level
b. all unintentional errors, but too close to the materiality level
2. will recommend to adjust repair and maintenance expense because it is not meet GAAP
R&D, manufacture, sale of medical devises used by ophthalmologists during eye surgeries
Customer: doctors and laser-eye clinics
Wayne founded corporation
3rd largest supplier of optical equipment, 25% market share, 425 employees
Users:
30% owned by Wayne and family. 40% of stock owned by employees. Venture Capitalist, bankers, outside investors
Debt Covenant
Meet GAAP
Only adjust for material amount
Internal control problem:
1. lack of trained personnel
2. key controls appear to be functioning but not performed on a timely basis
3. RMM high => rely primarily on substantive
Client:
1. audited for 5 years
2. management follows the adjustment recommendations
3. Feb is deadline => now missing the deadline => management does not want any adjustment to reduce shareholder and creditor’s confidence
Materiality:
1. 625000 = 5% of earnings before taxes
2. performance materiality = 75% * 625000 = 468750
Misstatements (SUDS)
1. warranty expense, repair and maintenance expense, litigation expense and A/R
2. non-sampling procedures: warranty expense, repair and maintenance expense, litigation expense
3. sampled A/R
Warranty expense
Underestimate by 130000 (verbal commitment of extending warranty period to 2 years)
Repair
Understated by 200000; incorrectly capitalized 240000 of costs related to modification to production process
Modification is unsuccessful
Litigation expense
Overstated by 50,000 (with product liability insurance)
Excellent record
A/R
40 sample for positive confirmation four non-response => alternative procedures misstatements unintentional (incorrect pricing) overstated 8662
Answer:
1. support c reason: a. under overall performance materiality level => total misstatement = 614569 which is slightly less than overall materiality level and goes over the performance materiality level
b. all unintentional errors, but too close to the materiality level
2. will recommend to adjust repair and maintenance expense because it is not meet GAAP