Uncorrected Misstatements and Performance Materiality. AaronRivers, CPA, is auditing the financial statements of ChargerCompany, a client for the past five years. During past audits ofCharger, Rivers identified some immaterial misstatements (most ofwhich relate to isolated matters and do not have commoncharacteristics). A summary of these misstatements follows. (Toillustrate, in 2012, the misstatements would have reduced netincome by $13,200 if corrected) Year Effect on Net Income Effect onAssets Effect on Liabilities Effect on Equity 2012 ($13,200)($20,000) ($6,800) ($13,200) 2013 5,000 12,000 7,000 5,000 2014(9,250) (11,000) (1,750) (9,250) 2015 (2,000) (5,500) (3,500)(2,000) 2016 1,000 1,000 0 1,000 During the most recent audit,Rivers concluded that sales totaling $11,000 were recognized as ofDecember 31, 2017, that did not meet the criteria for recognitionuntil 2018. When Rivers discussed these sales with Chris Turner,Charger Company's chief financial officer, Turner asked Riversabout the performance materiality level used in the audit, whichwas $25,000. Upon learning of this, Turner remarked, "Then there'sno need to worry . . . it's not a material amount. Why should webother with this item?" Required: a. How does the misstatementidentified in 2017 affect net income, assets, liabilities, andequity in 2017? (Assume a 35 percent tax rate for Charger.) b.Comment upon Turner's remark to Rivers. Is Turner's reasoningcorrect? c. Upon doing some research, Rivers learned of therollover method and iron curtain method for evaluating theperformance materiality of misstatements. Briefly define each ofthese methods. d. How would Rivers evaluate the performancemateriality of the $11,000 sales cutoff error in 2017 under therollover method and iron curtain method? e. Based on your responseto part (d), what adjustments (if any) would Rivers propose toCharger Company's financial statements under the rollover methodand iron curtain method? ? Subsequent Events, SubsequentlyDiscovered Facts, and Omitted Procedures. Jay Ralph completed theDecember 31, 2017, audit of Raider Company on February 3, 2018;Raider's financial statements and Ralph's reports on Raider'sfinancial statements and internal control over financial reportingwere released on February 12, 2018. During April 2018, Ralph's firmconducted a quality review over selected audits that had beencompleted during the most recent year, and the audit of RaiderCompany was randomly selected for review. The reviewer identifiedthe following matters that Ralph had not addressed during the auditof Raider: 1. On February 9, 2018, Ralph learned of the followingevents during his post-audit meeting with Raider's chief operatingofficer. a. A class-action lawsuit was brought against RaiderCompany by some of its former employees for workplacediscrimination. An attorney on behalf of a class of employees filedthe lawsuit on January 10, 2018. The letter from Raider's attorneysdid not identify this lawsuit. b. One of Raider's major customersis experiencing significant financial difficulties; this customer'saccount receivable balance on December 31, 2017, was $1.2 million,which represented 2 percent of Raider's total accounts receivableon that date. 2. Because of an important deadline for submittingthe financial statements to lenders for evaluation, Raider did notmodify its financial statements for the preceding events despitethe fact that they were material. Raider's justification was thatbecause the events occurred after the date of the financialstatements, they were not required to be disclosed in the financialstatements. Ralph acquiesced to Raider's wishes and did not modifythe report on Raider's financial statements. 3. On March 16, 2018,Ralph initially learned of the following events affecting RaiderCompany, neither of which was disclosed in Raider's financialstatements: a. Raider Company declared a significant dividendpayable to its shareholders. This dividend was declared on March14, 2018, to be paid to Raider's shareholders of record on May 16,2018. b. Raider Company activated a portion of its line of crediton February l, 2018, by borrowing $2.5 million. This additionalobligation increased Raider Company's long¬-term liabilities by 10percent. 4. Reviewing Ralph's audit documentation, it does notappear that any tests were con ducted to evaluate the need forimpairment of the carrying value of Raider Company's property,plant, and equipment. Required: For each of the preceding items,describe what actions Ralph should take after the firm's qualityreview identified these issues.