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 $1,020,000.00Returns 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 accountYou have set a TOLERABLE MISSTATEMENT in this account at $50,000.00You 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.DETERMINE2) Percentof ReturnsActualSales 7/1 – 12/31/2007$5,158,604Returns 1/1 – 6/30/2008$1,662,796Sales 7/1 – 12/31/2008$7,367,053Returns 1/1 – 6/30/2009$2,358,689Sales 7/1 – 12/31/2009$5,834,712Returns 1/1 – 6/30/2010$1,759,836Sales 7/1 – 12/31/2010$4,926,051Returns 1/1 – 6/30/2011$1,298,450Sales 7/1 – 12/31/2011$4,563,943Returns 1/1 – 6/30/2012$775,241Sales 7/1 – 12/31/2012$5,094,107Project Return$1,020,00020.0%Requirements:1) Set your Tolerable Misstatement2) 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 Returns5) 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
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