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P13-13 (Liability Errors) You are the independent auditor engaged to
audit Millay Corporation's December 31, 2014, financial statements.
Millay manufactures household appliances. During the course of your
audit, you discovered the following contingent liabilities.
1.
Millay began production of a new dishwasher in June 2014 and, by
December 31, 2014, sold 120,000 to various retailers for $500 each.
Each dishwasher is under a one-year warranty. The company estimates
that its warranty expense per dishwasher will amount to $25. At year-
end, the company had already paid out $1,000,000 in warranty expenses.
Millay's income statement shows warranty expenses of $1,000,000 for
2014. Millay accounts for warranty costs on the accrual basis. As
presented, these contingencies are not reported in accordance with
GAAP, which may create problems in issuing a favorable audit report.
You feel the need to note these problems in the work papers.
Instructions Heading each page with the name of the company, balance
sheet date, and a brief description of the problem, write a brief narrative
for above issues in the form of a memorandum to be incorporated in the
audit work papers. Explain what led to the discovery of each problem,
what the problem really is, and what you advised your client to do
(along with any appropriate journal entries) in order to bring these
contingencies in accordance with GAAP.