ASSIGNMENT
a. Identify and explain any items included in “Other Information” that need not be part
of the auditor’s report.
b. Explain the deficiencies in Patel’s report as drafted.*
The following are independent situations for which you will recommend an appropriate audit report:
1. Subsequent to the date of the financial statements as part of his post-balance sheet
date audit procedures, a CPA learned that a recent fire caused heavy damage to one
of a client’s two plants; the loss will not be reimbursed by insurance. The newspapers
described the event in detail. The financial statements and footnotes as prepared by
the client did not disclose the loss caused by the fire.
2. During the course of his audit of the financial statements of a corporation for the
purpose of expressing an opinion on the statements, a CPA is refused permission to
inspect the minutes of board of directors’ meetings that document significant deci-
sions of the board. The corporation secretary instead offers to give the CPA a certified
copy of all resolutions and actions involving accounting matters.
3. A CPA is engaged in the audit of the financial statements of a large manufacturing
company with branch offices in many widely separated cities. The CPA was not able
to count the substantial undeposited cash receipts at the close of business on the last
day of the fiscal year at all branch offices.
As an alternative to this auditing procedure used to verify the accurate cutoff of cash re-
ceipts, the CPA observed that deposits in transit as shown on the year-end bank reconcili-
ation appeared as credits on the bank statement on the first business day of the new year.
He was satisfied as to the cutoff of cash receipts by the use of the alternative procedure.
4. On January 2, 2020, the Retail Auto Parts Company received a notice from its primary
supplier that effective immediately, all wholesale prices will be increased by 10 percent.
On the basis of the notice, Retail Auto Parts revalued its December 31, 2019, inventory
to reflect the higher costs. The inventory constituted a material proportion of total as-
sets; however, the effect of the revaluation was material to current assets but not to total
assets or net income. The increase in valuation is adequately disclosed in the footnotes.
5. A CPA has completed her audit of the financial statements of a bus company for the
year ended December 31, 2019. Prior to 2019, the company depreciated its buses over
a 10-year period. During 2019, the company determined that a more realistic esti-
mated life for its buses was 12 years and computed the 2019 depreciation on the basis
of the revised estimate. The CPA has satisfied herself that the 12-year life is reasonable.
Required
*
Based on AICPA question paper, American Institute of Certified Public Accountants
AUDIT REPORTS
The company has adequately disclosed the change in estimated useful lives of its
buses and the effect of the change on 2019 income in a note to the financial statements.
6. E-Lotions.com, Inc., is an online retailer of body lotions and other bath and body
supplies. The company records revenues at the time customer orders are placed on
the website, rather than when the goods are shipped, which is usually two days after
the order is placed. The auditor determined that the amount of orders placed but not
shipped as of the balance sheet date is not material.
For each situation, do the following:
a. Identify which of the conditions requiring a deviation from a standard unmodified
opinion audit report is applicable, if any.
b. State the level of materiality as immaterial, material, or highly material. If you cannot de-
cide the level of materiality, state the additional information needed to make a decision.
c. Given your answers in parts a. and b., state the appropriate audit report from the fol-
lowing alternatives (if you have not decided on one level of materiality in part b., state
the appropriate report for each alternative materiality level):
(1) Unmodified opinion—standard wording
(2) Unmodified opinion—explanatory paragraph
(3) Unmodified opinion—nonstandard report wording
(4) Qualified opinion—GAAP departure
(5) Qualified opinion—scope limitation
(6) Disclaimer
(7) Adverse*
For the following independent situations, assume that you are the audit partner on the engagement:
1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about YogurtLand’s ability to continue as a going concern.
2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. Management re- fuses to write off the products or to increase the reserve for obsolescence.
3. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its existing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in footnotes.
4. Your client, Harrison Automotive, has changed from straight-line to sum-of-the- depreciation. The effect on this year’s income is immaterial, but the effect in future years may be highly material. The change is not disclosed in the footnotes.
5. Circumstances prevent you from being able to observe the counting of inventory at Brentwood Industries. The inventory amount is material in relation to Brentwood Industries’ financial statements. But, you were able to perform alternative procedures to support the existence and valuation of the inventory at year-end.
6. Approximately 20 percent of the audit of Lumberton Farms, Inc., was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work.
For each situation, do the following:
a. Identify which of the conditions requiring a deviation from a standard unmodified
opinion audit report is applicable, if any.
b. State the level of materiality as immaterial, material, or highly material. If you cannot de-
cide the level of materiality, state the additional information needed to make a decision.
80Part 1 / THE AUDITING PROFESSION
c. Given your answers in parts a. and b., state the appropriate audit report from the fol-
lowing alternatives (if you have not decided on one level of materiality in part b., state
the appropriate report for each alternative materiality level):
(1) Unmodified opinion—standard wording
(2) Unmodified opinion—explanatory paragraph
(3) Unmodified opinion—nonstandard report wording
(4) Qualified opinion only—GAAP departure
(5) Qualified opinion—scope limitation
(6) Disclaimer
(7) Adverse
