Hide-It (HI), a family-owned business based in Tombstone, Arizona, builds custom homes

with special features, such as hidden rooms and hidden wall safes. Hide-It has been an audit

client for three years.

You are about to sign off on a “clean” opinion on HI’s current annual fi nancial statements

when Art Hyde, the VP-Finance, calls to tell you that the Arizona Department of Revenue

has seized control of a Hide-It bank account that includes about $450,000 of company funds;

the account is not currently recorded in the accounting system and you had been unaware of

it. In response to your questions about the origin of the funds, Art assures you that the funds,

though not recorded as revenue, had been obtained legitimately. He explains that all of the

money came from separately billed but unrecorded change orders to items in contracts completed

before you became HI’s auditor, and before he or any members of current management

became involved with the company. You subsequently determine that there is insuffi cient evidence

to allow you to reconstruct the nature of these cash transactions, although the following

analysis is available from the Arizona Department of Revenue:

Deposits 1/17/X2–12/3/X4 $455,000

Interest earned 1/2/X2–12/31/X8 95,000

Withdrawals 2/12/X3–4/7/X7 (100,000)

Balance 12/31/X8 $450,000

Art also informs you that HI has agreed to pay a combined tax and penalty of 12 percent on

the total funds deposited within 120 days as required by a recently enacted rule that provides

amnesty for tax evaders. Furthermore, he states that negotiations with the Internal Revenue

Service are in process.

a. The professional standards defi ne errors as unintentional misstatements or omissions of

amounts or disclosures in the fi nancial statements. Is the situation described an error?