Reference no: EM13150617

Homework Extra Credit

Prince Publishing Company sell trade books to all major retailers & wholesalers booksellers

on a returnable bases. The bulk of returns of current book sales come back over a  

six month lag. Thus, sales for any 6 month period are returned in the subsequent

six months.

Prince Publishing has on it's balance sheet at December 31, 2012 a liability account labeled

"Reserve for Returns" with a balance of $1,020,000.00

Returns are a major issue in the publishing industry. An overstatement or understatement of

of returns can cause a material misstatement in the financials. Thus, Audit Risk is high

for this account

You have set a TOLERABLE MISSTATEMENT in this account at $50,000.00

You decide the best type of evidence you can gather is by recalculation the reserve

for returns.

You request the following information:

Sales for the six months ending December 31 & returns for the subsequent

six months for the past FIVE YEARS & sales for the six months ending

December 31, 2012. c

	Actual										of Returns
	Sales 7/1 - 12/31/2007			$51,58,604		Returns 1/1 - 6/30/2008			$16,62,796
	Sales 7/1 - 12/31/2008			$73,67,053		Returns 1/1 - 6/30/2009			$23,58,689
	Sales 7/1 - 12/31/2009			$58,34,712		Returns 1/1 - 6/30/2010			$17,59,836
	Sales 7/1 - 12/31/2010			$49,26,051		Returns 1/1 - 6/30/2011			$12,98,450
	Sales 7/1 - 12/31/2011			$45,63,943		Returns 1/1 - 6/30/2012			$7,75,241
	Sales 7/1 - 12/31/2012			$50,94,107		Project Return			$10,20,000		20.0%
	Requirements:
	1) Set your Tolerable Misstatement
	2) Determine the actual percent of RETURNS for each of the 5 Years (above).
	3) Using the above return percentages, derive a projected return percentage for 2012.
	4) Based on your return percentage, WHAT is an adequate Reserve for Returns										$0
	5) Does it fall into your Tolerable range.     Draw a conclusion based on your finding.
	6) If you are the client and you disagree with the audit findings, what rebuttal,  would you have for the auditor ????+B25