CPA Auditing and Attestation Aud Question of the Day

1. There is no misstatement because management's estimate is reasonably close to the auditor's range.
2. The misstatement is $20,000, the difference between management's estimate and the low end of the auditor's range. (correct answer)
3. The misstatement is $70,000, the difference between management's estimate and the high end of the auditor's range.
4. The misstatement is $45,000, the difference between management's estimate and the midpoint of the auditor's range.

Explanation: The correct answer is B. When an auditor develops a range of reasonable estimates and management's recorded estimate falls outside that range, the misstatement is, at a minimum, the difference between the recorded amount and the nearest point in the auditor's range. In this case, management's recorded amount of $180,000 is below the auditor's reasonable range of$200,000 to $250,000. Therefore, the known misstatement is$200,000 - $180,000 =$20,000. This amount represents an understatement of the allowance (and thus an overstatement of net receivables and income).